The topic of income inequality is, as they say, trending, and this has moved CoreLogic to look at the nature of incomes and homeowners.  In a recent article in the company's Housing Trends Blog, principal economist Kathryn Dobbyn talks about a new CoreLogic Index and the questions it is designed to answer.

The index is based on the company's loan level database and measures monthly median incomes derived from debt-to-income (DTI) ratios for households obtaining mortgages.  Data, which was limited to fully documented, owner-occupied, single-family originations, was used to create both an inflation-adjusted and a non-inflation adjusted median income time series from January 2000 to September 2014.  An index value of 100 equals the median borrower income for loans originated in 2000 for each index.    

Dobbyn said the index was designed to answer questions that included:

• How have the incomes of homebuyers and homeowners changed over time?
• Are the incomes of households participating in the U.S. mortgage market somehow different from the entire universe of U.S. households?
• How were they impacted by The Great Recession?
• How are the incomes of homeowners recovering?

What she called interesting and unsuspecting trends emerged from the time series.  As can be seen from Figure 1, the income of borrowers who are refinancing have a much more volatile profile than that of borrowers taking out purchase mortgages.  There were sometimes 5 to 10 percent jumps in the median in only a few months and these quick upward movements coincided with downturns in the average interest rate of a 30-year fixed rate mortgage.  This suggests that lower rates prompted "a relatively greater number of high income, more financially savvy borrowers" to refinance.

Dobbyn noted that starting in 2006, the height of the subprime boom, the rise in median income slowed somewhat.  She concludes that the new subprime products brought a larger share of lower income borrowers into the market while at the same time higher income borrowers were dissuaded by increased interest rates. 

Even as the Great Recession came and went and continuing into the first few years of the recovery, the median income of borrowers who were refinancing continued to rise but then fell off at the beginning of 2013.  She attributes this to the expansion of the Home Affordable Refinance Program (HARP) in late 2012.  New guidelines broadened to program to include borrowers with higher levels of negative equity and/or with private mortgage insurance.  This permitted larger numbers of lower-income households to refinance.

While CoreLogic did not find median incomes in the purchase mortgage market to be as volatile or to rise as quickly as among refinancers that median did grow by an "astonishing" 20 percent between January 2000 and August 2005.  This was at the same time period the Census Bureau said median incomes nationally fell 2.7 percent. Then, as with refinancing, new subprime products brought lower income borrowers into the purchase market and the median income leveled off and even declined in 2005, 2006, and 2007.     

In August 2008 the median purchase income index began falling dramatically, dropping 19.8 percent from 149.1 to 120.1 in December 2009.  This coincides with the most dramatic events in the housing crisis but Dobbyn points out this decline was not mirrored on the refinancing timeline nor in the country as a whole.  The incomes of borrowers originating refinance mortgages rose 9.1 percent and the Census Bureau puts the decline in U.S. household incomes during the period at only 0.7 percent. 

One of the most surprising findings of the CoreLogic analysis was the degree to which tight credit shut high income borrowers out of the market.  Dobbyn notes that the purchase index was fairly stable from 2009 until March 2012 when it began a surge that carried it upward by 42 percent, from 120.1 to 170.1 in September 2014.  This was a time when median household incomes nationally barely moved.  

One would have expected, she says, that during the recession and the early period of recovery the index would have risen as tighter credit should have produced buyers with higher FICO scores and presumably higher income.  Instead, those buyers were hit by the virtual disappearance of jumbo mortgage lenders.  Those originations dropped from a 3.91 percent share in 2007 to 1.32 percent in 2008 and 0.4 percent in 2009 having what she calls a huge impact on both the mortgage and high end sales markets.  The median income index for purchases declined during that period by 19.8 percent and sales of million dollar homes fell from a 2.1 percent share in July 2007 to 1.0 percent of all homes sold in April 2009.

In Mid-2012 the jumbo market began to revive and both the median purchase index and the share of upper-end homes took off.  Dobbyn says the dramatic surge in the median purchase income index over the last two years reflects the pent-up demand among high-income borrowers for more expensive homes.  It also shows, she says, the impact of opening the credit box and releasing this demand for even a small segment of the market.  It is now time, she concludes, to open the credit box to the other side of the income distribution "as responsibly providing access to financing through new underwriting standards, loan programs and policies will help ease the pent-up demand for a larger segment of U.S. households and help boost home sales more broadly, aiding to the nation's recovery."