Tuesday, January 31, 2012

Homeownership Rate Falls to Lowest Level Since 1997; The Homeownership Bubble Is Still Deflating

The U.S. homeownership rate fell in 2011 to 66.15%, according to data released today by the Census Bureau. That was the lowest homeownership rate in 14 years, since the 65.7% rate in 1997.

Conclusion: The political obsession with homeownership in the 1990s and early 2000s raised homeownership in the short run to an artificial and unsustainable level of 69% by 2004, but failed in the long run to create a homeownership rate that was sustaintable.  In the process, numerous government policies turned good renters into bad homeowners, created a housing bubble, waves of foreclosures, and a subsequent housing meltdown and financial crisis. In other words, the chart illustrates how government policies (monetary, mortgage market, GSEs, CRA, affordable housing, etc.) created an unsustainable "homeownership bubble" that is still deflating.  It's likely that the homeownership rate will continue to fall for at least several more years, until we eventually get back to the more sustainable 64-65% homeownership rate that prevailed from 1975-1995 before various government policies destabilized the U.S. housing market.  

Update: The chart below shows how the U.S. homeownership rate increased from a stable rate of about 64% for almost a decade through 1994, up to historically unprecedented and unsustainable "homeownership bubble" levels above 68% between 2003-2007.  At the same time, the percentage of residential mortgages with a 3% down payment or less increased from 2.3% in 1994 to almost 40% by 2007 (data from Ed Pinto).  One of the primary reasons for increased homeownerhip rates above 68% was the deterioration of credit and lending standards, including significant increases in the share of home purchases with very low down payments. 


At 1/31/2012 11:11 AM, Blogger Che is dead said...

Roberts says the average median income for a family is $55,000, and the average median home sales price is $214,000. To afford such a home, the average American would have to put down 20%, or roughly $42,800. But, Roberts says that amount is nearly impossible to save, given the state of the economy and consumer debt levels.

"In today's credit constrained environment due to the financial crisis which has left the major banks saddled with millions of homes that are delinquent or in foreclosure -- there is little reason to lend money to borrowers who can't meet very stringent qualification requirements," Roberts wrote in a recent blog posting ...

When asked how effectively Washington D.C. has dealt with the housing crisis. Roberts responded, saying, "Washington has failed by not letting the cycle resolve itself naturally. If someone loses their home – they rent."

He added, "By trying to keep people in homes that they cannot afford we have created a lack of mobility in this country. Furthermore, by changing accounting rules to keep banks afloat they have artificially kept home prices higher than they should be. This keeps investors from coming in to buy up homes. The natural order of an economic cycle has been suspended…at least temporarily. We would have already been a long way through the deleveraging cycle, painful as it would have been at the time, if the cycle was allowed to unfold naturally. -- Housing Wire

At 1/31/2012 11:16 AM, Blogger Tom said...

I would add to the list of causes of the subprime housing meltdown "HUD low-moderate income mortgage quotas" which rose from 30% of all mortgages in the mid 1990's to 56% of all mortgages in 2008. By the time of the collapse, nearly half of all US mortgages were less than prime quality. The quotas applied to Fannie Mae and Freddie Mac, and to all banks which wanted to expand.

At 1/31/2012 11:17 AM, Blogger Jon Murphy said...

I agree with your conclusion, Dr. Perry, but would like to add one other thought of my own.

One thing that may hinder homeownership going forward is Generation Y (born 1982-1995). This generation (my generation) has several characteristics that make us weary homeowners. First off, we are mama's boys and daddy's girls. Research has shown that Gen Y is very attached to their parents and tend to leave the nest later in life then our parents did. Also, Gen Y is used to instant gratification and that has not translated well into the workforce. Granted a small sample size, but Gen Y tends to switch jobs more often, making home ownership difficult. Gen Y was highly traumatized by this recession. Our whole lives we were told "Own a house! It's the American Dream and the road to wealth!" Now, we are seeing our parents and friends foreclosed upon and ending up in a mountain of debt. "Why would I put myself through that?" we ask.

The incentive system is messed up here. If we only focus on home ownership, then we'll end up right back here. If all we care about is facts and figures and disregard the rest, we'll repeat the same mistakes made in the 1990's. Home ownership should not be a goal. Quality home ownership should.

At 1/31/2012 11:27 AM, Blogger Buddy R Pacifico said...

What kind of a firm is buying up to 200,000 homes as rental properties?

Private equity.

"Private equity funds began focusing on these investments in September, after the administration asked for proposals to sell the government's inventory of foreclosed homes -- about half of all houses seized from delinquent borrowers."

Private equity will rent these homes because:

"Preliminary estimates suggest that about two-fifths of Fannie Mae's REO inventory would have a cap rate above 8 percent -- sufficiently high to indicate renting the property might deliver a better loss recovery than selling the property,..."

Renting a hgome, rather than home ownership, is influencing the market dyanamics a lot.

At 1/31/2012 11:37 AM, Blogger morganovich said...

there is also some interesting arbitrage going on as a result of foreclosure laws.

i know a guy doing this in california.

when a home is sold on the courthouse steps in CA, you have to pay cash. it cannot be a mortgage, even a pre approved one.

this makes the market for lower/middle end homes (say in the $300-400k range) pretty much impossible.

the sort of buyer who want to live in a $350k split ranch in san rafael is very unlikely to have $250k in cash lying around to buy at fire sale prices.

so, you step in, buy for cash, then flip it to a guy who needs a mortgage, pocketing $75k for warehousing it for a few months.

it's a terrible policy for the state as they are getting much lower prices than they could and bad for the ultimate buyer, as he likely pays more, but hey, that's government policy for you.

At 1/31/2012 11:50 AM, Blogger Buddy R Pacifico said...

morgan, you stated:

"when a home is sold on the courthouse steps in CA,...

Are these homes that have been siezed for unpaid r.e. taxes?

"so, you step in, buy for cash, then flip it to a guy who needs a mortgage, pocketing $75k for warehousing it for a few months."

This seems very presumptive, because home prices are still declining and are slow. The cash buyer is taking a big risk.

At 1/31/2012 12:16 PM, Blogger morganovich said...


no, it's not just homes seized for taxes. this is how foreclosure sales work as well.

i understand the risk issue you raise, but the point is that you are buying a $350k asset at current prices for $250k and, in many cases, already have a buyer lined up for $325k. it's the fact that the buyer needed a mortgage that prevented the state of the bank from getting the $325.

were i a bank, this would infuriate me beyond belief.

i think he's made about $5 million doing this in the last 3 years and has yet to have a transaction fail.

that said, i think that this opportunity is also fading as such large profits do not go unnoticed and other entrants have started doing the same thing, bidding up prices and driving down profits.

like any arbitrage, it only lasts until lots of people notice it.

At 1/31/2012 12:25 PM, Blogger Benjamin Cole said...

Let's not forget to eliminate the home mortgage interest tax deduction.

At 1/31/2012 12:27 PM, Blogger Benjamin Cole said...

Scott Sumner, conservative monetarist, points out there were other nations that had housing bubbles, but prices did not collapse. Their central banks did not trigger a recession by over-tigtening.

See Money Illusion, great blog.

At 1/31/2012 1:23 PM, Blogger morganovich said...


you statement is inherently impossible.

all bubbles pop. it's part of the definition of bubble.

if it never popped, it was not a bubble, just a price increase.

bubbles come from excess speculation and leverage. there are lots of ways for prices to go up absent that.

what scott really ought to be looking at is whether they failed to have bubbles because their rates were not much too low earlier (and negative in real terms).

At 1/31/2012 4:46 PM, Blogger sethstorm said...

The incentive system is messed up here. If we only focus on home ownership, then we'll end up right back here. If all we care about is facts and figures and disregard the rest, we'll repeat the same mistakes made in the 1990's.

If we focus on home ownership, we won't be in the same place - it takes businesses that aren't able to move people so that settling down for a house is possible.

Home ownership should not be a goal. Quality home ownership should.

Only if you want to make the houses worse off and people's living arrangements worse off. Where "flexibility" is touted, the person really means the worst kind of disposability.


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