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July 19th, 2011

Homeownership is down and it needs to increase

by Peter Miller


Intro TravisFewer and fewer of us are buying homes.

That’s not a surprise.

What’s a surprise is one alleged reason for our falling homeownership rate. According to a new study from the Mortgage Bankers Association, “Sharp declines in house prices served as a catalyst for the 2007 meltdown in mortgage and capital markets and the downturn in the global economy.”

This reasoning confuses cause and effect. Falling home prices were the result of the erosion of mortgage norms, NOT the cause of a mortgage meltdown.

The causes of the mortgage meltdown

Don’t believe me? Let’s go to the tapeā€¦.

“High risk mortgage lending and shortcomings in consumer protections for mortgage borrowers were among the most important underlying causes of the housing bubble and the financial crisis that resulted,” said former FDIC chair Sheila Bair.

“Not only did the proliferation of high-risk subprime and nontraditional mortgage products help to push home prices up during the boom, but excessive reliance on foreclosure as a remedy to default has helped to push home prices down since the peak of the market over four years ago.”

Homeownership levels need to remain high

According to the MBA:

In 2000, U.S. homeownership rates stood at roughly 67 percent, the highest level recorded to that point in time. That rate jumped to a new all-time high of 69.2 percent in the fourth quarter of 2004 and remained at roughly that level through the middle of 2006. With the onset of the 2007 financial crisis, homeownership rates have dropped, falling to 66.4 percent in the first quarter of 2011.

As ownership levels decrease, the number of vacant homes increase, making it more difficult to construct new homes and benefit from the jobs, local taxes and spending which new homes create and which our economy desperately needs.

Moreover, vacancies can create real problems if the properties are not correctly managed or repurposed into rental housing.

An excess of homes holds down prices. For this reason it’s difficult for a current homeowner to sell a property and move-up. That means the owner of the more expensive property is also less able to sell.

Mortgage rates are also impacted by the problem of surplus homes. Today’s mortgage rates are surely lower because there is less competition for financing. That’s good news if you need a loan, not good if you want to restore the economy.

More owners seems unlikely at the moment

Can we again increase homeownership?

In the short term–the next few years–this seems very unlikely. We have a huge number of foreclosed properties which are owned by lenders, properties which need to be re-sold and placed back into the inventory of occupied homes. The problem here is that the ownership of these properties–and the grounds for their foreclosure–are no longer so clear as a result of the robo-signing scandal.

Also, those who have lost their homes to foreclosure are not likely to qualify for a new mortgage for several years to come (in most cases). In particular, those who have “walked away” from a mortgage are unlikely to get new financing for many, many years.

Lastly, high rates of unemployment mean large numbers of potential buyers are unable to qualify for financing. No matter how much someone wants a house, no matter how low today’s mortgage rates might be, it doesn’t matter if household income is insufficient.

6 Responses to “Homeownership is down and it needs to increase”

  1. Dan K Says: July 19th, 2011 at 2:36 pm

    Part of me is surprised less people are buying homes; in many cities it is cheaper to buy than rent right now. However, I think the lending institutions are being more particular in who they lend to this time around. Interesting stuff though.

  2. Tripp Says: July 19th, 2011 at 8:21 pm

    This is only temporary. Banks aren’t making money the way they used to. The risk-reward out there is skewed, and with QE2 going to be the last round, banks will have to start opening up to riskier assets (e.g. someone who can only put 10% down and their income is 3 times their mortgage). With risk, there will always be loss, but it balances prices and makes it more affordable for people to buy houses in the first place.

  3. Peter G. Miller Says: July 21st, 2011 at 4:15 am

    Tripp — Down payments are NOT an issue — think of FHA, VA and insured conventional loans. It’s easy to buy with little down. The real issue is that people worry we have not reached bottom. It’s not an unreasonable concern in terms of housing prices. Peter

  4. Peter G. Miller Says: July 21st, 2011 at 4:16 am

    Dan — I agree that owning can not be cheaper than renting in some areas. However, to rent or buy you need a job and job security — neither of which are especially certain for millions of Americans. Peter

  5. Rebecca Says: July 25th, 2011 at 11:24 am

    Dan – Does homeownership need to increase? Back when there was a push to increase homeownership in this country, many economists pointed out that the countries with lower home ownership rates had lower unemployment rates. For instance, Spain has both the highest unemployment rate and the highest rate of homeownership, while Switzerland has both the lowest unemployment rate and the lowest rate of homeownership. Think about it: one of the strengths of the American workforce has been its mobility – people can easily go where the jobs are. When you are stuck in a house that is underwater and you can’t sell it, how do you move to a new city that is hiring? There’s no doubt that with low rates and low home prices it’s a great time to buy a home – if you have a secure job (as one of the commenters here points out). But homeownership isn’t a panacea for a strong economy. There should be healthy mix of renters and owners.

  6. Susan Says: July 28th, 2011 at 12:04 pm

    I agree with Peter that the real issue is that people worry that we haven’t reached the bottom yet. I am in the process of buying a house and where I am buying home prices have held steady. But with the threat of new foreclosures in my area, it could drop prices even more. One benefit of buying now are mortgage rates. If rates increase, that increased cost to the loan might offset whatever drop in real estate prices we see over the next year. My husband and I plan on keeping this house until its paid off, so we felt that the savings of interest is worth the purchase in this market.

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