Homeownership at Lowest Level in a Decade
Bloomberg has an interesting update on the current state of homeownership in America, which further illustrates how well-meaning solutions become problems themselves. She notes:
The number of vacant properties, including foreclosures, residences for sale and vacation homes, rose from 18.6 million in the year-earlier quarter, the U.S. Census Bureau said in a report today. The ownership rate, meaning households that own their own residence, was 66.9%, the lowest since 1999.
Tim Cavanaugh at Reason adds:
While the rate of homeownership has been falling since 2005, the rate of so-called real homeownership — the percentage of equity Americans have in their homes — has been declining since the 1950s. So it’s true that 60+ percent of Americans still have title to a house, but what they actually own is a bigger pile of debt (relative to the pile of house).
A fair point. But what is behind this implosion in homeownership?
The direct root of the problem of declining homeownership can ironically be traced directly to government policies encouraging homeownership. Consider this hypothetical. Confronted with a surging real estate market, low mortgage rates, tax deductibility, depressed standards for home loans, and (possibly) a hefty tax credit for buying a house, would you be more or less inclined to “reach” for your dream home?
Let’s consider the causes. Real estate markets went relentlessly upward this past decade. (That is, until they didn’t.) This is quite easily tied to multiple factors, perhaps foremost among them being low mortgage rates. Aside from making consumer credit more easily accessible, low mortgage rates indicate low target rates set by the federal reserve. Where such rates are low, credit is less expensive, and underwriting standards are loosened, even to the point where “doing anything” beats sitting on the miniscule return offered by the benchmark Treasury bond in a low-rate environment. This means that investors chase return, and as Hayek so elegantly laid out, they grasp for limited resources until they realize that these limitations have been exceeded by the mad dash for return. This problem is especially acute when dealing with capital investment projects, such as housing construction.
These low target rates caused investors to be overinterested in capital investment projects and the supposedly infallible asset-backed securities offered by the federally-backed mortage giants. All this on top of the fact that lower mortgage rates enticed consumers to keep consuming these investments, regardless of their ultimate prudence in the long term.
And speaking of the mortgage giants, their stated policy was to extend credit to people who, just a few years prior, would be considered financially unfit for home loans. In the interests of extending credit to those who previously could not get it, Fannie Mae and Freddie Mac offered easy credit to the non-creditworthy, goosing the homeownership numbers while the market was on the rise. Likewise, the FHA dropped underwriting standards to previously unheard-of levels, allowing mortgage loans to be disbursed basically equity-free.
To sum up, low interest rates led to a mad dash into the housing market, federally-backed mortgage companies extended credit to those who didn’t deserve it and on ridiculous terms, and tax policies favored taking on debt. Then, after the crisis, government programs for foreclosure abatement and mortgage modification stunted new growth of the housing market (and some measure of a recovery along with it) by forcing mortgage lenders to alter their terms in unfavorable ways. This on top of the fact that such programs have generally been unhelpful, with heavy majorities simply redefaulting anyway.
Well, the results are in. Attempts to modify the number of homeowners through social engineering worked until it failed spectacularly. We need to ask ourselves if the temporary gain was worth the ultimate heartache, embarrassment, and loss of wealth inflicted on many Americans lured into the market by these programs.