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Home | Blog | The homeownership rate is still too high

The homeownership rate is still too high


The AP reported today that the homeownership rate declined to 65.1 percent during 2010, which is “the biggest drop since the Great Depression.” However, in order to return to a more normal rate of homeownership, the present rate needs to drop even more.

According to the Census Bureau’s quarterly estimates of the homeownership rate (found here), the homeownership rate peaked in the US at 69.2 percent during the fourth quarter of 2004. This then began to slowly drop, and then the decline began to accelerate after 2007. The homeownership rate has now fallen about 5 percent from the peak, and was 65.9 percent during the second quarter of 2011.

As can be seen in the graph below, even after the declines of the last four years, the homeownership rate is still above what was common for most of the past 45 years. The average homeownership rate, including all years since 1965, is 65.3 percent. But, if we exclude the bubble years from 1996 through 2010, the average is 64.3 percent.

(A one-percent change in the homeownership rate is a pretty big deal since there are more than 127 million households in the US, so a change in the ownership status of one percent of those households involves well over a million people.)

So, before the US homeownership rate returns to the norm, it’s likely that hundreds of thousands of present homeowners will become renters again.

Of course, it’s not like there’s some law of nature that states that the homeownership rate should be around 64 or 65 percent. Homeownership rates vary greatly from country to country, and don’t necessarily tell us much about the standard of living of a population, either. The homeownership rate in Switzerland, for example, is around 34 percent.

Nevertheless, we wouldn’t be going out on a terribly long limb by concluding that a 65 percent homeownership rate is actually on the high end of what should be considered normal in the US since World War II. In fact, when we look back on rates form the sixties, we see that the homeownership rate climbed to 65 percent following the so-called “Thirty Glorious Years” of the post-war easy-money-fueled expansion. Real incomes did truly increase during this period and the standard of living increased substantially. Personal saving rates also increased to some degree.

Yet, at the tail end of this period, the homeownership rate only reached 65.6 percent in 1981 before heading down again, and it then remained below 65 percent until the homeownership boom took off in the late 1990s.

Yet, there’s no reason that the homeownershiip should have risen above its historical average during the last 15 years, except for the fact that household and mortgage debt expanded greatly during this period. People weren’t buying more houses after 1996 because they had more savings and more real income. In fact, we know that real average wages have not been going up since the 70s. And saving rates certainly haven’t increased. So where did all the money for down payments come from? The only explanation we’re left with is that the easy money policies of the central bank during this period, combined with a faulty psychology that convinced people that homeownership is some kind of investment, drove many people to buy. And they could buy because mortgage rates had been driven down to 6 percent (or lower) at the same time that the saving rate was falling. In a free market of course, the lack of saving would have been driving interest rates up, but the Fed intervened to make sure that no one missed out on one’s god-given right to granite countertops.

It’s also worth remembering that When the homeownership rate was heading north during the 1960s, people were still putting 20 percent down for most conventional loans. These levels of homeownership were then surpassed over the past 15 years, but it certainly wasn’t because people were making more and saving more than their parents did. They were simply going more deeply into debt.

Now, after three years of high unemployment and stagnant growth, the homeownership rate has fallen, with millions of homeowners becoming renters again. Amazingly, the homeownership rate remains above what it was during much of the post-war boom, and is likely to keep falling.

The Fed has managed to push mortgage rates below 4 percent, but the cat is out of the bag and potential homeowners know that homeownership comes with significant risks. In an age of declining incomes and high unemployment, why should people be clamoring to buy houses? One can only hope that the Fed will fail in its effort to re-inflate the bubble.

The present crisis can only be cured through a process of debt reduction, savings, and capital accumulation to make up for 15 years of non-stop spending at the expense of all else. A decline in homeownership is an important part of this process.

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