Homeownership Levels Continue to Plummet and Home Values Follow

This should come as no surprise in light of the foreclosure crisis and plummeting home values, but homeownership levels have dropped to levels not seen since 1998, according to reports from the Census Bureau (which I learned of via this HousingWire article by Jon Prior).

Homeownership is down to 66.4%, down from 67.1% from the year prior.  High unemployment, tight credit, and foreclosure are largely to blame.  Many people who bought at the peak of the market and subsequently saw their home equity evaporate are hesitant to re-enter the housing market (if indeed they are able to).  It is the rare person that touches a hot stove twice.

This situation is probably not getting better any time soon.  As of last summer, 25.5% of Americans had credit scores below 599, making them unlikely to be able to attain credit for a mortgage.  More than 25% of homeowners that have mortgages are underwater (owe more on their mortgage than their home is worth).  The further someone is underwater, the higher the likelihood that they end up defaulting on their loan (strategically or otherwise).  Foreclosures are down in the first quarter, but are likely to pick up as lenders and servicers resume foreclosures which were suspended due to the robo-signing mess.

Home prices have been falling since the expiration of the first time home buyer tax credit last year.  Prices are now down more than 30% according to the S&P/Case-Shiller Home Price Index, and are likely to surpass the 2009 lows soon (if they haven’t already, the Case-Shiller report is a delayed by two months), confirming the housing double dip.  Home prices are falling largely as a result of the massive supply of unsold houses (in visible as well as shadow inventory) and the lack of demand for them.  This lack of demand stems from high unemployment, low credit scores, tight credit, stricter underwriting, and a general sense of fear over our economic prospects.

We built houses during the bubble to accommodate homeownership rates close to 70%.  Now that number is falling and is likely to fall further.  This leaves a large gap between the number of available houses, and the number of people who wish to buy them.  Some percentage of these houses will ultimately be turned into rental properties, but that alone will not solve our excess supply issue.  Barring a massive influx of qualified home buyers or some miraculous economic turnaround, we should expect home prices to continue to fall.