Homeownership Rate Down Again – Time to Rethink Policies Promoting Homeownership?

According to new information from the Census Bureau, the U.S. homeownership rate fell again in the first quarter of 2012.  The overall rate is now 65.4%, down from 66% in the fourth quarter of 2011.  This is the lowest level in fifteen years.  Homeownership peaked at a rate of 69.2% in the summer of 2004.

The number of Americans owning homes has dropped largely as a result of foreclosure, and will likely to decline further as banks begin more foreclosures.  Foreclosures were down in 2011 due to increased legal scrutiny over the legality of many foreclosures.  Following the mortgage settlement, it seems likely that foreclosures will increase in the coming year.  RealtyTrac reported last week that foreclosures were up in the majority of U.S. metro regions, and foreclosure starts are rising as well.  A Bloomberg article today quotes Scott Simon, the head of mortgage bonds for PIMCO, as saying that as many as 6 million more borrowers will lose their properties over the next five years.

The vast majority of those that lose their homes will become renters (they will have to live somewhere).  The concept of REO to rental schemes has become popular of late, and if these plans are successful, they would sop up a large chunk of housing inventory (I am skeptical that massive REO rental programs will be successful due to the logistical complexities of managing large numbers of rental properties).  Nevertheless, the shadow inventory of unsold homes not on the market is potentially huge.  Nobody really knows how many homes are in shadow inventory, but estimates range from 1 million to 10 million homes.

It also seems likely that many lenders are holding REO properties off the market in order to prevent a freefall in home prices.  Delaying the sale of these homes helps banks avoid immediately marking the homes to their new market value.  If banks had to mark all these properties to their market value immediately, their bottom lines would take a massive hit.  Delaying this process allows banks to spread the losses over a longer period of time.  What this all boils down to is a massive excess supply of housing.

At the same time, there is a lack of demand for these homes.  Unemployment, lack of consumer confidence, falling home prices, low rates of household formation, demographic trends, and tight credit all depress the demand for homes.  This imbalance in supply and demand ensures continued declines in home values.

All of this leads to a larger question: should the United States continue to pursue a policy of promoting homeownership at all costs?  To a large degree, promoting homeownership has been the housing policy of the United States dating back to at least the creation of Fannie Mae during the Great Depression.  The creation of a credit bubble in the late 1990s-early 2000s helped to fuel a further rise in homeownership.  Homeownership is seen as one of the fundamental parts of the American dream, but the rush to promote homeownership is one of the reasons there is such a large overhang of excess housing (n.b. the private sector rush to originate and securitize mortgages that previously would not have met underwriting standards also had a lot to do with it – a lot of other countries had a similar boom/bust, and it isn’t all because of U.S. government policies).

Do you think our policy should be to promote homeownership to the extent that we are?  Let me know in the comments section below.

 

 

 

About Michael Kraus

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