Reconsidering the “Home-ownership Rate”
- “Rise in Renters Erasing Gains in Ownership,” New York Times, June 21st 2008
The story above is based on home-ownership data released by the Census Bureau back in April. The article bemoans the fall in the home-ownership rate from 69.1% in the first quarter of 2005 to 67.8% as of the first quarter this year. Yet I wonder: did the home-ownership rate ever really reach 69.1%?
What I doubt isn’t the Census Bureau’s figure, I doubt their definition of home-ownership.
With approximately 110 million households nationwide, the decline to 67.8% represents 1.7 million households that shifted from owning to renting. But who were these 1.7 million households? How did they come to own their house and how much of their house did they actually own?
It’s no secret that financial “innovation” in the mortgage market made “home-ownership” possible for millions. That’s what the “proponents” of subprime lending say and perhaps for a few thousand borrowers it was true. But clearly we had a case of too much of a good thing.
Wall Street funneled hundreds of billions of dollars at increasingly easy terms to folks who’d never had access to the mortgage market before. Probably for a good reason. In 2006 alone, $600 billion worth of subprime mortgages were handed out. From 2004-2006, Moody’s Economy.com estimated that 21% of all mortgages originated were subprime: low teaser rates and, crucially, little or no downpayment.
Having put little or no money down, subprime buyers’ paid mostly interest to the bank each month. Their mortgage payments purchased little or no equity in their homes. It’s ironic, but you could say they were effectively renting—from the bank instead of a landlord.
Subprime lending didn’t make true home-ownership possible, merely the illusion of ownership.
This is why it’s foolish to lament the fall in the “home-ownership rate.” No gains in ownership were actually made. Instead, we should lament the fall in home equity, which is a more precise gauge of ownership to begin with. The Fed reported in early June that homeowners’ portion of equity in their homes has fallen to 46.2%, a new all-time low. More frightening was this quote from the same article:
A homeowner’s equity is the market value of a property minus the mortgage debt. And homeowners’ percentage of equity has declined steadily even as home values surged during the housing boom due to a jump in cash-out refinancing and home-equity loans, plus an increase in 100 percent financing.
Not only have the gains evaporated, but in Americans’ race to cash-out—and spend—those artificial gains, many now owe more on their house than it is worth. And since their house is often their only asset, their net worth is negative.
So much for the “ownership society.”
[P.s. if anyone knows where to find the raw data on homewoners' portion of equity, please send me an e-mail. I'd love to add a chart to this post showing how equity continued to fall even as prices went up....]
[P.p.s: Paul Krugman today expounds on the misplaced importance American society places on homeownership.]