After three decades of stability, the national rate of homeownership suddenly began rising in the mid-1990s, going from 64% in 1994 to 69% in 2004. But new research published by the Federal Reserve Bank of Atlanta concludes that the bulk of the increase was caused by looser mortgage-lending practices rather than demographic factors such as more households of home-buying age.
That raises an important question: How much of the growth in homeownership is sustainable now that lending standards have tightened? There's no reason to expect all the gains to disappear, but some economists say the Atlanta Fed study points to more trouble ahead for the reeling housing market.
In an Oct. 23 e-mail to BusinessWeek, Goldman Sachs (GS ) chief U.S. economist Jan Hatzius wrote: "The key issue is the potential for a vicious cycle" in which falling homeownership hurts housing prices and forces more defaults, causing ownership to decline even more. That's because falling prices make it more difficult for holders of certain types of mortgages to refinance and hang on to their homes. Added Hatzius: "What the Atlanta Fed paper does is illustrate how important changes in access to credit can be in this cycle."
One warning sign: The rate of homeownership has already begun to drop. It was 68.2% in the second quarter of 2007, down a full percentage point from its peak. The third-quarter number was scheduled for release on Oct. 26.
Many analysts have pointed to easy lending as a contributor to the housing boom, but the Atlanta Fed paper may be the first to quantify its effect in a rigorous way. Using math-heavy macroeconomic analysis, the authors conclude that the availability of new mortgage options accounted for 56% to 70% of the decade-long increase in the U.S. homeownership rate, while demographic changes accounted for only 16% to 31%. Although the paper cites lowered downpayment requirements as the biggest factor in raising ownership, co-author Carlos Garriga of the St. Louis Fed says a forthcoming paper will attribute more of the effect to "teaser" loans with low introductory payments that appeal to young and lower-income buyers.
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True, many of the mortgage changes since 1995 were legitimate and lasting, including banks' outreach to minorities under the Community Reinvestment Act. Even the first wave of the subprime lending boom, from 2000 to around 2004, was fairly sensible. It was only in 2005 that lending standards were really abandoned.
Nevertheless, the homeownership rate could fall well below the level it reached in 2004, at least temporarily, because the mortgage market is in such turmoil. Christopher R. Burdick, director of economic analysis at the Schwab Center for Financial Research (SCHW ), says the rate could fall to 67% and stay there for some time.
If that doesn't sound like much, keep in mind that each percentage-point change has a huge impact on housing construction and prices. In a recent report, Goldman's Hatzius wrote: "Given the current number of U.S. households of 110 million, the change in the homeownership rate over the past two years has already subtracted almost 500,000 from the underlying demand for new homes." Looks like there's more bust left in the housing bust.
By Peter Coy