American Dream Slipping as Homeownership at 18-Year LowPrashant Gopal and Clea Benson
The U.S. homeownership rate, which soared to a record high 69.2 percent in 2004, is back where it was two decades ago, before the housing bubble inflated, busted and ripped more than 7 million Americans from their homes.
With ownership at 65 percent and home values rising, housing industry and consumer groups are pressing lawmakers to make the American Dream more inclusive by ensuring new mortgage standards designed to prevent another crash are flexible enough that more families can benefit from the recovery. Regulators are close to proposing a softened version of a rule requiring banks to keep a stake in risky mortgages they securitize, according to five people familiar with the discussions.
Lawmakers currently shaping housing finance are seeking to reduce the government’s role in keeping rates affordable for riskier borrowers while ensuring homeownership is within reach of minorities and first-time buyers who could be needed to sustain the housing recovery as borrowing costs rise from record lows. Who will be able to buy property depends on the balance they reach, according to Anthony Sanders, a professor of real estate finance at George Mason University in Fairfax Virginia.
“Low down-payment loans coupled with exotic adjustable rate mortgages helped fuel a massive housing bubble, which ultimately burst and took down the financial sector,” said Sanders, who was the former head of mortgage-bond research at Deutsche Bank AG. “So the question now is do we want to do this again?”
The homeownership rate in the second quarter was unchanged from the prior three month period, according to Census Bureau data released today. It will hit bottom at about 64 percent in the next year as families leave the foreclosure pipeline and enter rental homes, according to a May analysis by London-based Capital Economics Inc. It’s currently the lowest in almost 18 years after averaging about 64 percent for 30 years through 1995.
First-time buyers and minorities are among the groups that have seen the sharpest declines since the crash. While property ownership among senior citizens was little changed at about 81 percent, the share below age 35 that own a home fell to about 37 percent from almost 42 percent five years earlier.
The rate for blacks reached almost 50 percent in the second quarter of 2004 from about 43 percent in 1995, Census Bureau data show. By the second quarter of this year, it had dropped to 42.9 percent. The rate for whites fell to 73.3 percent in the second quarter, from 76.2 percent in 2004.
In the midst of a new economic push, President Barack Obama, who spent much of his first term managing the foreclosure fallout, is now turning to buying homes.
“The key now is to encourage homeownership that isn’t based on bubbles, but is instead based on a solid foundation where buyers and lenders play by the same set of rules, rules that are clear, transparent and fair,” Obama said in a July 24 speech.
Presidents have been promoting homeownership at least since the Federal Housing Administration was created by Franklin Delano Roosevelt in 1934 to insure mortgages so more borrowers could qualify. Over more than 50 years, administrations touted property buying as a way to put lower-income families on a path to social and financial stability by forcing savings and making for a more involved citizenry.
Successive Clinton and Bush administrations unleashed ambitious programs to widen buying. Clinton’s “National Homeownership Strategy” in 1995 set a goal of allowing millions of families to own homes, in part, by making financing “more available, affordable, and flexible.”
President Bush credited his policies with homeownership reaching an all-time high after he set a goal in 2002 of allowing 5.5 million poor and moderate-income and minority families to buy homes so that “everybody who wants to own a home has got a shot at doing so.”
At the center of these efforts were Fannie Mae and Freddie Mac, which financed mortgages for low- and moderate-income borrowers according to goals set by the federal government that steadily increased until 2008.
As Wall Street helped create subprime and riskier mortgages for borrowers with low credit scores and zero down payments, Fannie Mae and Freddie Mac bought more of the loans to meet those targets. After house prices peaked in 2006 and then fell as much as 35 percent, defaults surged and the companies required a $187.5 billion bailout from the taxpayer.
Stuart Gabriel, finance professor and director of the Ziman Center for Real Estate at UCLA, said the crisis was brought on in part by the belief that homeownership could drive the economy and give the middle class access to a relatively safe leveraged investment, combined with the housing industry’s thirst for profits.
“The rhetoric going into the mid-2000s was that on a national basis and subsequent to the Great Depression housing prices only moved in one direction and that was up,” Gabriel said. “If you study the housing policies of the Obama administration, there’s an effort to push the needle back to some balance with rental assistance. There are reasons for that, including the massive homeownership failure he was dealing with.”
As the economy heals, first-time buyers and second-chance borrowers with damaged credit want a crack at property. While affordability is near a record, they’re facing a tight mortgage market, rising borrowing costs as the Federal Reserve weighs reducing its stimulus efforts, and a housing market drained of low-cost listings by private-equity firms building an industry of single-family houses for rent.
The median home price rose 13.5 percent in June from a year earlier as 1 in 3 properties were purchased with cash, according to the National Association of Realtors. The share of first-time buyers, which historically averaged about 40 percent, has fallen to 29 percent, according to the Realtors’ group.
Buyers in their 20s and early 30s are often at a disadvantage because they have thin credit files and limited assets for down payments, said Sarah Rosen Wartell, president of the Urban Institute, a Washington-based nonprofit organization that studies social and economic issues.
“I’m not suggesting indiscriminate access to homeownership but there are many borrowers who are capable of demonstrating the capacity to pay,” Wartell said. “Those who are able to benefit from the low rates and prices are the investors and those families who weathered the recession most successfully. And those who had a job loss or foreclosure, in many cases through no fault of their own, have the double whammy of being shut out of a rising market.”
Julie McKinney, 26, and her fiancé Chris Miller are saving for a down payment so they can begin married life in a house of their own. McKinney, a college marketing coordinator, took on weekend work at a gym and winery and the couple moved into her sister’s basement outside Baltimore. McKinney and Miller, a first grade teacher, also bag lunches and cut grocery coupons, she said.
“We’ve never taken anything on that is this big and it’s so exciting to have a goal in mind,” said McKinney, who hopes to amass about $7,000 for a down payment on a Baltimore starter home. “It’s a transition into adult life.”
Their opportunity to buy depends on a mortgage underwriting system that’s in transition.
Six regulators, including the Fed and the Securities and Exchange Commission, plan in the next few weeks to ask for public feedback on a rule mandated by the 2010 Dodd-Frank Act that’s known as the Qualified Residential Mortgage rule, or QRM.
Facing pushback from a coalition of more than 50 organizations advocating homeownership including homebuilders, Realtors and consumer groups, the panel is preparing to unveil a weakened version of a proposal that will require lenders to keep a stake in risky mortgages that they securitize.
The agencies are scrapping an earlier, more stringent proposal that would have required banks to hold a share of mortgages issued to borrowers spending more than 36 percent of their income on debt and those who made less than a 20 percent down payment. Instead, it will require lenders to retain risk on loans issued to borrowers spending more than 43 percent of their income on debt.
“If what we’ve heard about the proposed QRM rule is true, then we are very pleased that the agencies are moving towards a broad definition that will benefit the American people by ensuring access to safe, affordable options for buying a home,” Gary Thomas, president of the National Association of Realtors, said in an e-mailed statement.
Meanwhile, the U.S. Senate and the House of Representatives have both introduced bills that would overhaul the housing finance system by winding down government-owned Fannie Mae and Freddie Mac, which back more than two-thirds of all mortgage originations.
A House bill from Representative Jeb Hensarling, a Republican from Texas, would eliminate Fannie Mae and Freddie Mac and remove the federal backstop from most of the residential mortgage market.
The Senate bill, written by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner, reflects a growing bipartisan consensus that the U.S. should have a role as a catastrophic reinsurer of mortgages, behind significant private capital. The bill was written with input from the Treasury Department.
“They’re looking for a way to accomplish goals that very much reflect our goals,” Treasury Secretary Jacob Lew said in a July 18 interview on Bloomberg Television.
Those goals include limiting taxpayer risk, getting private capital back into the mortgage markets and maintaining access to credit for worthy borrowers, Lew said.
Obama said in the July 24 speech in Galesburg, Illinois, that he is acting on his own “to cut red tape for responsible families who want to get a mortgage but the bank is saying ‘no.’”
“We’ll work with both parties to turn the page on Fannie Mae and Freddie Mac, and build a housing finance system that’s rock-solid for future generations,” Obama said.
While legislators delve into the intricacies of mortgage lending, what they aren’t debating is homeownership and how much of it is a good thing, said Isaac Boltansky, an analyst with Compass Point Research & Trading LLC in Washington.
“We don’t have as much of a focus on the big picture,” Boltansky said. “We don’t talk about whether we should be a homeownership society any more. It’s not where the debate is. There’s a discussion about mechanism.”
Owning a home that is fully paid off provides stability in retirement and if the U.S. has a greater share of aging renters that could put a strain on taxpayers, said Christopher Mayer, a real estate professor at Columbia Business School in New York.
“Having a path that people can become a homeowner is an important path,” Mayer said. “And it’s really important for middle to lower income folks who have a hard time saving and for whom targeting savings programs are not very successful.”
While homeownership has a natural appeal because people like permanence and the ability to make a property their own, it has been oversold, Yale University economist Robert Shiller said.
The 65 percent homeownership rate may even be high compared with robust economies such as Germany’s, where 53 percent own homes and Switzerland, which has a rate of about 35 percent, Shiller said. Homeownership may inhibit economic growth by limiting the ability of families to move as freely for jobs and the government subsidies could be used for other purposes, he said.
“We’ve learned that the risks matter,” Shiller said. “We’ve seen the consequences of encouraging people to put all their life savings in one investment. Public support for homeownership will be lower for years to come and I would be surprised if this boom turned out to be as big as the last one.”
Editors: Pierre Paulden, Rob Urban