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Federal National Mortgage Association
Federal Home Loan Mortgage Corp
For anyone who owns a home, the past six years have seemed anything but normal. Nationally, home prices are down some 35 percent in that time, and in some cities the drop was almost double that figure. Even with some recent signs of improvement, the housing market is likely to bounce along the bottom for a long time.
Yet in one sense, we’re returning to normal. The homeownership rate in the first quarter of 2012 fell to 65.4 percent. It is now at 1997 levels, 3.6 percentage points below the peak reached in the bubble years—and coming closer to what you might call a natural rate for the U.S. economy.
The share of U.S. dwelling units occupied by owners was remarkably stable from 1900 through 1940, in the mid-40 percent range. Then it jumped to 55 percent in 1950, and to the 60-plus percent level starting in the 1960s. World War II veterans and their families bought homes, and policy legislators encouraged this by actively promoting housing, lavishing such tax breaks on owners as the mortgage interest deduction. The homeownership rate was relatively stable again from 1970 (62.9 percent) to 1990 (64.2 percent).
The embrace of housing ran even deeper. Giant subsidized institutions such as Fannie Mae (FNMA), Freddie Mac (FMCC), Ginnie Mae, and the Federal Home Loan Banks supported home buying. The mortgage industry giants helped create and expand the securitized mortgage market, building an enormous money pipeline between homeowners and the global capital markets. Washington made ownership even more attractive in 1997 by eliminating capital gains on the first $500,000 in profit at sale for joint filers, and $250,000 for single filers. Regulators in the early 2000s cheered the democratization of credit as bankers and their Wall Street partners ginned up all kinds of loans targeted at low-income borrowers, from no-doc mortgages to option ARMs.
As we all know, the ranks of homeowners swelled in the 2000s. Money flooded the market until the rate peaked at 69.4 percent in 2004. The bubble burst two years later. “The way we got to nearly 70 percent was to call a lot of people who had no equity in their homes ‘homeowners,’” says Richard Green, director of the Lusk Center for Real Estate at the University of Southern California.
Homeownership still has its attractions. America is aging, and older folks like the relative security that comes from owning. A home offers roots in a community. Owners also don’t have to worry about landlords raising the rent on them. A home becomes more affordable for many aging Americans as their incomes and wealth increase. For example, even after the dreadful experience of the past several years, the homeownership rate for those 65 and older was 80.9 percent in the first quarter of 2012, essentially unchanged from the 80.8 percent level for the same time period in 2005. In sharp contrast, the rate of those 35 and under was 37.9 percent in the first three months of 2012, down from 43.3 percent seven years earlier.
Fundamental social and economic trends suggest we won’t go back to the near 70 percent homeownership rate. Badly burned bankers and their regulators are more conservative in their practices. Families have changed in ways that will dampen the desirability of owning. Couples are getting married later. Far more important, the average worker has less job security today. Everyone feels they live on a high-wire act as corporations routinely downsize, right-size, reengineer, and overhaul their operations. And that was before the high unemployment rates of the worst labor market since the Great Depression. Laid-off workers have learned the hard way that they need to have the kind of financial freedom that comes from renting.
“We have encouraged people to buy homes, even though we don’t have great job security in the U.S.,” says Dean Baker, economist and co-founder of the Center for Economic and Policy Research in Washington, D.C. “Given what we know about job insecurity you wouldn’t expect a high homeownership rate.” Adds Green: “In the end, a 64 percent to 65 percent homeownership rate is likely where we will be for some time to come.”
Of course, there’s nothing new about changing family structure and rising job insecurity. Washington and the banking industry were simply having too much fun and profit to pay attention. We’ve all learned the hard way that owning any asset—home, stock, or other—is riskier than promoters believed or ever let on.