Our recent experiences in D.C. confirm that homeownership is clearly a value that is promoted by most politicians. They are in for a rude awakening, however, and a legacy that they will not be proud of.
8 million homeowners are currently not paying their mortgage, and we believe 6 million of them will lose their home to the bank in the next 2 years. This will reduce the homeownership rate to 62%, as follows:
According to a recent study, another 5% of all households which roughly equals 5 million additional homeowners have no equity in their home. This suggests only 57% of U.S. households own a home with equity value. If you believe that many will strategically default, this will push homeownership even lower.
Here are the many variables that will affect homeownership over the coming years.
Factors Pushing Homeownership Up
- Aging Demographics – If we built a fence around the U.S. and did not let immigrants in, homeownership would go up due mostly to the fact that homeownership rises as you age.
- New Households – Every year, millions of young people reach the age where they leave their parents and go out on their own. This far exceeds the households lost to death. The actual numbers cycle with the economy, however, as they won’t leave if they can’t find a job or can’t afford housing.
- Great Affordability – Approximately 58% of homeowners can afford the median priced home vs. 45% historically (assuming a 31% front-end DTI ratio and a 95% LTV). Affordable housing and generous mortgage terms impact housing greatly.
- Social Policy – Elected officials seem to be very much in favor of high homeownership because it builds equity and provides neighborhood stability. While that’s correct in theory, they need to balance that goal with the fiscal reality that not everyone is financially responsible enough to save some money for a down payment and to make their mortgage payment every month!
Factors Pushing Homeownership Down
- Immigration – Immigrants tend to rent first before buying. A rule of thumb is that immigrants average 7 years as a renter before becoming a buyer. The higher the immigration, the lower the homeownership rate.
- Lending Policies Tightening – Fannie Mae, Freddie Mac and FHA have tightened standards, but it is still much easier than usual to get a mortgage. For most of the last 50 years, 20% down payments or 10% down payments with mortgage insurance, 32% front-end and 40% back-end debt to income ratios were the norms. Fannie and Freddie will still buy loans in some states over $700,000. Fifteen years ago, the maximum was only $203,000. Thanks to government mandates to get more aggressive, mortgages have become much easier to obtain, with default risks borne by the taxpayer.
- Defaults – As mentioned above, 8 million homeowners are not paying their mortgage, and this number grows every day. The loan modifications have little prayer of helping, primarily because so many of these consumers have too much additional debt. As an example, the homeowners who have received permanent modification pay more than 30% of their income to service debt that is not their mortgage.
Today, the official homeownership rate stands at 67.1% – back to a level consistent with early 2001. Now that the economy has slowed much more than expected, consumers have moved back to the sidelines (despite the fantastic interest rates and affordability). Adults with incomes can afford to buy homes, and we have 7.4 million fewer adults with incomes today than we did at the peak in 2007.
The economic growth data improved slightly this month, although we are seeing signs that the economy is slowing, which will show up in the data releases in July and August. Retail sales and personal income growth continued to increase on a year-over-year basis, and year-over-year job losses continued to ease. Q1 Real GDP grew 2.7%, which is down from 5.6% last quarter. The unemployment rate decreased this month to 9.5%, and the broader measure of unemployment, the U-6, decreased to 16.5%. The length of unemployment in the labor force increased to 34.4 weeks this month, which is a new record high since the BLS began tracking the statistic in 1948. Personal income growth improved for the fifth consecutive time since December 2008, increasing by 1.6%. The CPI (all items) decreased to 2.0% from 2.2% last month, while the Core CPI (minus food and energy) held steady at 0.9% compared to last month.
The ECRI Leading Index – an indicator of future U.S. growth – decreased this month compared to the previous month, and the yearly growth rate remains positive but has slowed to 7.9% year-over-year growth. Stocks declined this month, with the S&P 500 down 5.4%. All four major indices have still experienced large positive year-over-year growth, ranging from +12% to +16%. The S&P Homebuilding Index got hammered this month, declining 18%, as weaker than expected home builder orders and CEO commentary made investors quite skittish. The spread between corporate bonds and the 10-year treasury narrowed this month, decreasing to 167 bps and is well below the peak of nearly 270 bps in March 2009 as Wall Street has become less worried about businesses failing over the past year. Business credit availability remains poor overall, but conditions are slowly improving.