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10.10

Lower Home Ownership Foreseen

For many years home ownership was seen as a sign of stability. Owners tended to stay in their homes longer than renters did, had an incentive for home improvements, and developed community networks.  In the past decade, the “Ownership Society” was touted as a goal for the United States.  Low or zero down payments for home mortgages had made ownership an achievable goal.  One of the advantages was the ability of homeowners to borrow against the equity in their homes.  As prices rose, this came to be seen as another ATM.  But prices in the housing market were artificially inflated by demand from buyers who really could not qualify for traditional mortgages.

Low mortgage interest rates meant that a family could move into their own home for about the same cost as rent.  By 2006, the rate of home ownership peaked at 69 percent. 

The housing bubble burst.  Between the second quarter 2006 and the first quarter 2009, U.S. housing prices overall fell by 31 percent.  With the recession and consequent rise in unemployment, the home ownership rate fell to 67.2 percent in the fourth quarter of 2009.

About a quarter of homes are now underwater — more owed on the mortgage than the home is worth.  Many of these homes are being abandoned by their owners in favor of renting living quarters.  Even where the mortgage had been paid off, and the home was being counted as a part of the retirement nest egg — either to sell and move to smaller quarters or to use as collateral for a reverse mortgage — owners were adversely affected by the falling housing market.  One estimate is that there is now a supply of unsold housing on the market that exceeds eleven months of sales.

While house prices soared during the bubble, over the long term they generally rose at about 1 percent to 3 percent per year — about the same as inflation.  According to the Financial Times, a $100 investment in housing in 1933 is now worth $178, adjusted for inflation.  A similar investment in stocks would be worth $982 in today’s dollars, according to Yale economist Robert Shiller.  The comparison does not account for dividends or the use of debt.

Research by the Federal Reserve Bank of New York introduced the concept of the home ownership gap — defined by excluding negative equity homeowners from the Census Bureau’s official rate, which includes underwater homes in its overall owner-occupied statistics.  The gap is significant, measuring 5.6 percent for the nation as a whole and rising as high as 39 percent for the metropolitan areas hardest hit by the housing crisis.  This gap contains the homeowners who are most likely to emerge as renters.

Two indexes are show in the table below — the Federal Housing Finance Agency (FHFA) and the S&P/Case-Shiller (Case-Shiller) indexes.  The authors warn that the gap may be understated, because not all liens are reflected.

(click to see larger image)

The report calculates net savings required for the average negative equity homeowner to buy a new home in five years.  This includes making a new down payment, paying all transaction costs, and settling differences between the current house price and the mortgage balance at the time of sale.  It works out to more than $1,200 more savings per month.  More than 6 million households are in negative equity, so the total savings increase for the nation would be $92 billion for five years. During 2009, the average personal saving rate was 4.3 percent.  This addition would boost the required personal savings rate to 5.1 percent.  Some 6.3 million workers have been unemployed for more than six months, so employment prospects would have to improve if all the underwater homeowners were to see a way out.

Perhaps home ownership has been oversold.  Houses are an illiquid investment and tend to cause laid-off workers who own them to look for work nearby rather than pull up roots to go seeking work elsewhere.  This tends to increase the duration of the period of unemployment.  Homeowners receive subsidies in the form of mortgage interest deductions and property tax deductions.  Those may be limited in the future to increase federal tax revenue. 

Bill Gross, who manages Pimco, the world’s largest bond fund, says “We’ve overemphasized our investment in housing and neglected to invest in education and infrastructure.  We need to refocus on the production of ‘things’ rather than the production of financial products and houses.”

Already, there is an increase in the demand for investor-owned rental housing as former homeowners become tenants.  This trend will continue.

References

“Sunset Boulevard: US Housing,” Financial Times, 17 August 2010  http://www.ft.com/cms/s/0/9c6ac4d2-a968-11df-a6f2-00144feabdc0.html

George F. McClure is Technology Policy editor for IEEE-USA Today’s Engineer and the IEEE Vehicular Technology Society's representative to IEEE-USA's Committee on Transportation and Aerospace policy.

Comments may be submitted to todaysengineer@ieee.org.