Macroeconomics

Why Is the Homeownership Rate Still Falling? An alternative explanation.

When it comes to loan rates, the one that concerns the most regular consumers is the mortgage loan interest rate. This past February 2016 a 30-year mortgage interest rate averaged 3.66 percent accordingly to Freddie Mac, whereas the homeownership stubbornly kept its 63 percent level. So, with the mortgage interest rates averaging 3.53 percent (15-year mortgage loan), why the homeownership has not come back to 69 percent level as it was before the Great Recession? Some analysts have proposed cynically that 69 percent homeownership represents an unsustainable level, and that homeownership is no longer attractive. Neither of those explanations would look rational to a maximizing agent. Otherwise, an alternative analysis could lead to a different conclusion. That is, low-interest rates are helping investors to outbid competitors rather than prospective homeowners to get a house. The worrisome part of the problem is that this situation could lead the housing market to a crisis due to inflated home prices, as well as to higher levels of inequality.

Given that purchasing a house represents arguably the biggest investment of a lifetime of a regular person, these rates are mainly observed by monetary authorities, analysts, and homebuyers. In fact, these rates have become even more relevant since the Great Recession originated ostensibly from failures within the regulation of the housing market.

By Catherine De Las Salas

By Catherine De Las Salas

Homeownership rate has been declining.

A rapid view of real estate market indexes will show firstly that homeownership rate is flat. This rate has been flat and declining since its highest level before the Great Recession for which it reached 69 percent. Last economic quarter of 2015, homeownership registered 63.7 percent. Second, prices of both sales and rents are up to the extent that cost of shelter is among the only factors driving up inflation in the United States. Following the Case-Shiller index and the Federal Housing Finance Agency, home prices have increased at a yearly rate of 6.0 percent. Third, new residential sales, as measured by the U.S. Census Bureau, were also up by 6.1 percent in January 2016 when compared to the same month of 2015. Likewise, Pending Home Sales in January recorded 3.5 percent increase. Fourth, mortgage loan interest rate averaged 2.96 percent for a 15-year fixed loan during February 2016 (find more on housing indicators)

Investors could be outbidding prospective homeowners.

All these indexes beg the question on why homeownership has not increased due to the rising levels of sales, as well as the cost of shelter, and upturns in home prices. One of the answers available for this puzzle is that investors are taking over the market. Investors could be outbidding prospective homeowners making it harder for them to access ownership. Likewise, having investors controlling the housing market retains the risk that speculative money could inflate a bubble again in the housing sector, leading loans to go underwater at some point afterwards. A housing sector crisis could repeat under the same circumstances of the Great Recession nowadays.

The counter argument derives from the fact that the housing crisis was only the trigger for the Great Recession to start. Indeed, default in mortgage-backed loans trickled down in the form of multiple spillovers on the banking system. Securitization of banking products through the practice of bundling subprime mortgages led to the spreading of toxic assets all over the financial system (learn more of this issue here). Therefore, the fact that recent regulation within the financial system, as well as regulation governing lending practices, makes it less vulnerable for the rest of the economy. So, if the housing sector happens to be a risky position, an eventual crisis will not spread inasmuch as it did before the Great Recession.

The consequence, rising levels of inequality.

So, although a housing sector crisis could be discarded by looking at the arguments herein, the effects on inequality could not. As of March 2016, there appears to be no worrying signs or data with respect to the housing market. Nevertheless, assuming that homeownership has not increased because an alleged lack of incentives in owing seems ridiculously naïve.  And concluding that pre-Great Recession levels of homeownership were unsustainable appears not rational either. Then, an alternative explanation points at the competition of capital for seizing valuable assets. The consequence, low level of homeownership rate while rising levels of inequality.

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