Wednesday, November 19, 2008

How the Social Goals of Increasing Homeownership Caused the Mortgage Mess

This article is reprinted with the written permission from the author. It was originally printed in the October 2008 edition of the NAPFA ADVISOR.

The Bush Administration, Congress and the U.S. Department of Commerce haven't been bragging about homeownership percentages in the U.S. for the past two years. They would prefer to have voters forget about the social goal of increasing homeownership that was regularly reported in the news for years. The rate was 66% in the second quarter of 1998 and rose to 69.2% in 2004, but it dropped back to 68 % in the second quarter of 2008. (Data comes from the U.S. Department of Commerce, Census Bureau, Housing Vacancies and Homeownership Report, Second Quarter 1998 and US Census Bureau News Second Quarter 2008 Report, July 24th, 2008.)

What's really interesting about the situation is that it could be argued that the social engineering experiment of putting a larger percentage of people into their own homes didn't even occur. The percentage of homeowners as reported by the Commerce Department is a misleading figure.

Homeownership are reported as the percentage of owners and renters in occupied housing units. This is not the same thing as a calculation that reflects the number of owners as compared to total housing units. The difference between the two measurements is substantial and it highlights the folly of the government-aided housing boom.

As of June 30th, 2008, there were 130 million housing units in the U.S. This number was boosted by rapid development in the last 10 years, as 12.5 million units were added in that period. Many of these units were built to meet surging demand caused by easy credit and low rates.

As of June 30th, 2008, only 111.2 million of those 130 million units were occupied. Breaking it down, 75.7 million were owner-occupied and 35.5 million were renter-occupied. That's roughly 68% or the number reported by the government to reflect homeownership.

However, with 18.6 million units vacant, the homeownership rate that reflects actual use of homes by homeowners is much lower. Only 58% of existing homes were being occupied by the actual owners (75.7 million occupants out of the 130 million homes). That is a more realistic number.

When looking at homeownership from this angle, some stark statistics emerge. For example, the number of units vacant has risen 33.8% over the last two years. In the year ending June 30th, 2008, the U.S. added 2.1 million in total housing units. Unfortunately, only 900,000 of the new units were occupied. This is hardly a model upon which to grow an economy.

The Securities and exchange Commission (SEC) and the investment industry's voluntary regulatory operation known as FINRA have responded to scandals in the mortgage industry. They have issued new, stringent rules requiring finger-printing and background checks. These measures should be lauded but the horse (protecting consumers) left the barn three years ago.

The SEC should have curbed the mortgage industry in 2005. But nobody wanted to stop the party. For the mortgage industry and real estate developers, money was rolling in. For banks, the lending was easy. And for the federal government - which is supposed to be watching out for the public - the goal of higher homeownership rates was apparently being met.

Over the last 10 years, some efforts were made to reign in the housing market before it busted. Fannie Mae and Freddie MAc, two of the biggest proponents of the housing boom, were challenged. But their lobbying efforts overwhelmed the opposition, even as Fannie and Freddie reported billions of dollars of false earnings claims.

Everyone applauds the social goal of putting more of our citizens in their own homes. It is a part of the American dream. But the push to increase homeowneship even a few percentage points helped create the mortgage mess we have now.

At this point, we don't need new regulations to correct the abuses in the mortgage and housing sectors because economic forces are correcting them for us. Mortgages being funded now require stellar credit and a substantial down payment.

In conclusion, millions of people have been harmed by the bubble and the entire U.S. economy has been put at risk. All of the current troubles are in response to a social goal of increasing the rate of homeownership that never really happened. Tens of thousands of people were talked into buying homes they realistcally had no economic business purchasing. Now, whatever wealth they had accumulated has been crushed and their credit and self-esteem have been damaged for many years.

All of us are paying for the excesses of a failed social policy that pushed those folks into temporary homeownership.

by J.Stephen Cowles, CFP is a NAPFA member in LaJolla, CA

Call me at 802.238.5256, email me at or post your comments at Hurd's The Word or go to my website at Burlington Vermont Real Estate.

1 comment:

Patrick said...

It is just so tempting to abandon the real estate business (at least temporarily) right now. However I’ll look into your ideas. Thanks

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