The homeownership rate in the U.S. fell in the third quarter of 2012 to 65.3% (seasonally adjusted rate, see chart above), according to data released recently by the Census Bureau. Compared to the all-time high homeownership rate of 69.2% in 2005, the share of American households owning a home has been trending downward consistently, and has now fallen almost four full percentage points to the current level. The 65.3% rate in Q3 of this year is the lowest homeownership rate in 17 years, going all the way back to the fourth quarter of 1995 when the rate was 65.1%.
Comment: The political obsession with homeownership starting in the mid-1990s raised the U.S. homeownership rate from below 64% in 1994 to an artificial level above 69% by 2004, but obviously failed to create a homeownership rate that was sustainable in the long run. Government housing policies did increase the homeownership rate in the short-run, but in the process turned good renters into bad homeowners, created a housing bubble, waves of foreclosures, and a subsequent housing meltdown and financial crisis.
What changed in the mid-1990s that created the “homeownership bubble”?
That’s when various federal housing policies that were designed to promote greater homeownerhip among low and moderate income households started being implemented, which required looser mortgage lending standards to achieve the goal of a higher homeownership rate. Here’s a description of that shift towards looser lending standards staring in 1995 for low- and moderate income households and for minority households, from James Gwartney’s economic textbook (14th edition, p. 615):
Home ownership is a worthy goal, but it was not pursued directly through transparent budget allocations and subsidies to homebuyers. Instead, the federal government imposed a complex set of regulations and regulatory mandates that forced various lending institutions to extend more loans to low- and moderate-income households. To meet these mandates, lenders had to lower their standards. By the early years of the twenty-first century, it was possible to borrow more (relative to your income) and purchase a house or condo with a lower down payment than was the case a decade earlier.
Responding to earlier congressional legislation, the Department of Housing and Urban Development (HUD) imposed regulations designed to make housing more affordable. The HUD mandates, adopted in 1995, required Fannie Mae and Freddie Mac to extend a larger share of their loans to low- and moderate-income households. For example, under the HUD mandates, 40% of new loans financed by Fannie Mae and Freddie Mac in 1996 had to go to borrowers with incomes below the median. The mandated share was steadily increased to 50% in 2000 and 56% in 2008. Similar increases were mandated for borrowers with incomes of less than 60% of the median income. Moreover, in 1999, HUD guidelines required Fannie and Freddie to accept smaller down payments and extend larger loans relative to income.
Modifications to the Community Reinvestment Act (CRA) in 1995 also loosened mortgage-lending standards. These changes required banks to meet numeric goals based on the low-income and minority population of their service areas when extending mortgage loans. In order to meet these requirements, many banks, especially those in urban areas, were forced to reduce their lending standards and extend more loans to borrowers who did not meet the conventional credit criteria.
The lower standards resulting from the GSE and CRA regulations reduced lending standard across the board. Lenders could hardly offer low-down-payment loans and larger mortgages relative to housing value on subprime loans without offering similar terms to prime borrowers. As the regulations tightened, the share of loans extended to subprime borrowers steadily increased. Measured as a share of mortgages originated during the year, subprime mortgages rose from 4.5% in 1994 to 13.2% in 2000 and 20% in 2005 and 2006.
Bottom Line: The chart helps to illustrates how government policies (monetary, mortgage market, GSEs, CRA, affordable housing, etc.) created an unsustainable “homeownership bubble” that continues to deflate.
Update: See chart below showing the close relationship between the U.S. homeownership rate and house prices (FHFA purchase only index) from 1991 to 2012. As the homeownership rate was pushed up to historically high and unsustainable levels through federal housing and lending policies, home prices followed to historically high levels that were equally as unsustainable. The homeownership bubble started to deflate in about 2005, and the deflation of the housing price bubble soon followed.