Aug012014
Home ownership rate hits new lows
US policymakers want to increase home prices and maximize the home ownership rate. Prices are up, but the home ownership rates continues to drop.
Declines in the home ownership rate were inevitable when the housing bubble popped. Foreclosures pushed people out of their homes and into rentals at an unprecedented rate. While policymakers have managed to manipulate supply to cause a rise in home prices, demand still hasn’t picked up, and the home ownership rate continues to slide.
It shouldn’t be too surprising the home ownership rate isn’t rising. New home sales are weak, and so are pending home sales, recently slipping 1.1%. Further, new multi-family construction is up, so many more rental units are coming to market. For the home ownership rate to rise, more owner-occupant sales must occur than new rental units come on line. Right now, that isn’t happening.
The decline in home ownership rates may also reflect a generational shift in attitudes toward home ownership. I believe the current generation won’t have the unbridled enthusiasm of the previous generation — thankfully — and they will be more cautious about buying, which is a natural reaction to the carnage they witnessed, but ownership is primal, and no matter how bad lenders and government officials screw everything up, people will still want to own if it’s advantageous for them to do so, and probably even if it’s not.
Homeownership Rate Continues to Decline
The seasonally adjusted national homeownership rate fell to 64.8% during the second quarter of 2014. This marks a drop of 4.6 percentage points since the peak rate of 69.4% during the second quarter of 2004, according to the Census Bureau’s quarterly survey.
The homeownership rate declined by 0.3 percentage points year-over-year. The current rate is also below the 20-year historical average of 66.9%.
The data continue to show declines in homeownership across all age groups, with the largest declines being experienced for younger households. For example, the homeownership rate for those under age 35 currently (second quarter of 2014) stands at 35.9%, which is 7.7 percentage points lower than the peak rate of 43.6% (second quarter of 2004). For those 35 to 44, the homeownership rate is currently 60.2%, 9.9 percentage points lower than the peak rate of 70.1% (first quarter of 2005).
The homeownership rate will continue to decline as pent-up housing demand is unlocked, as such new households are more likely to be renters than homeowners.
I expect the home ownership rate to hit bottom soon. With foreclosures down and hedge funds no longer buying homes to convert to rentals, the number of homes being converted from owner-occupancy to rentals is slowing dramatically. I doubt we see any significant increase in the home ownership rate, as it will probably level out near the 64% rate that proved stable for about 40 years.
The failure of housing policy
The goals of US government housing policy are to increase in resale value of houses and maximize the home ownership rate. Buying a home is characterized as the best investment a middle-class family can make, and home ownership has become synonymous with the American Dream.
During the early 00s, on the surface conditions looked great. House prices were appreciating rapidly, mortgage equity withdrawal was fueling an economic boom, subprime lending was providing home ownership opportunities to everyone, and the American Dream was being recognized by a record number of Americans.
For government officials, this was touted as the success of their policies. Critics of these policies were mocked or widely ignored as the ravings of madmen. Housing subsidies are detrimental to America. Evidence of this epic failure is the collapse in home prices and the resulting 7-year economic malaise caused by the withdrawal of the HELOC abuse stimulus from the American economy. Now we can show their failure was complete as the home ownership rate hits an 18-year low.
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I was looking at some El Cajon properties, and recently spoke with a realtor friend in San Diego. He told me deal activity in his area (East County) has fallen off a cliff, for both him and his realtor colleagues. They’ve had very few showings. Open house showings have totally flatlined, so bad that sometimes not even a single person showed up. He also said they have *nothing* in the escrow pipeline. He says they are all asking, “what the hell is going on?” the last six weeks.
Yes, anecdotal. I don’t know what it means, nor am I extrapolating anything other than current conditions in this specific area. This is an accurate recitation of the discussion we had.
Both new home sales and pending home sales are down, that’s been reported. If the anecdotes from your aquaintences is correct, we should see purchase mortgage applications, new home sales, and pending home sales take a big dive in the coming months.
This is a recipe for continued low mortgage rates.
If demand is already low, if lenders want to do any business at all, they are going to have to lower the cost of money. That will help affordability and perhaps help sales volumes. If for some reason mortgage rates go up, the market will completely freeze and sales activity will really plummet.
This activity will cause mortgage rates to rise independent of demand.
Mortgage-Bond Price Tumble Signals New Risks in Markets
Prices of a new type of U.S. mortgage bonds are plunging this month, teaching investors a lesson on the risks to markets wrought by the growing constraints on Wall Street banks.
The $8.2 billion of risk-sharing securities sold in the last year by government-controlled Fannie Mae and Freddie Mac can shift their losses from homeowner defaults to bond buyers. One slice of a deal issued in May traded at 95.7 cents on the dollar yesterday, down from 99.7 cents at the end of last month, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
While JPMorgan Chase & Co. analysts say they fail to see “any fundamental reason” for the tumble, investors from CQS U.K. LLP to Calvert Investment Management Inc. are speculating that the drop is mainly about the growing amount of the debt running into limits created by new regulations on bond dealers’ ability to smooth trading by building up their inventories.
“It could be symbolic of what could happen more broadly in a real ‘risk-off’ environment,” Bill Murray, a New York-based money manager at $14 billion hedge-fund firm CQS, said in an interview.
Many of the new developments in the Irvine area are offering incentives because selling has slowed.
Fannie Mae promotes lending to deadbeats
Fannie Mae updated a handful of its policies regarding significant derogatory credit events, allowing more borrowers to jump back into the housing market.
1. Mortgage debt waiting period
The borrower is now held to the bankruptcy waiting period and not the foreclosure waiting period. This is true even if a foreclosure action is subsequently completed to reclaim the property in satisfaction of the debt.
2. Preforeclosure Sale or Deed-in-Lieu of Foreclosure waiting period
The waiting periods are being updated to remove the LTV restrictions tied to different waiting periods and establish a standard 4-year waiting period, with a 2-year waiting period permitted if a borrower has extenuating circumstances.
3. Mortgage debt
As a new policy, charge-offs of mortgage accounts now require a 4-year waiting period following this derogatory credit (2 years if the borrower can demonstrate extenuating circumstances). Additionally, the existing charge-off policy in the Selling guide has been relabeled as “non-mortgage charge-offs” to clearly differentiate the two policies.
The first one is effective immediately, while the second and third are effective for mortgage loans with applications dated on and after Aug. 16.
the lingo here is confusing to me, what exactly does this mean?
I ask as I had a foreclosure in october 2010, what do these new guidelines mean for me and my attempt to get back into the market?
as a side note, not all foreclosures were deadbeats that could not handle money, some were simply unfortunate circumstances of a terrible economic collapse and bad timing entering the market…not a result of 0 down liar loans and cash out refis.
the economy has “recovered” not sure why tptb wont give the average joe a little compassion and realize in the last 4 years their economic circumstance might have also recovered.
thanks…
They are reducing mandatory waiting times. If you are shopping for a home, contact your lender, they will have more details. This only applies to Fannie-Freddie loans, not FHA, so you will need at least 5% down to use GSE financing, plus the limits are lower, which could be a problem if you want to buy a more expensive home.
we have well over 20%, and i checked with my lender he said nothing was available and I linked the article, maybe I need to look at changing lenders, he said nothing had changed…
he said the timelines changed for potential buyers with shortsales only, so if I had a foreclosure, are you reading that it sounds like they are requiring a 4 year waiting period even with a foreclosure?
because we have over 20% and want to avoid pmi we need a fannie/freddie conforming mortgage, i thought this sounded promising, but the lender said there were no changes…
I found more documentation from the release, 7 year waiting period, 3 years with extenuating circumstances…
very fair…I just love how lenders get a bailout, but I don’t…
I get that I defaulted on the loan, but a lot of people including banks and lenders got caught in a bad spot during that time, I was not irresponsible or any of those other phrases people want to use, I was unlucky that I happened to be 26 and want to buy a house in 2007 and bought into pretty much the worst most inflated market ever all the while being told, values always go up, re-finance in a few years to get out of PMI…I was lied to and feel like I got a raw deal, and still now that I have financially recovered, still no options for me to buy a house unless I want to pay $500 in PMI, very fair…thanks for nothing!
I understand your frustration. There were many like you who simply bought at the wrong time and got a raw deal. It’s the buyers like you that should have obtained some kind of relief, but separating people like you from the Ponzis and deadbeats was a nearly impossible task. If you had held out longer, you probably would have been offered a loan modification to stay were you were, but then you would have been trapped like millions of other waiting for years for prices to get back to the peak to get out at even and start over.
Because the banks are still not solvent. The economy has not recovered. And compassion is never part of the equation.
I’ve lost count on the number of settlements in excess of $1 billion.
Bank of America Hit with $1.27 Billion Fine
A U.S. District Judge Jed S. Rakoff ordered Bank of America to pay a significant civil penalty of $1.27 billion for fraud related to poor quality mortgages sold by Countrywide Financial Corporation, which Bank of America acquired in July 2008.
The court ruled that Bank of America should pay for the fraud that countrywide committed before and during the time taxpayers invested $45 billion in the bank through the Troubled Asset Relief Program (TARP). In addition, the court ordered former Bank of America executive Rebecca Mairone to pay a civil penalty of $1 million to the government. The investigation was carried out by the office of the Special Inspector General for TARP (SIGTARP), a federal law enforcement agency that investigates crime related to TARP funds.
“Bank of America’s mortgage fraud, uncovered and investigated by SIGTARP and its law enforcement partners, was brazen, but simple,” said Christy Romero, Special Inspector General for SIGTARP. Starting in 2007 and continuing as the mortgage crisis worsened up to 2009, Bank of America developed a program known as the “Hustle,” which stood for “High Speed Swim Lane” or “HSSL.” As its name implies, the lending program focused on generating and selling a high volume of mortgages at high speed to the GSEs.
“To do so, Bank of America removed critical quality control checks and fraud prevention measures that could have slowed down the origination process, despite repeated warnings that doing so would yield disastrous results, including defaults on the loans,” Romero said.
Through the Hustle program, Bank of America originated thousands of poor quality loans and sold them to the GSEs based on lies that the loans were investment quality and met the GSEs’ requirements, cheating the GSEs out of money in the process, according to Romero. As a result, Bank of America fraudulently added billions of dollars to its bottom line and paid executives bonuses based on the speed and volume of the defective GSE loans they processed.
“Although Bank of America received $45 billion in TARP funds, American taxpayers’ hard-earned tax dollars and TARP investments were not intended to support mortgage fraud. All TARP-related crime is unacceptable,” Romero said.
As originally reported by Reuters, the recent Bank of America’s penalty was below the $2.1 billion sought by the U.S. Department of Justice. However, it marks another legal defeat for Bank of America related to its purchase of Countrywide, which has cost the bank billions in dollars in litigation, loan buybacks, and write-downs.
Bank of America has also held talks on another, potential multi-billion dollar settlement to resolve separate government probes into questionable mortgage securities, including from Countrywide and its Merrill Lynch unit, according to Reuters.
Bank of America contends that no penalty was justified. “The $1.27 billion penalty award simply bears no relation to the limited Countrywide program that lasted several months,” Bank of America spokesman Larry Grayson said on Wednesday. “An appeal is possible.”
There’s no doubt that the Countrywide acquisition was the most disastrous move in the history of mortgage banking. For the low, low price of $2 billion, BofA acquired a trusted brand name (want a toxic mortgage anyone?), laid off a huge percentage of the bloated sales staff, and exposed itself to $60 billion in legal settlements (at last count). These guys surely deserve their bonuses for creatively finding a way to do something that not many executives have been able to do… lose 30x their initial investment on a business deal.
My question is has there ever been a worse acquisition in the history of US business?
There are some that say AOL-Time Warner was the worst, but I don’t know man. Angelo Mozilo sold a dead body to BofA and now it’s eating their brains.
apt description!
Yes. Time Warner’s acquisition of AOL. Resulted in the largest goodwill writedown in history, over $100 billion, and perhaps a lot more because they had both writedowns and net operating losses. It is a pinnacle which still stands today.
Well, they said bigger is better. Greater efficiencies, better service, lower prices. Certainly not for consumers, and definitely not for taxpayers. We’re all worse off.
http://kytoh.files.wordpress.com/2011/04/media-consolidation2.jpg
http://www.motherjones.com/files/images/big-bank-theory-chart.jpg
And it was forced upon BoA by the federal reserve. Bravo! Take one for the team Ken!
I don’t always agree with the fed’s policies, but I do think they need to remain independent. History has shown that whenever a central government controls or influences currency directly, they print money to pay pork-barrel projects, leading to inflation and currency debasement. We need transparency to stop the fed from giving unfair deals to member banks, but not direct Congressional control.
House Committee Approves Fed Reform Bill
The House GOP on Wednesday fired its latest rounds in its ever-escalating battle with the Federal Reserve, as the Republican-controlled Financial Services Committee passed a reform bill aimed at making the Fed more accountable and transparent.
The Fed has already warned of serious trouble if the nation’s central bank were held to formal policy regarding its ability to set interest rates.
The committee’s effort to markup and vote on a series of six financial bills included the passage of a bill that requires the Fed to adopt a more predictable rules-based policy that it must share with the public and to conduct a study to determine the appropriate capital requirements for mortgage servicing assets for banks.
Other bills considered include requirements on federal agencies to ensure that new or modified financial regulations are efficient before they are introduced and for the Government Accountability Office (GAO) to vet the Fed’s Regulation D, which forces financial institutions to focus on compliance rather than spending time with consumers to meet their financial needs.
The committee also approved a five-year reauthorization of the Native American Housing Assistance and Self-Determination Act as part of the package.
In a press statement, committee chairman Jeb Hensarling (R-Texas) said, “With millions of our fellow Americans unemployed and underemployed, job number one continues to be jobs creation and economic growth. Our committee has approved dozens of bipartisan bills … to help alleviate the red tape burden that Washington piles on job creators so all Americans can enjoy a stronger, healthier economy.”
Unsurprisingly, the Fed is wary of rules that dictate how it can set rates and other financial policies. Earlier this month, Federal Reserve Chair Janet Yellen fielded questions from Republican lawmakers about the policies that would be passed in the House two weeks later. Yellen told the lawmakers that “it would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule. No central bank does that.”
Her reasoning is that any infraction of any rule, no matter how tiny, could trigger a costly and wasteful audit by the GAO. Such a course of action, she said, “would essentially undermine central bank independence in the conduct of monetary policy.”
Having been approved, the bill can now go the full House for consideration. Even if passed there, however, it’s unlikely to make it through the Democrat-controlled Senate.
remain independent? fed reform bill? give me a M##### F#####G break. Are our heads that far up our asses? WE HAVE BEEN USURPED. at what point exactly will we stop with the sugar coated, flim flam, middle of the road, politically correct horse shit? Fed reform bill is tantamount to Irvine Renter dog paddling a super tanker 180 degrees. ZERO chance of reform.
Those who focus on the money illusion (nominal prices have risen), instead of reality (OC RE is priced in USD, so the less it will buy in terms of real money, real goods/returns) are sitting right where the sell-side NEEDS them to sit. Like ducks.
“I doubt we see any significant increase in the home ownership rate, as it will probably level out near the 64% rate that proved stable for about 40 years.”
Isn’t it interesting how the author cites the artificially inflated 20 yr home ownership rate of 66.9%, and not the 40 yr rate? Why do you suppose this is?
Also, just because the rate is dropping, that doesn’t mean that total ownership is falling. In fact, more people live in owner occupied housing today than did in 2004. As population rises about 3M per year, new housing demand is created for .64*3M = 1.92M individuals. With average household size of 2.55, this results in a rising demand of 1.92M/2.55 = 750k new home sales each year. There is also a need to build .36*3M/2.55 = 423k rental units each year.
Since we massively overbuilt to meet the artificial demand during the boom, rising population hasn’t resulted in rising demand for new construction. Since 2004 US population has grown from 293M to 318M, while ownership rates have fallen from 69.4% to 64.8%. Simple math shows that the number of individuals living in owner occupied housing has risen from 203M to 206M over the last 10 years. Under normal market conditions we would expect this to have risen by .64*(318-293)= 16M instead of 3M, or a difference of 13M or 1.3M/yr fewer housing units needed.
What does this mean? This means that as we return to a steady ratio, we will naturally see rising demand for new and existing housing. The fact that we are close to the 40 yr trend line is actually good news, even though many like to cast it as bad news. Why is this good news? Because it means we are closer to the end than we are to the beginning.
And we are Asymptotic to the 40yr trend. Home ownership dropped by -0.2% from 1Q2013/14 (65.0 to 64.8). And home ownership actually rose from 2Q2013 to 3Q2013 (65.0 to 65.3). So, if anything, we are bouncing along the bottom and the home ownership ratio is now only politically meaningful, if even that.
There are going to be shocks to the system as debt is purged (see Argentina), but this is a necessary step to return to equilibrium, and can be very beneficial. Remember, during The Great Depression, we saw double digit GDP growth as debt was purged and normal international trade resumed.
Why did the home ownership rate go from a flat line 64% throughout history to all of the sudden shooting up dramatically in 1994? There wasn’t very much toxic lending at that moment in time.
Non commercial banks began to issuing securities of sub prime loans in the early 90’s. The Gramm Leach Bliley Act was then passed and it was off to the races in 2001.
The 42nd POTUS was elected in 93.
nuff said.
I wonder what those “Impeach Clinton! And her husband too!” stickers will sell for on ebay in a few years.
http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Legislative_changes_1989
And check out this Federal Reserve (Bank of Kansas City) survey in 1996, especially Appendix B:
http://www.kc.frb.org/publicat/fip/prs96-2.pdf
The strongest correlation I’ve found that explains the rise in the home onwership rate is the rise in subprime lending. Subprime was almost non-existent prior to 1995, and if you superimpose the rise and fall of subprime lending on the home ownership rate, the correlation is obvious and striking.
cha-ching…
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bah!!
cha-ching²
http://stockcharts.com/h-sc/ui?s=XHB&p=D&yr=0&mn=1&dy=0&id=p57687210350
Super short.
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