Feb142017

Nine percent of US homeowners lost their homes over the last decade

The homeownership rate is plunging because the housing bust tarnished the American Dream dream, and a new generation chooses to rent instead.

For nearly 100 years, US government housing policy maximized the homeownership rate and the rate of growth in house prices. Politicians characterized homeownership as the best investment a middle-class family could make, and home ownership equated with the American Dream.

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During the early 00s, on the surface conditions looked great. House prices appreciated rapidly, mortgage equity withdrawal fueled an economic boom, subprime lending provided home ownership opportunities to everyone, and a record number of Americans realized the American Dream. Government officials touted the success of their policies, and critics of these policies were mocked or widely ignored as the ravings of madmen.

Unfortunately, homeownership is not right for everyone. Many Americans require the freedom of movement that accompanies renting. Further, many Americans lack the financial management skills necessary to sustain homeownership. While providing homeownership to everyone is a laudable goal, in the real world, it’s necessary to exclude those who lack these skills because if homeownership is granted to those unable to sustain it, the result is a heart-wrenching price crash and 10 million foreclosures.

During the housing boom, policymakers and new (temporary) homeowners ignored reality. Everyone considered themselves a homeowner, even those who didn’t pay for their houses. The housing bust prompted the disillusionment of a generation, and we’re still dealing with the fallout from the painful policy disaster.

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Homeownership Rate in 2016 Was Lowest in 50 Years

63.4% Homeownership Rate in 2016 Was Lowest Since 1966

Frank Nothaft, February 08, 2017

The erosion of homeownership has been one legacy of the housing boom-and-bust of the last decade. The homeownership rate peaked at 69 percent in 2004, inflated by relatively easy mortgage credit primarily provided by subprime and low/no-doc loan products. The drop in homeownership continued through 2016, with the homeowner rate just a tad above 63 percent, the lowest annual average in 50 years (Figure 1). But we may be at or near the bottom of the homeowner decline.

Analysis of our foreclosure and short sale data has found that more than 10 million homeowners lost their homes through completed foreclosures or short sales since 2006 (Figure 2). Given that the number of households in 2006 was about 115 million, that would represent about 9 percent of households.

Completed foreclosures have dropped significantly since the trough in the housing market, with annual totals falling 21 percent just in the past year. Household income growth, home price gains, and loan modification programs have reduced foreclosures; another 20 percent fall in completed foreclosures during 2017 would bring foreclosures below the 2006 level, lessening the downward tug on homeownership.

The loan modification programs — otherwise known as can-kicking — removed distressed inventory from the market and caused the home price gains that allowed many distressed borrowers to exit with an equity sale. The one thing both the foreclosures and equity sales had in common was that once the former owner left the property, they generally became renters because, in both instances, they left without an equity check for a move-up, and often with tarnished credit.

Demographics have been another cause of the dip in homeownership as the large millennial cohort has formed households and entered the rental market. But this age-related drag on aggregate homeownership may be largely behind us, as an increasing number of millennial households enter their 30s, the typical age of first-time ownership. …

Everyone in the homebuilding industry eagerly awaits the Millennial generation. They are the future of the housing market.

Overall, the decline in foreclosures and distressed sales, aging of the millennial cohort, and projections of economic growth suggest that the homeownership rate may be at or near the bottom of its 12-year decline. However, unless minority-headed households are able to increase their ownership rate, it’s unlikely that there will be any substantive increase in the homeownership rate during the next decade.

Redefining the American Dream

Lenders and borrowers perverted the American Dream during the housing bubble as Americans began to define themselves by the size of their house. Wealth became confused with debt; appreciation became confused with income; credit became confused with savings.

Rather than viewing the road to prosperity as one that required hard work and delayed gratification, Americans came to believe they could achieve success by simply purchasing the right house and living off the increase in its value. The new American dream required no work, no sacrifice, no experience, no expertise, and no risk, yet yielded unlimited rewards.

These perverted views of what it means to be American are so ingrained in the collective consciousness of Californians, that few remember the real American Dream:

Work hard, save money, pay off a mortgage, and live in your debt-free house on the investment income from your savings in your golden years.

In a sad way, I understand why people bought the fantasy. If offered to chose between working hard and sacrificing to obtain a goal or doing nothing and instantly gratifying all desires, most people will choose the latter. Unfortunately, reality has a way of exposing myths that are too good to be true, and the housing bust destroyed the illusions and perversions of the American Dream created by the housing bubble; unfortunately, no new mythos has yet emerged to take its place.

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