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.
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.
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.
Euphemism of the day: unauthorized immigrants. Previously, the thought police of political correctness tried to get illegal aliens rebranded as undocumented workers. Since that one failed, they are now going for “unauthorized immigrants.” Both are bullshit euphemisms for someone illegally living in the United States.
20 metro areas are home to six-in-ten unauthorized immigrants in U.S.
Most of the United States’ 11.1 million unauthorized immigrants live in just 20 major metropolitan areas, with the largest populations in New York, Los Angeles and Houston, according to new Pew Research Center estimates based on government data.
The analysis shows that the nation’s unauthorized immigrant population is highly concentrated, more so than the U.S. population overall. In 2014, the 20 metro areas with most unauthorized immigrants were home to 6.8 million of them, or 61% of the estimated nationwide total. By contrast, only 36% of the total U.S. population lived in those metro areas.
But the analysis also shows that unauthorized immigrants tend to live where other immigrants live. Among lawful immigrants – including naturalized citizens and noncitizens – 65% lived in those top metros.
By far the biggest unauthorized immigrant populations were in the New York and Los Angeles metro areas (1.2 million and 1 million, respectively). No other metro area approached a million.
Before anyone claims I am anti-immigrant, I would point out that I married an immigrant. The legal immigrants aren’t a problem.
How Immigrants Changed the Geography of Innovation
President Donald Trump’s recent executive orders crack down on illegal immigration as promised. But his immigration and refugee ban, leaked draft orders, and the language of his top aides all suggest that he’s looking to go further, restricting the legal immigration of “high-skilled” workers as well. If these efforts succeed, it’s possible that America’s ability to innovate will take a hit, compromising the country’s technological edge and economic growth.
History provides some support for that argument. In a new working paper, University of Chicago economists Ufuk Akcigit and John Grigsby and Harvard economist Tom Nicholas examined the role that immigrants play in innovation. By matching U.S. patent data to local Census data between 1880 and 1940—what they call the “golden age of innovation”—they were able to quantify the significant contributions of immigrants to American technological progress. Broadly, they found that immigrants fueled regional inventiveness, bolstered creative momentum within their industries, and drove long-term technological growth.
“You’ve got these anecdotes like Alexander Graham Bell that give you an image of what immigrant inventors were like, but hopefully, the beauty of this paper is that we’re going way beyond those anecdotes,” Nicholas tells CityLab.
The paper first illuminates how immigrants influenced the geography of inventiveness. In states like New York and Illinois that had the highest per-capita patents in this time, around 20 percent of the population was foreign-born. In the states with the least, immigrants only comprised 2 percent of the population.
I like how they are spinning the policy. Yes he wants to restrict legal immigration of “high skilled” IT workers who are replacing the domestic workforce and lowering wages. Heaven forbid they state Trump is closing a wage/benefit slashing loop hole in the US immigration policy which benefits corporate America.
This is what will really determine whether or not Trump gets reelected.
Why Donald Trump Needs The Next Recession To Start As Quickly As Possible
A new recession is coming, and Donald Trump needs it to begin sooner rather than later. As I explained last week, most American voters tend to care about their pocketbooks more than anything else. If the next recession were to officially start during the first quarter of 2017, it would be very easy for Trump to blame it on Obama, and then he could portray himself as the one that pulled the U.S. economy out of recession in time for the 2020 election. But if the next recession does not begin until 2018 or 2019, everybody is going to blame it on Trump even if it is not his fault. In politics, who gets the blame for whatever goes wrong is often the most important thing, and if Trump wants to avoid blame for the next recession he needs for it to start as quickly as possible.
It’s confirmed: CFPB doesn’t need to follow Trump’s executive order on regulations
The Office of Information and Regulatory Affairs finally put to rest questions around the requirements of independent agencies under President Donald Trump’s recent presidential memorandum and executive order.
The uncertainty surrounded the impact of the EO on the future of regulations across all industries.
Dominic Mancini, acting administrator of the OIRA, put out a memorandum giving interim guidance on implementing Trump’s executive order on Jan. 30 titled “Reducing Regulation and Controlling Regulatory Costs.”
The memorandum, which gives a list of questions and answers, includes the question, “Do Section 2’s requirements apply to significant regulatory actions of independent agencies?”
The short answer: no.
From the memorandum:
No, the requirements of Section 2 apply only to those agencies required to submit significant regulatory actions to OIRA for review under EO 12866. Nevertheless, we encourage independent regulatory agencies to identify existing regulations that, if repealed or revised, would achieve cost savings that would fully offset the costs of new significant regulatory actions.
Although the OIRA released the guidance specifically on Trump’s executive order, it answers the government’s stance on where independent agencies fall in having to oblige with the onslaught of regulatory changes coming out.
The biggest housing-related independent agency caught in the confusion is the Consumer Financial Protection Bureau, especially since there are two major housing regulations in motion right now that could be frozen.
It’s official: Steven Mnuchin sworn in as Treasury Secretary
Despite all the bluster, attempted parliamentary maneuvering, and name-calling from the Democratic party, the Senate voted Monday evening to approve Steven Mnuchin to serve as the next Secretary of the Department of the Treasury.
As expected, the Senate approved Mnuchin in a partisan vote of 53-47, with one Democrat, Sen. Joe Manchin, D-West Virginia, splitting from his party and voting with the Republican majority.
Democrats were quick to criticize Mnuchin after President Donald Trump chose the former Goldman Sachs executive and former chairman of OneWest Bank as his nominee for the Treasury post.
Democrats took to calling Mnuchin the “foreclosure king” in an attempt to use OneWest’s foreclosure practices against him.
Senate Democrats attempted to dent Mnuchin’s nomination during his confirmation hearing, even going to so far as pushing to allow some of OneWest’s supposed foreclosure victims to testify before the Senate Finance Committee, a request that the committee’s chairman, Sen. Orrin Hatch, R-Utah, denied.
Then Democrats took their fight against Mnuchin a step further by boycotting the committee’s vote, a move that the Republicans on the committee overrode.
In spite of all those efforts, the Senate still confirmed Mnuchin with relative ease.
It is very simple to explain why home ownership tends to be lucrative in major coastal cities, and a decent investment in most other major interior cities.. Basically, the underpinnings of this economy requires a certain amount of positive inflation. If deflation takes over, the entire system will collapse and it will be game over for this country and many others. So, the central banks, and especially those of the developed world, will do whatever it takes to keep inflation positive by a reasonable amount. That is how the system is built and there is no getting around that fact.
So, real estate investments provide you with an asset that tends to track inflation which is usually positive because of central banks. Add some leverage with low down mortgages, and the money flows into the pockets of real estate investors and home owners.
As far as the 2008 episode, much of that was caused by stupid people who bought into the real estate panic pushed by the dishonest media and walked away from homes. The media knew the bigger the panic, the better for Democrats. Myself, I took many economics classes in college, so I knew central banks would jump into action. So, I held on. If more Americans understood central bank economics, they would have ignored the media hyped real estate panic as fake news that was pushed on the public on behalf of the Democrats.
This last election cycle, the fake news told us a vote for Trump would crash the markets. That fake news was put out on behalf of Clinton. This time, the fake news did not work.
The only reason we need positive inflation is because of government debt. The government has to debase the currency to stay solvent. Technological innovation is deflationary and a lowering of prices (as long as aggregate wages don’t decrease) is beneficial to the working class.
How much is housing going to cost when you can 3d print the entire structure for a few thousand dollars instead of hundreds of thousands?
People who cheer for expensive housing should also cheer for expensive food, healthcare, water, and clothing since those are also essentials of life.
Astute! Nice post!
Very ‘telling’ that people continue to cheer for the loss of purchasing power/devaluation of their own labor…. aka rising house prices.
Hogwash! “The only reason we need positive inflation is because of government debt” I personally need positive inflation so that in 20 years my dollars will go a lot farther in paying down my 3.75% home loan.
We also need some growth and inflation to allow our over-indebted workers to pay off their past loans, particularly student loans among Millennials.
Class is now in session.
*A good investment is something that pays you each month to hold.
Q: Does a house (lived-in) pay you each month??
A: No… you have to pay it each month to hold.
Class dismissed.
Class get back here….
So you mean to tell me when your monthly housing cost are $2000 because you bought in 2010, while someone renting the same house in 2017 for $4000 is not an a cash flow positive investments?
online learning LoL
I put 15,000 down on a new house in 2012. I now have over 200,000 in home equity by just paying my 3.75% loan each month. If/when i sell i will recoup every house payment and upgrade i ever make to the house and my tiny downpayment also. So i am essentially living in a free house. You should have included this benefit…. teacher.
Gary, not to mention the fact that you can likely rent your house out for double the cost to own.
HBS
H’el-O Business School
It’s completely free and worth every penny you paid for it.
In el O’s defense, your timing was particularly good. If you had purchased in 2006, the story would have been quite different.
Gary A said: “So i am essentially living in a free house”.
———-
If that was true, the US home ownership rate would be blasting higher instead of TANKING, and .gov would no longer need to pay people to buy homes
The US home ownership rate is at historic norms.
Unfortunately I expect more landlords in the future.
It established a 40-year norm from the 50s through the 90s, but the current rate dipped a little below that range recently. I agree with you, particularly in California, we will see more landlords in the future.
The historic norm is about 64% and we are currently at 63.7%.
There is no reason to be concerned about that… however there will absolutely be more landlords in the future. Every dip in housing prices leads to more landlords. Every time credit gets harder to get leads to more landlords.
Its true that timing is everything. The Housing Panic blog really prepared me to buy my first home.
I miss Keith. That blog more than most captured the Zeitgeist of the time.
I think you overestimate how many of the defaults were truly voluntary. People lost their homes because they couldn’t meet the terms of the agreement. The amount of panic selling by discretionary sellers was near zero. Ninety-nine percent were involuntary sales. Even some of those that looked voluntary, like short sales, were caused by irreparable financial distress, so they were involuntary as well.
You are making up stats that have no basis in reality. Just look at the HAMP mod rejection reasons put out by the Treasury Dept. The #1 reason was “Income Too High to Qualify”. In other words, they could afford their home just fine, but didn’t like the 8% rate they were locked into and wanted a government handout (modification) because their home value had declined. If that modification was denied, they could threaten to walk away and many of them did.
Think about what you are arguing. In the old days, you encouraged people to strategically default because you claimed that only a fool would hold on to an underwater property. The implication is that many people could afford their payments, but it was such a lousy investment they should walk away. Now you say that nobody could afford their homes and there was no such thing as strategic default. Everybody would have defaulted eventually anyway.
Either the old you was wrong or your current view is wrong. Maybe you feel guilty for advising people to engage in such shady activity, I don’t know. Cognitive dissonance is a powerful coping mechanism when facts contradict perception.
The shade of gray we are parsing here is what defines affordability. Most of the people who were denied loan modifications and subsequently defaulted could not make their payments easily. The government’s standards of what entails financial distress was onerous, and many people chose not to pay what amounted to blood money.
Look at this from the point of view of an underwater homeowner in 2008. They were paying $5,000 a month for a mortgage a bureaucrat or banker considered “affordable.” They could rent the same house for $2,500 per month. They were deeply underwater, and they had little hope of regaining equity anytime soon (you admitted it took a decade for your condo to come back, and that was in a strong market). It made no financial sense to make what was considered an “affordable” payment.
Those people who strategically defaulted early on were really just accelerating the inevitable default that was going to happen anyway because the payment wasn’t truly affordable. For those people who really could make the payment (like you), almost none of them defaulted. Some obtained loan modifications and struggled through, but most people just continued making payments if they were affordable. The studies on strategic default made after the fact bore this out.