Aug012013

Titanic failure of American housing policy, home ownership rate hits 18-year low

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. Yesterday, I detailed how 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 recently hit an 18-year low.

American Dream Slipping as Homeownership at 18-Year Low

By Prashant Gopal & Clea Benson – Jul 30, 2013 7:23 AM PT

The U.S. homeownership rate, which soared to a record high 69.2 percent in 2004, is back where it was two decades ago, before the housing bubble inflated….

Like home prices, the home ownership rate is only supposed to go up. Hitting an 18-year low is unprecedented and an undeniable sign of failure by policy makers.

With ownership at 65 percent and home values rising, housing industry and consumer groups are pressing lawmakers to make the American Dream more inclusive by ensuring new mortgage standards designed to prevent another crash are flexible enough that more families can benefit from the recovery. Regulators are close to proposing a softened version of a rule requiring banks to keep a stake in risky mortgages they securitize, according to five people familiar with the discussions.

Lending standards were pretty flexible in the 00s, and look where that got us. Putting irresponsible people into a temporary ownership position benefits no one. (For more information on the lobbying efforts, see Easing of Mortgage Curb Weighed .)

“Low down-payment loans coupled with exotic adjustable rate mortgages helped fuel a massive housing bubble, which ultimately burst and took down the financial sector,” said Sanders, who was the former head of mortgage-bond research at Deutsche Bank AG. “So the question now is do we want to do this again?”

No, we don’t.

Hitting Bottom

The homeownership rate in the second quarter was unchanged from the prior three month period, according to Census Bureau data released today. It will hit bottom at about 64 percent in the next year as families leave the foreclosure pipeline and enter rental homes, according to a May analysis by London-based Capital Economics Inc. It’s currently the lowest in almost 18 years after averaging about 64 percent for 30 years through 1995. …

Effective home ownership rate is under 50%

Lost in the discussion about home ownership rates is the issue of negative equity. People who don’t have equity in their homes don’t own anything other than their loan. When you consider that 25% of those whose name is on title have no real ownership, you must subtract 25% of the 64% from the home ownership rate. That puts it at about 48%.

“The key now is to encourage homeownership that isn’t based on bubbles, but is instead based on a solid foundation where buyers and lenders play by the same set of rules, rules that are clear, transparent and fair,” Obama said in a July 24 speech.

Obama says the right things, but will he do anything substantive to change the system? I’m not holding my breath.

Presidents have been promoting homeownership at least since the Federal Housing Administration was created by Franklin Delano Roosevelt in 1934 to insure mortgages so more borrowers could qualify. Over more than 50 years, administrations touted property buying as a way to put lower-income families on a path to social and financial stability by forcing savings and making for a more involved citizenry.

Successive Clinton and Bush administrations unleashed ambitious programs to widen buying. Clinton’s “National Homeownership Strategy” in 1995 set a goal of allowing millions of families to own homes, in part, by making financing “more available, affordable, and flexible.”

It’s hard for either side to gain political advantage on this issue. It was a group failure. The political Right has erroneously claimed the housing bubble and resulting collapse were caused by the GSEs, the darlings of the Left. Unfortunately, this doesn’t comport with the facts.

“I’m not suggesting indiscriminate access to homeownership but there are many borrowers who are capable of demonstrating the capacity to pay,” Wartell said. “Those who are able to benefit from the low rates and prices are the investors and those families who weathered the recession most successfully. And those who had a job loss or foreclosure, in many cases through no fault of their own, have the double whammy of being shut out of a rising market.”

That’s the breaks. Although some small percentage of foreclosures were due to circumstances outside of the borrowers control, most foreclosures were caused by irresponsible borrowing as people overextended themselves and profligate spending as HELOC abusers treated their home equity as income. There is no way to single out the unfortunate people who were not at fault from the legions of fools who were.

Owning a home that is fully paid off provides stability in retirement and if the U.S. has a greater share of aging renters that could put a strain on taxpayers, said Christopher Mayer, a real estate professor at Columbia Business School in New York.“Having a path that people can become a homeowner is an important path,” Mayer said. “And it’s really important for middle to lower income folks who have a hard time saving and for whom targeting savings programs are not very successful.”

I used to be a firm believer in the benefits of loan amortization as a forced savings account. Far too many people don’t have any fiscal discipline, and amortizing loans forces them too. Unfortunately, with unrestricted HELOC access to this forced savings account, lenders found a way to completely invalidate the best feature of amortizing mortgages. This also invalidates the goal of public policy encouraging home ownership. Policy makers need to plug this hole by restricted loan-to-value ratios to no more than 80% of value on any refinance or second mortgages. Texas has such a law, and it prevented a housing bubble there.

While homeownership has a natural appeal because people like permanence and the ability to make a property their own, it has been oversold, Yale University economist Robert Shiller said.

The 65 percent homeownership rate may even be high compared with robust economies such as Germany’s, where 53 percent own homes and Switzerland, which has a rate of about 35 percent, Shiller said. Homeownership may inhibit economic growth by limiting the ability of families to move as freely for jobs and the government subsidies could be used for other purposes, he said.

“We’ve learned that the risks matter,” Shiller said. “We’ve seen the consequences of encouraging people to put all their life savings in one investment. Public support for homeownership will be lower for years to come and I would be surprised if this boom turned out to be as big as the last one.”

This boom will go on just long enough for banks to get out from under their bad loans. The manipulation of the market through limited inventory will persist until prices reach the peak where banks can foreclose or struggling loanowners can sell without a loss. Until we get there, and until this bad debt is purged, the inventory restriction will persist. That alone appears enough to push prices back to the peak. After that, we will be back to a normal market with balanced supply and demand. Lenders are praying interest rates remain low enough long enough to let this play out. If interest rates go up and buyers can’t finance peak prices, lenders are in real trouble.

The home ownership low is caused by failed housing policy

There is no question that the low home ownership rate is a direct result of failed policies that put people into homes under circumstances where they couldn’t sustain ownership. It’s not the direct correlation through the GSEs that political right would have us believe, but the connection is just as real. Failure to regulate derivatives caused a massive amount of capital to flow into unregulated toxic loan products. It was a double failure of the Greenspan federal reserve exacerbated by government subsidies and policies that encouraged too many people to buy houses they could not afford.

Robbing the family

The former owner of today’s featured property bought a property she couldn’t afford at the peak. The second mortgage was borrowed from a private family trust. She immediately opened a $30,000 HELOC after putting nothing down, and in just over a year, she defaulted, and Wells Fargo foreclosed. The family loan for her down payment was lost.

Somehow, she came up with the money to force Wells Fargo to give her the property back, but then she defaulted on the new loan. After a series of loan modifications and redefaults, the property was foreclosed on again this May. It’s hard to tell how long she was squatting, but it was off and on for at least five years.

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26182 VIA MONTEREY San Juan Capistrano, CA 92675

$449,900 …….. Asking Price
$280,000 ………. Purchase Price
12/12/2012 ………. Purchase Date

$169,900 ………. Gross Gain (Loss)
($35,992) ………… Commissions and Costs at 8%
============================================
$133,908 ………. Net Gain (Loss)
============================================
60.7% ………. Gross Percent Change
47.8% ………. Net Percent Change
73.3% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$449,900 …….. Asking Price
$15,747 ………… 3.5% Down FHA Financing
4.38% …………. Mortgage Interest Rate
30 ……………… Number of Years
$434,154 …….. Mortgage
$129,717 ………. Income Requirement

$2,169 ………… Monthly Mortgage Payment
$390 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$94 ………… Homeowners Insurance at 0.25%
$488 ………… Private Mortgage Insurance
$210 ………… Homeowners Association Fees
============================================
$3,351 ………. Monthly Cash Outlays

($531) ………. Tax Savings
($584) ………. Principal Amortization
$25 ………….. Opportunity Cost of Down Payment
$76 ………….. Maintenance and Replacement Reserves
============================================
$2,337 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$5,999 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,999 ………… Closing Costs at 1% + $1,500
$4,342 ………… Interest Points at 1%
$15,747 ………… Down Payment
============================================
$32,086 ………. Total Cash Costs
$35,800 ………. Emergency Cash Reserves
============================================
$67,886 ………. Total Savings Needed
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