Homeownership Declines

A cloud of uncertainty still hangs over financial markets and the economy as the fallout from the summer's mortgage securities market collapse continues. Today, for instance, as we write, we're awaiting an announcement from Merrill Lynch about the firing of their Chief Executive Officer Stanley O'Neal. That big firm announced early this month that it was estimating losses from the mess of $5 billion in the third quarter, but in their official profit report on October 24, that loss was calculated at $7.9 billion. Senior officials at some other brokerage firms have been let go and numerous mortgage companies and mortgage-centered mutual funds have closed altogether.

In the midst of this turmoil, however, the stock market as a whole is holding up well. The key price indexes hit new all-time highs on October 9 and are hovering just below those levels now. Money markets have calmed after their mid-August panic. And the drop in the number of jobs across the country in August which we were concerned about in our last discussion of these issues was revised to a modest rise in a later data report. So current conditions are clouded and uncertain, but that's certainly a better state for us all to be in than if the markets were sustaining persistent declines.

Home Sales & House Prices Going Down
Housing markets, though, remain unequivocally weak. Sales of new homes during August and September were the lowest since the spring of 1997. Sales of previously occupied houses – often referred to as "existing homes" – in September were the lowest since January 1998. House prices have been either flat or declining for some time; in fact, prices of existing homes sold have been down from year-earlier levels for 14 consecutive months, an unprecedented time span of weakness.

It is the weakness in home values that is perhaps the greatest source of concern. Our homes are not only where we live, but for the vast majority of us, they constitute our largest single asset. When those values are rising, we feel better off. Home equity has been perceived as a source of savings. Alternatively, many people have borrowed against their home equity to finance other purchases and major expenses, such as college tuition. A reversal of trends in home equity takes away some of people's feelings of well-being. They may slow their spending, and some may begin to wonder if homeownership is worth the cost and effort.

Homeownership Ratios Decline
That latter notion has elicited action by a significant number of people, who have turned from owning homes to renting them. The rate of "homeownership" has declined markedly, according to new data through the third quarter, which were reported by the US Census Bureau last Friday.* In one of our earliest of these articles, we noted with some satisfaction that homeownership had risen by 5 percentage points over the last 10 years to more than 69% of housing units occupied by owners versus renters, a substantial move among the country's roughly 110 million housing units. The highest levels were attained in 2004 and early 2005 with a peak of 69.2%. In the last 12 months, though, a distinct downtrend has developed. From 68.9% in Q3 2006, the rate has moved progressively lower quarter by quarter: 68.7%, 68.6%, 68.3% to 68.1% in the most recent period. More, the absolute number of houses occupied by the people who own them decreased by 465,000 from the third quarter 2006 to this latest quarter. The worst this statistic had seen before is -8,000 in the double-digit-interest-rate-plagued recession in 1982.

This loss of homeownership is surely disappointing. We've talked before about the social values of homeownership: people take better care of houses they own; more people take more interest in their communities; people are more conscientious parents and are more concerned about education. You know the drill: you're moving and if you have kids, the first thing you want to know is how good the schools are. Even if you don't have kids, you know that good schools are good for resale value. Also, the more owners there are, the more stable the neighborhood is: people who own don't move so often. The list goes on. The impact of homeownership on these desirable characteristics of lifestyle and community has even been documented statistically. It isn't a panacea for every ill of society, but it helps.**

Did Benefits of Subprime Loans Vanish? Not Altogether, Thankfully
We had argued back in the summer that subprime mortgages were beneficial because they helped raise homeownership rates among the population groups who might benefit the most. But has the recent spate of subprime defaults and foreclosures undone this desirable outcome? The data on homeownership ratios are given in some detail, and we can check on whether broad groups of the population have seen their ownership status reverse. Among white households, ownership has declined from a peak of 76.2% at the end of 2004 to 75.3% most recently. Black homeownership reached 49.7% of total housing units occupied by black families in the second quarter of 2004, but that share is now only 46.7%. Hispanic homeownership was about 48% in 2004 and now it is 50%, that is, this group has recently increased the proportion of housing units that are occupied by their owners. Finally, "other" races, including Asians, Native Americans and others, reached 60.6% in the third quarter 2006 and they are managing to hold at 60.1%. By race, then, the outcomes are mixed: some minorities are holding on to gains and some are not. White homeownership has decreased.

Income groups show the same ambiguous result, although the grouping is too broad to make a clear connection. In this report, the Census Bureau divides households simply by whether their income is above or below the national median. We show the ratios for each group in this graph. Those with higher-than-average income have much higher ownership rates to begin, close to 85%; however, they seem to have experienced somewhat more deterioration in their ownership rates, to about 83.5% during this year. The lower-income half saw their ownership reach a peak of 53% as early as 2001; the ratio at the height of the subprime boom in 2004 was only nominally higher at 53.1%. This rate has fluctuated; the current figure is 51.9%, but that's higher than it was in 2003.

So we seem to be able to conclude that the subprime debacle has not hurt everyone who used that type of mortgage to "move up in the world". The gains during the 2003-2004 subprime rush have been held by Hispanics and "other" races and to some extent by lower-income homeowners. As time goes on and more adjustable rate mortgages reset to higher rates, this impact may be diluted. But right now, there still appear to be net benefits.

New Borrowers Need Education: You Can Help!
Further, one other lesson that lenders have learned can help going forward. Education of borrowers and credit counseling have been offered almost exclusively to those who let their loans enter a default condition; there are some efforts to help people while they are current in their payments to stay current. One specific organization is NeighborWorks America, found on http://www.nw.org/. If there are such efforts in your community, you can help by supporting them. If there are not programs locally where they are needed, help start them! It will be a support indeed for families who want to participate more fully in their community life.

*US Census Bureau. "Census Bureau Reports on Residential Vacancies and Homeownership". Press Release CB07-144. October 26, 2007.

**Edward Gramlich. Subprime Mortgages: American's Latest Boom and Bust. Washington, DC: The Urban Institute Press. 2007. pp. 58-60.