National Homeownership Eroded by Government Initiatives Designed to Artificially Increase Participation in "The American Dream"
The Federal Reserve of New York recently released an interesting study which demonstrates the abject failure of the Government's efforts to increase homeownership.
Link to paper titled The Homeownership Gap by Andrew Haughwout, Richard Peach, and Joseph Tracy.
The study's authors wisely observe that home "owners" with negative equity both behave like renters and convert to become renters over time.
As such, the analysis calculates an "effective" homeownership rate that "excludes negative equity homeowners from the sum of owner-occupied houses and counts them instead as the renters they are likely to become".
The effective homeownership rate may be used to evaluate the effectiveness of Government efforts to manufacture homeownership during the 1990s.
Limitations of the Study
Not all homeowners who are underwater will convert to become renters. Of greater impact, potentially, is the large number of homeowners who are functionally underwater but still retain small sums of home equity. Given the transaction costs involved in selling one's home, many more Americans today would have negative equity than are included in the analysis should they move.
The Study Ignores the Government's Loose Credit Strategy for Solving the Housing Crisis
The FHA and other GSEs continue to issue or secure highly leveraged, mortgages with down payments as low as 3%. When taking into account transaction costs, many Government financed home acquisitions are instantly underwater, and these new buyers could be counted as effective renters.
First and Foremost, the Housing Bubble Was a Homeownership Bubble Intentionally Manufactured by Well Intentioned but Economically Illiterate Politicians
The purpose of Government initiatives which created the Housing Bubble was to grow homeownership by 8 million people and increase the homeownership rate to 67.5% by the end of 2000. Lax lending standards, subsidized credit, increased demand and rising prices generated a self-reinforcing housing bubble. The public policy mission was achieved but fomented a massive economic distortion. Neither the concocted homeownership gains nor the intended economic benefit of "The National Homeownership Strategy" were sustainable.
The following charts illustrate the collapse of effective homeownership in the context of historical rates.
A coordinated Government initiative designed to artificially increase homeownership has had the unintended consequence of reducing effective ownership to record lows. The collateral damage from this distortion is the ongoing Affordable Mortgage Depression.
The Fed Study Raises an Important Question
How many of the calculated 5.6% of national homeowners will convert to become renters, by what mechanism, and on what timeline?
Given the dismal rate of savings in America, and the large amount by which many owners are underwater, paying cash to buy out of "homeownership" seems unlikely. Distressed resolution options, including short-sales and foreclosures, are available, but intensify the housing crisis by forcing prices lower. Lower prices create more underwater homeowners which, as observed, tend to become renters over time.
The 5.6% Effective Ownership Gap represents an overhang of distressed properties that need to be rationalized before the housing crisis, falling prices or The Affordable Mortgage Depression may end. But this gap is also a source of fuel which will continue to perpetuate all three.
Posted by Whitney Ross at 6/16/2010 1:05 PM 
Categories: Government Action is Counter Productive, Homeownership, Focus on Homeownership
Categories: Government Action is Counter Productive, Homeownership, Focus on Homeownership
Whitney,
If you review the methodology of the 'Gap' study (p.4) I believe you will find they did account for the "transaction costs involved in selling," thus their definition of a break even owner is a LTV of 94 (i.e. 100-6% transaction costs).
Now that we're on the subject of 'transaction costs'... I read a persuasive article (I wish I could find) arguing that the real LTV to be concerned with is more in the 74-80 range, as a healthy market is dominated by move up buyers (vs '1st time' and 'cash'), trading their equity gains upward as their new, conventional 20% downpayment. If you don't have those move-up buyers, the whole pyramid (pun intended) comes to a standstill, (for sellers at the high end anyway). The Gap study even eludes to this and its impacts on household mobility on p. 7: "significantly reduced". But instead of factoring in the additional 20% of LTV and its resultant, horrible impact on the 'effective homeownership rate' (as I would like to see, below), they run numbers assuming (1) an underwater owner will make diligent payments for 5yrs to scrap back to 94LTV, while (2) increasing savings to simultaneously save a 20% downpayment! WTF?
I'm sorry NYFed, but underwater homeowners living on planet EARTH are WAY ahead of you, and since TBTF's have morphed into the most lenient landlords in the galaxy in order to maintain their Zombie status, homedebtors can live rent free in their own homes here and save that 20% down in a fraction of the time you propose, while further suppressing future home prices (from which they will eventually purchase) to boot! See details here: http://theaffordablemortgagedepression.com/2010/06/08/the-worlds-largest-predatory-lender-promotes-speculative-derivatives-trading.aspx#Comment
Imagine what marking the 'effective ownership rate' with an 80 LTV vs the 94 would do to your "Historical Perspective" graph. What I envision would be the 1965-1994 values to more or less stay the same; they become the ~20%down/80LTV 'chain' values. The NHS incline would largely be flattened due to MEWs and the fact that 0% and other 'low' downs exploded greater than sixfold from '98-'06. Here is some data just on the 0%'s: http://www.doctorhousingbubble.com/wp-content/uploads/2008/10/no-down.gif
The post peak decline crash would go THROUGH THE FLOOR relative to what you already have plotted, which is already crushing. A historical graph of Household Percent Equity here seems to sort of approximate the idea, but not quite: http://www.doctorhousingbubble.com/wp-content/uploads/2010/06/homeowner-equity-10.jpg
Whitney, do you have the ability to run that graph with all values chained, even if roughly, to the pre-bubble lending standards? I would very, very much appreciate even your best ball park of it.
Buck
Reply to this
Buck,
The Fed correctly identifies break even LTV as less than 100%, but in fact they default to the standard 100% definition in their analysis. If 94% were used the number would be far uglier.
I would love to get my hands on the data they used, but I do not believe it is available for public consumption. Should you or anyone else find the data please let me know.
I am not sure a back of the envelope guess of effective homeownership at different price levels would be worthwhile given the huge number of variables and questionable assumptions I would have to make. But I will think about it. Methodology suggestions welcomed.
Reply to this