Housing trends

OPINION:

The homeownership rate in America continues to plummet as “[t]he rate of foreclosure starts and the percent of loans in the process of foreclosure are at the highest levels ever,” according to a recent report by the Mortgage Bankers Association (MBA). In addition, the total delinquency rate for mortgage loans is “the highest in the MBA survey since 1985.” As housing prices continue falling at an ever-accelerating pace, a large and growing number of homeowners find themselves in a “negative-equity” position, owing more on their mortgages than their houses are worth. With the slide in housing prices eating away at homeowner equity, the Federal Reserve reported earlier this month that homeowners’ share of the total value of their houses fell to 47.8 percent last quarter, the lowest percentage since World War II.

These ominous trends virtually guarantee that the homeownership rate will be lower at the end of the Bush administration than it was at the beginning. Meanwhile, the accelerating deflation of the housing bubble, which expanded during the first five-and-a-half years of the Bush administration, has precipitated one of the most serious financial crises since the Great Depression.

The trend in homeownership deserves a closer look. From the fourth quarter of 1982 (64.5 percent) through the fourth quarter of 1992 (64.4 percent), the rate remained virtually stagnant. During the Clinton administration, however, as inflation-adjusted median family income (measured in 2005 dollars) increased from $49,869 in 1992 to $57,508 in 2000 (and inflation-adjusted mean, or average, family income increased from $60,298 in 1992 to $74,558 in 2000), the homeownership rate increased from 64.4 percent to 67.5 percent. Inflation-adjusted housing prices (calculated by deflating the S&P/Case-Shiller national housing index by the consumer price index) increased by 22 percent between 1992 and 2000, while median and mean family incomes increased by 15 percent and 24 percent, respectively. In an economy that grew at an average annual rate of 3.6 percent (1993-2000), the combination of rapid growth, steadily rising incomes and relatively moderate housing-price appreciation made housing quite affordable for the quintessential middle-class (median) family and the average (mean) family.

President Bush inherited a 67.5 percent homeownership rate (fourth quarter of 2000). After rising during the first four years of the Bush administration, the rate peaked at 69.2 percent during the fourth quarter of 2004, when the president was re-elected. Since then, however, it has been declining. By the fourth quarter of 2007, the homeownership rate had fallen to 67.8 percent, a mere 0.3 percentage points above the rate he inherited. With foreclosure rates at record levels and most economists believing that the economy is in recession, the homeownership rate will continue to decline in 2008 and will almost certainly fall below the rate Mr. Bush inherited.

After rising by 15 percent during the 1993-2000 period, inflation-adjusted median family income in 2006 was actually 2 percent lower than it was in 2000. Meanwhile, nominal housing prices increased 76 percent from the beginning of 2001 until they peaked in mid-2006. Inflation-adjusted housing prices increased by 60 percent. Given a declining median family income, the housing bubble during the first six years of the Bush administration was clearly unsustainable. Moreover, it turns out that the “Bush boom” was significantly financed by trillions of dollars in “mortgage equity withdrawals” as homeowners tapped the once-soaring values of their homes to fund a consumption binge. That practice, of course, generated higher mortgage balances on houses whose values are now falling.

Indeed, the nominal S&P/Case-Shiller national housing index has declined 10.2 percent from its peak, and many economists expect additional declines of 15 to 20 percent. A peak-to-trough decline of 25 percent to 30 percent would place well over 10 million homeowners underwater, with their houses worth less than their mortgage balances.

Republicans and Democrats propose kicking the can down road. Then again, isn’t that what they’re doing with Social Security?