Opinion

Low Homeownership Rate Likely to Be as Good as It Gets

The Census Bureau recently reported that the U.S. homeownership rate fell to 65% in the first quarter, down from 65.4 % a year earlier, putting it at its lowest level since the third quarter of 1995. That's down sharply from the peak of 69.2% reached in the first quarter of 2009.

At least some of the decline is certainly due to temporary, technical factors, like low housing supply, high unemployment and super-tight underwriting standards by lenders, which is keeping many people from buying homes. But at least some industry observers think a more generic trend is underway among consumers, away from the "American dream" of owning your own home. The current home ownership rate may therefore be as high as we can reasonably expect it to get.

"We're in a really unusual time in the housing market in that all three potential sources of housing stock—existing homes, new homes and distressed homes—are at unusually low levels. And that rarely happens." says Rick Sharga, executive vice president at Carrington Mortgage Holdings in Santa Ana, Calif.

And it could take several more years for market conditions to return to normal, he says. "We could be in a position a year from now where there's slightly too much inventory or at least enough inventory that it has a marginal effect on home price appreciation. But I've been forecasting for a while that we're really looking at probably two to three years of slow but steady growth."

"The principal reason for the drop in home ownership is the oppressive lending requirements from big banks. Many banks are not lending unless a borrower is making over $100,000 and has limited debt," says Gloria Shulman of Centek Capital Group, a mortgage broker in Beverly Hills, Calif. And, she adds, "Because no one really knows what Dodd-Frank regulations will look like, I do not expect this situation to change."

But other people believe that the aftermath of the mortgage bubble has so damaged consumer feelings toward homeownership that it could take a long time before it changes, if it ever does.

"I see more and more people electing to rent their homes rather than buy," says Elle Kaplan, CEO and founding partner of Lexion Capital Management LLC in New York. "The mortgage crisis changed the American dream. We have shifted away from the idea that homeownership is a universal goal and benchmark of success. Many Americans today are deciding that that owning a home would be a significant liability. Renting provides flexibility and the chance to have money invested in the markets, as opposed to a concentrated investment in a home."

"The job market, credit complications in getting a mortgage, and to some extent lower inflation rates are pushing people toward renting. If you look at the actions of home rental REITS, they are making longer term bets on rentals," says Brian Barnier, a principal analyst at ValueBridge Advisors, a consulting firm in Norwalk, Conn. "The end of the 'treacherous triangle' in housing consumption suggests a return to pre 1996 and really pre-1990s patterns in consumption."

And that might not be a bad thing, he adds. "In some ways this isn't all bad if it reduces excessive debt and promotes labor force mobility to reduce unemployment," he says.

Josh Lewis, a mortgage broker at Unity West Lending in Huntington Beach, Calif., says the previously high ownership rates in the early 2000s were artificially inflated by government policies and that the homeownership rate is now moving back toward more historical, realistic levels.

"Government policies of the late 1990s and early 2000s aimed at increasing homeownership beyond the long-term level of around 64% were doomed to fail," he says. "To achieve 'full home ownership' the government put in place policies to reduce down payments, income and credit requirements and interest rates. That expanded the pool of eligible buyers who could move from ownership to renting. For a period of time, rising values hid the problems being sewn by these easy money policies. Sadly, the housing market reached a tipping point where these marginal buyers were destined to be flushed out of the market."

"From this view, lower ownership rates are actually a great sign that the market is returning to a healthy, sustainable level," says Lewis.

Eric Wallberg, co-founder and co-managing partner of WCS Lending in Boca Raton, Fla., says deeper, endemic economic issues since the Great Recession will likely effect consumers' attitudes toward homeownership for years to come.

"The American dream was never tied to home ownership alone," he says. "It was a dream of establishing a life where a family could establish roots in a community, with a stable source of income and employment, in a house that could be depended upon for both shelter and financial equity. That dream is still at the heart of the American culture, but until we regain the economic support where all of those factors can come together to a greater degree, the American dream will be overtaken by the American reality."

George Yacik has been covering the residential mortgage business for more than 20 years and writes frequently for industry publications. He can be reached at gyacik@yahoo.com.

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