Thursday, August 19, 2010

Redefining Homeownership

Homeownership is usually defined as the percentage of households living in owner-occupied housing instead of rental units. Since 1960, the rate of homeownership has been relatively steady. From a low of 62.1% in 1960, it rose to 64.3% in 1969, 65% in 1978, 66.3% in 1998, 67% in 2000, 68% in 2003, peaking at 69% in 2004. In 2009 it stood at about 67.5%.

On this measure, the subprime mortgage crisis did not seriously harm the incidence of ownership, although many are underwater as their mortgages exceed the value of their homes and face foreclosure.

A more informative measure of ownership is owners’ equity as a percentage of household real estate holdings, which appears in Table B.100 in the annual statistical releases of the Federal Reserve Board's Flow of Funds Accounts of the United States. That share fell from 80.2% in 1952 to 47.9% in 2007, the first time the ratio fell below 50%. The crash in home prices further reduced owners’ equity to 38.4% and 37.6% in 2008 and 2009 respectively.

Simply put, the reduction in down payments, refinancing of home loans and use of the funds for personal consumption, and the correction in home prices has transformed homeowners from owning 80% of their homes in 1952 to only 37.6% in 2009. Holders of mortgages, whoever they may be, own 62.4%. In the course of promoting the American dream of homeownership, the dream has turned out to be a nightmare for many.  To the extent that Fannie Mae and Freddie Mac hold a significant share of mortgages, it means that the government has replaced families as a principal source of owners' equity.
 
(HT:  Michael S. Bernstam)