Why falling homeownership rates could be good for the economy

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The homeownership rate keeps dropping and is down to levels last seen in 1995. Maybe we should be happy about that -- things were pretty good back then.

These days, however, a falling homeownership rate has provoked grave concern about the demise of the American Dream and the desperate plight of the middle class. The portion of Americans who own the home they live in dropped one-tenth of a percentage point in the second quarter, to 64.7% -- the lowest level in 19 years, as almost every headline about the news proclaimed. Homeownership peaked at 69.2% in 2004, and the 4.5 point drop since then is the biggest decline on record.

Yet back in 1995, nobody worried that the homeownership rate was too low. In fact, people were growing quite optimistic as the 1990-91 recession faded out of sight and prosperity blossomed. The consumer confidence index hovered around 100 in 1995, roughly 14 points higher than it is today. The unemployment rate was 5.6% -- half a point lower than it is now — and was midway through a long decline that would last another five years. A booming economy helped President Bill Clinton get reelected in 1996. Income inequality was barely a concern.

The gloomiest news

Today, by contrast, a homeownership rate at 1995 levels seems to signal progress has stalled. The news may be gloomiest for potential first-time buyers, who only account for about 28% of all home sales today, down from 40% a few years back. Scarce jobs, onerous student-loan debt, weak pay and rising home prices have forced many entry-level buyers to the sidelines, where they might get stuck forever, if you believe some of the doom-speak foretelling an irreversible decline in living standards.

Before a nationwide bubble mentality set in, however, the homeownership rate would have looked just fine where it is. Between 1965 and 1995, the portion of Americans owning their homes was remarkably stable, mostly staying between 63% and 65% and never moving by more than 1 percentage point in either direction within a given year. The average was 64.8%, just one-tenth of a point higher than it is now.

Beginning in 1997, the homeownership rate began to climb well beyond its historical range. It hit 66% in 1997, 67% in 1999, 68% in 2001, then peaked at 69.2% in 2004. This run-up occurred during the administrations of both a Democratic and a Republican president and had several causes, including expanded federal aid for low-income buyers, increasingly loose lending standards, unusually low interest rates, lax regulatory oversight and outright fraud meant to generate mortgage processing fees whether the borrower could afford the mortgage or not. It took a confluence of powerful forces to produce the housing bust that began in 2006, and anybody who blames the bust strictly on one cause or another is almost assuredly pushing an ideological viewpoint.

More simply put, the housing market got out of control and more people bought homes than should have. We’re now correcting back to a level that is more healthy and sustainable than during the stratospheric buying frenzy of 10 years ago. That’s good news, because the economy can’t recover in earnest until people wriggle out from the burden of unaffordable mortgage payments. As former homeowners realign their living expense with their incomes, they’ll be able to pay down debt, stabilize their finances and eventually spend more on other things.

There’s another reason renting will benefit a lot of people more than owning, at least for a while. We consider homeownership to be the central tenet of the American Dream, but these days, homeownership can actually interfere with the quest for opportunity and prosperity. Owning a home is a long-term commitment, yet the economy these days changes faster that it used to and requires more mobility than many people are prepared for. People often need to move around to find opportunity instead of staying in one place and hoping it comes to them.

There’s already evidence that some homeowners suffer from “mortgage lock-in,” which prevents them from selling their homes and moving to a place with better opportunities because they owe more on their home than it’s worth and would have to take a sizeable loss just to move. Younger workers should be careful to avoid mortgage lock-in, and that seems to be exactly what some of them are doing. Realtors, home builders and appliance manufacturers might think this is terrible, but for somebody eager to preserve financial flexibility, it’s shrewd.

If homeownership hadn’t risen to unsustainable levels in the first place, we wouldn’t see anything wrong with where it seems to be settling out now. And if it falls further still, it might give even more former homeowners an opportunity to move around and see what they’ve been missing.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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