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Hooray for a falling homeownership rate

Rick Newman
·Senior Columnist

This is supposed to be bad news: The homeownership rate has now fallen to 64%, the lowest level since 1994. As if two decades of progress have summarily been wiped out.

What’s really going on, however, is the last bit of air squeaking out of a 20-year housing bubble that obscured the pitfalls of owning a home, while exaggerating the virtues. The homeownership rate is now back to its historical average—where it probably ought to be—as this chart shows:

Source: Census Bureau.
Source: Census Bureau.

There’s no “correct” homeownership rate, and there’s not even a clear correlation between a high percentage of homeowners and a prosperous economy. The homeownership rate in Germany and Switzerland is far lower than it is in the United States, for instance, yet those are two of the most prosperous countries in the world. And of course an orgy of home purchases in the early 2000s, by people who never should have bought, was one of the main contributors to the financial meltdown in 2008.

It’s very clear, meanwhile, that buying a home is a huge commitment of money, and that it also locks the buyer in place for several years, at a minimum, unless taking a loss on a quick resale is no big deal. The great myth of the housing boom, of course, was that home values would always rise, promising a quick profit even if you sold just a few months after you bought. A sharp drop in home prices from 2006 to 2012 proved that idea to be a dangerous fiction.

We now know, or ought to know, that owning a home isn’t for everybody. The first problem is the debt it takes to finance a purchase. Taking out a mortgage can be a shrewd investment for people who can afford it and are in the right circumstances. But it can be a disastrous commitment for those who are unprepared. Banks are supposed to assess creditworthiness and deny loans to suspect borrowers, but of course underwriting standards evaporated during the housing boom and nearly anybody who wanted a mortgage could get one.

As a result, household debt levels became ruinous. The amount of outstanding mortgage debt more than doubled between 2001 and 2008, rising from $5.2 trillion to $10.7 trillion, according to Federal Reserve data. The portion of the nation’s disposable income going toward mortgage payments rose from 5.6% -- where it was for most of the 1990s — to 7.2%, the highest level on record. We know those debt levels were too high because of the soaring foreclosure rates that followed the end of the housing boom. A sharp drop in overall consumer spending during the 2007-2009 recession was another inevitable result.

The housing boom peaked in 2006, and it’s been a painful period of adjustment since then. But many parts of the housing market are healthy once again. The portion of income going to pay off mortgages is down to 4.7%, which is about a full percentage point below the long-term average. Super-low mortgage rates engineered by the Fed help with that — a lot — but it’s a break for consumers, nonetheless. Less mortgage debt is helping people pay off student loans, credit card balances and other bills, and stabilize their finances after nearly a decade of turbulence.

A shrinking portion of home buyers also means more workers will have the flexibility to move around for a job, easing a stuck-in-place syndrome that has prevented some workers from leaving downtrodden areas and going where there are more jobs. The rate of labor mobility, as it’s known, has hit record lows recently, with people staying put when they ought to be going where the work is. More renters and fewer owners ought to improve mobility.

Still, the homeownership rate might be close to bottoming out. Banks are finally starting to ease lending standards, which will help more people qualify for loans. An improving job market will give more people the confidence to commit to a mortgage. Interest rates remain extraordinarily low and homes are still affordable in most areas.

If that’s not enough, there are new government programs meant to help first-time buyers purchase a home with down payments as low as 3%, and other fresh incentives from the Obama administration. Critics argue that Washington is repeating the mistakes of the past, by luring people into homes they can’t really afford. But for the time being, many potential buyers are renting instead, and there’s no obvious reason to worry about a renting bubble.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.