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| Homeownership Rate Likely to Decline Further |
| Written by Jonathan Smoke | |
| 08.06.2007 | |
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Discuss this article on the forums. (0 posts) In a post last week, I reported that changes in home ownership had a big impact on new home demand. Why this is of concern is that from a peak in 2004, what started as a slow decline has turned into a rapid descent. The national homeownership rate is forecasted by Moody’s Economy.com to be down to 68.2% by the end of 2007, a full point off its peak in 2004. We have seen a huge loss in demand as this rate has declined. )) So to prepare for the future, I thought it would be best to revisit the recent past. In their 2006 research paper, “The great turn-of-the-century housing boom,” published by the Federal Reserve Bank of Chicago, economists Jonas D. M. Fisher and Saad Quayyum reviewed the various factors that could have contributed to the housing boom. The authors conclude: “First, it appears that the housing boom has not been driven by unusually loose monetary policy. This is not to say the monetary policy has not been unusually loose, but that to the extent it has been loose, this is not what has been driving spending on housing. Second, the current levels of spending on new housing are largely explained by technology-driven wealth creation over the previous decade. Third, changes in the demographic, income, educational, and regional structure of the population account for about one-half of the increase in homeownership. That is, without any other developments, the homeownership rate is likely to have gone up anyway, but not by as much as it has done. The last finding is that substitution away from rental housing made possible by developments in the mortgage market, such as subprime lending, could account for a significant fraction of the increase in residential investment and homeownership.”
By “loose monetary policy,” the authors are referring to historically low interest rates. In other words, low interest rates did not cause the boom. Changes in home ownership drove a surge in demand. That surge in demand impacted prices, which attracted investors, who in turn had easy access to money. The home ownership changes were partially explained by demographic factors such as older and more educated households. But the remainder of the increase, especially demonstrated by lower income and younger households, could only be explained by innovations in financing, e.g. expansion of subprime, Alt-A, and a proliferation of exotic financing alternatives. This surge in demand was great on the way up. Tomorrow, I will dig into the implications of ownership going back down. 
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