For first-time buyers, on the other hand, continually increasing prices presents a problem. And this is even true in an age of easy money.
From Mises Wire:
by Ryan McMaken
I do not regard homeownership rates as a proxy measure of economic prosperity. But, in the United States, increasing homeownership has long been a goal of federal policymakers, and Federal Reserve policy is often defended on the grounds that it makes homeownership more affordable through its efforts to force down interest rates. Moreover, homeownership does remain broadly popular in the United States as a common life goal and as an indicator of having achieved the so-called “American dream.”
However, in recent years, years of federal stimulus and accommodative Fed policy has done a terrible job of making housing more affordable. In fact, thanks to the Fed’s efforts to prop up asset prices, housing has become exceptionally unaffordable as both rents and home purchase costs have risen to new highs and outpaced wage growth.
Let’s look at some of the stats that provide some indicators of the Fed’s legacy in recent years.
First of all, let’s note the most recent quarterly homeownership numbers released by the Census Bureau. During the thrid quarter of 2015, the homeownership rate was 63.7 percent. That’s up slightly from the second quarter of this year, but it’s down from the third quarter of 2014 when the rate was 64.4.
More notably, the rate is down considerably from the third quarter of 2006 when the homeownership rate was 69 percent. That was likely an all-time high, but since then, the homeownership rate has fallen back to the same place it was in 1990. The homeownership rate was 63.7 percent during the second quarter of 1990. In fact, from 2013 to 2014, the homeownership rate seemed to be in near-freefall.
So why are homeownership rates falling so rapidly? Some of it is simply due to the fact that home prices have climbed out of reach of many families. According to the Case-Shiller 20-city composite index, year-over-year home price growth has been up year-over-year for the past 39 months, and for most of that period has exceeded five percent growth.
(Note: for the sake of consistency, none of the numbers discussed below are adjusted for inflation.)
By another measure, (the FHFA expanded-data index) quarterly home price measures have been up year-over-year for the past 14 quarters, with growth exceeding five percent for the past 12 quarters:
For people who already own real estate, this doesn’t necessarily present a problem. Those who already own houses will sell their houses at the new higher prices before buying a new one. For first-time buyers, on the other hand, continually increasing prices presents a problem. And this is even true in an age of easy money.
While there was a significant tightening of lending standards from 2009 to 2012, standards have continually loosened over the past two years. So while it’s still not as easy to get a home loan as it was during, say, 2005, its still getting easy to get a loan even if one doesn’t have money for a meaningful down payment, and has few assets. Indeed, sub-prime lending is making a quick comeback as Washington, DC turns the screws on banks to keep the money flowing.
The need to keep the easy money flowing stems from these relentless increases in home prices. If asset prices continue to climb, the thinking goes, we just need to keep shoveling more money to borrowers to get them in a house. And then, once they have a house, they’ll spend a bunch of money and the economy will take off.
Unfortunately for the borrowers, however, this line of thinking means that the next time a recession comes along, they’ll quickly become underwater on their home loans and find themselves trapped. The drive toward low down payments and subprime lending makes it far more likely that borrowers will find themselves with a house they can’t sell for as much as they owe. Or, the homeowner may simply continue living in a home where he’s making payments based on inflated values.
For borrowers who milk the system and just “walk away” from their homes, that’s no big deal. The ones who will be punished the most, however, will be the people who play by the rules and try to make good on their mortgage payments. Yes, the lenders will suffer too, but they’ll get bailed out courtesy of the taxpayers. The borrowers won’t be so lucky.
But hey, rising prices are not big deal as long as wages keep up, right? Maybe, but the big bummer here is that wages are not keeping up with home price inflation. A look at average weekly earnings suggests wages are not keeping up. Weekly earnings consistently come in at under 3 percent growth year over year (the y axis = % change):
Thank you to Ryan McMaken, Editor of Mises Daily and The Austrian. (He accepts your article submissions. Read this first.) He has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.