Homeownership Rates Could Drop Further, Says Mortgage Bankers Association Report

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According to a new study by Mortgage Bankers Association (MBA) Research Institute for Housing America (RIHA), the drop in the homeownership rate from an all-time high of 69.2 percent in 2004 to 66.4 percent in the first quarter of 2011 reflects a decline from unsustainable levels to something closer to historical averages. While the homeownership rate may have bottomed out, it could fall another one or two percentage points because of tightened credit and other factors, the paper says.

Titled Homeownership Boom and Bust 2000 to 2009: Where Will the Homeownership Rate Go from Here?, the study was conducted by professors Stuart Gabriel of UCLA's Anderson School and Stuart Rosenthal of Syracuse University.  They found that the increase in the homeownership rate in the middle of the last decade extended to all age groups but was most pronounced among individuals under age 30.  These increases coincided with looser credit conditions that enhanced household access to mortgage credit, along with less risk-averse attitudes toward investment in homeownership.  Following the crash, these trends have reversed and homeownership rates have largely reverted to the levels of 2000.

"The question of why homeownership rates are falling now is really a question of why they were so high during the middle of the last decade," said Gabriel.  "From the late 1960s to the mid-1990s, U.S. homeownership rates were relatively stable between 64 and 65 percent. Our findings suggest that the boom and bust in homeownership rates over the last decade was driven in part by an initial relaxation of credit standards followed by a tightening of credit with the onset of the 2007 financial crash.  Evidence also suggests that households headed by people in their 20s and 30s were willing to take more risk with respect to homeownership in the boom years, followed by a return to a more conservative approach after the crash."

"How much more might the homeownership rate fall?  The answer depends on uncertain forecasts of attitudes towards homeownership and changes in the credit market and economic conditions," concluded Rosenthal.  "If underwriting conditions and attitudes about investing in homeownership settle back to year-2000 patterns and, if the socioeconomic and demographic traits of the population look similar to those of 2000, then the homeownership rate may have bottomed out and will not decline further.  If, instead, household employment, earnings and other socioeconomic characteristics over the next few years remain similar to those in 2009, then homeownership rates could fall by up to another 1 to 2 percentage points beyond 2011.  Those declines are likely to be greatest in cities and regions in which house prices were most volatile in the last decade."

Key findings from the study include:

• A combination of changes in mortgage credit standards and attitudes towards investment in homeownership likely contributed to much of the boom and bust in homeownership over the decade.  As credit conditions loosened in the first part of the decade, many people of all ages who would have remained renters instead became homeowners.  With the financial crash, the recession, and tighter credit conditions, homeownership rates have fallen back to levels close to those of 2000 for most age groups.

• Changes in the population's socio-demographic composition and economic attributes also served to lower homeownership rates between 2000 and 2009.  For all household heads age 20 to 80, demographic-socioeconomic shifts pushed homeownership rates down by roughly 2 additional percentage points over the period.  These effects were notably different across demographic groups, however. For example, among individuals 25-35 years old, shifts in their demographic-socioeconomic attributes pushed homeownership rates down by nearly 5 percentage points over the 2000-2009 period. For African Americans the analogous value was only roughly 1 percentage point.

• Individuals appear   to have been more risk-seeking in their approach to home buying in the first   half of the last decade.  This   changed to a more risk-averse posture following the real estate   meltdown.

• Between 2000 and   2009 there was a one percentage point increase in the homeownership rate.  But, were it not for the shifts in   access to homeownership through easier credit and the changes in socioeconomic   conditions, the homeownership rate would have actually fallen between 2000 and   2005, rather than increasing.

"Homeownership is deeply embedded in American culture and long has been a symbol of economic achievement in the United States. The recent sharp decline in the homeownership rate has symbolic as well as tangible adverse effects on the economy, with home sales and construction activity remaining near all-time lows," said Michael Fratantoni, Executive Director of RIHA and MBA's Vice President of Research and Economics.  "This is another in a series of studies that RIHA has issued on the issues of household formation, borrower attitudes after the recession and homeownership.  Single- and multifamily lenders, other participants in the real estate finance industry, and policymakers can utilize this research and assumptions on homebuyer behavior and credit availability to form their own forecasts regarding the likely path of the homeownership rate and implications for the mortgage market going forward."

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