Wednesday, April 29, 2020

Housing: Part 364 - Rising homeownership rates

This graph from Len Kiefer at Freddie Mac shows the latest movements in homeownership rates.  The Census Bureau reported updated homeownership rates, and the trend continues to be relatively positive.

Now, you can see from the graph that homeownership rates are still very low, when accounting for age.  The best looking group in terms of recent trends is the under 35 group, which has managed to just touch the bottom end of historical norms.  That age group was largely not in the housing market when the crisis struck, so they benefit from having less damaged balance sheets.

In the other age groups, the scars from the crisis are still quite large.  Yet, even though there is a long way to go, it is nice to see movement in the right direction.
However, there is limit to this movement, and I think really what we are seeing here is the continued settlement of American households into the "new normal".  According to the New York Fed, the median FICO score of mortgage borrowers before the crisis tended to float around 715.  During the crisis it moved to as high as 780, and has generally stayed high - 770 as of the end of 2019.
It is difficult to imagine homeownership rates increasing much further without further loosening in lending standards.

In fact, an important source of rising homeownership now is probably the work American households are doing to improve their credit.  The  Fair Isaac Corporation estimates that the average FICO score for the entire market (not just mortgage originations), has moved up from the low in 2009 of under 690 to 706.

That sounds great.  Macroprudential regulations are pressing Americans to be more prudent.  But, there is really only so much Americans can do.  As much as anything, credit scores are a measure of how old you are.  Are you young, with student loans or a bare bones credit card?  Or are you a retired couple with the remains of a mortgage you took out in 1995, living off of a pension and an IRA?

The thing is, you know what was an important factor for that retired couple with the 830 FICO score, paying off the last few years of their mortgage?  In 1995.....they were able to get a mortgage.
The average rising FICO score and the tentatively rising homeownership rate reflect the attempts by some Americans to meet the new more strict norms for owning a home.  All else equal, maybe that is a good thing.  It seems like it must be.  But, we should keep in mind that the way we are creating this trend - really the only way to - is through policies of exclusion.  Rules and regulations that put an extra gatekeeper on the path of the household credit lifecycle.

For some number of households on the margin, the new standards are within reach, and they have made the effort to adjust.  According to Ethan Dornhelm at Fair Isaac, this group has driven the increase in FICO scores.  Many households have been intermittently locked out of credit markets.  But, analysis of households that have had continuous use of credit since 2009 shows that those households have increased their average FICO scores by 29 points.

Account-level delinquencies down double-digit percentages, substantially lower credit card utilization, lengthier credit histories, and less credit seeking activity — it is no surprise that this population has experienced a major improvement in their FICO® Score.

Those households have delayed homeownership a bit, but their balance sheets are healthier.  And, the reason that they are engaging in this adjustment is that exclusion makes returns better.  Locking a lot of households out of entry level homebuyer markets means that entry level homes are a much better deal for those who can get them.

That is one price of "macroprudence".  It creates a rift between the haves and the have nots.  Marginally better-off Americans get an even better deal as homeowners, but they have to work at it a bit harder to be "qualified".  Other Americans will be unlikely to clear that bar, and they end up paying higher rents because when homeownership becomes a better deal for families, it also becomes a better deal for landlords.  Exclusion raises their rental income.

If this is the new normal, then in the long-term, homeownership will rise a bit from here, but not back to earlier norms.  Maybe really just a few percentage points lower than they used to be.  Americans that are homeowners will live in somewhat nicer or larger homes.  Or maybe they will bid up the prices of homes in favored locations.  Americans that aren't homeowners will live in somewhat less nice units, rents will go up over time, and will take a slightly larger portion of their incomes.  This won't be noticeable.  It's not like you could visit a $600,000 home today and then go to an apartment renting for $800 a month, and then revisit similar places again in 10 years and be hit with the realization, "Huh, it really seems like the relative amenities of that apartment have declined by 20% or so compared to the amenities and the rental value of that nice home."  It will just happen, and the newspapers will just keep printing columns about how awful it is when "Wall Street is your landlord."  We will notice, vaguely, that things just seem harder for the tenant in that apartment.
There is no magical resting place where we know we have made the correct set of compromises between prudence and access.  But, one thing to keep in mind when reading those articles about greedy Wall Street landlords is that access to homeownership isn't important because of the financial speculation ownership entails.  That's as least as much a cost as an opportunity.  What is important about it is that homeowners are never in those angry articles about greedy landlords.  What is important about it is that our homes have a sacred quality about them, and when a home has a landlord and a tenant, that sanctity is split.  It has an inherent conflict that cannot be cured.
Set aside those bromides about the American Dream.  Not everyone should be or wants to be a homeowner.  In many dense urban settings, in high-rise apartment buildings, the inherent conflicts of ownership might even outweigh the inherent conflicts of tenancy.  We shouldn't thrust this choice on Americans.
In an age where some cities have political regimes that create extremely high home prices, it is easy to start to think that the important reason that the retired couple has an 830 FICO score is that they were speculators.  But, really, there are couples like that in St. Louis just as there are in San Francisco.  The couple in St. Louis may not have gotten the gains of speculation that the couple in San Francisco did, but they are likely to share a high FICO score.  The reason is that for the past 30 years, they have had the world’s best landlord, who never engaged in a sacred conflict with them, and who, furthermore, didn’t raise their rent in order to compensate for the landlord’s portion of that conflict.
As we continue along in the “new normal”, when you see articles about greedy Wall Street landlords, it is worth keeping in mind that the conflict they are engaged in isn't a product of "Wall Street".  It is an ageless conflict.  And, for households who must engage in it because, on some margin, we have decided, through public gatekeepers of credit access, that they must, their conflict was a public imposition.  We have taken something sacred from them.  Maybe, all told, for the best. But, even so, we should acknowledge our role in their travails.  We must attempt to account for these costs in the quest for public prudence.
If the major cities made it easier to build more dense housing in and near city centers over the next twenty years, then the homeownership rate might become even lower than it is now.  That would be fantastic, because it would reflect Americans engaging in voluntary tradeoffs – moving to the city because of the opportunities and lifestyle it provides, even if it comes with sacred compromises about control over personal space.  Today, public housing policy is making those voluntary trade-offs more difficult while simultaneously imposing other involuntary trade-offs.


  1. Until the property zoning constipation is eliminated, I see you very little future for lower-cost housing along the coasts.

    1. I Mention you in my latest YouTube. I'm not really happy with my latest YouTube but I got a number of days without posting anything. Do YouTube experts say a guy's got a post if he's going to develop an audience.

    2. Thanks for the shout-out, Ben.

      But, we are talking about zoning! Mercatus has a whole group devoted to the topic, plus the monetary policy group is supportive of the topic.

    3. Yes, i should devote a future show to Metcatus, and i will. Hats off to you guys.

      But mention free trade and you will have an avalanche of economists falling all over each other to denounce the slightest wrinkle or deviation from theology. it is taught prominently in all macro courses.

      The much larger, and less disputable, structural impediment of property zoning is still very much a sideshow.

      Kevin Erdmann is leading the way.

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