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Declining Home Ownership Moving to 1950s Rates

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Last week, St. Louis Federal Reserve economist William Emmons presented a study showing American home ownership declining at a rate that’s projected to return levels to the 1950s. In a presentation entitled “Is Home Ownership Still the American Dream?” Emmons explains how the increase in home ownership of post-WWII was fueled by many factors, including New Deal government housing policies, which “laid the foundation for this huge increase in home ownership rates.”

Although the 2008 Housing Crisis was a strong factor, Emmons suggests the downward trend in home ownership began as early as 2005. The Fed economist also suggested the move on balance appeared secular and long-lasting, despite the fact that 90% of Americans younger than 45 have bought or expect to buy a home in the future. Aspirations to own homes are even higher among African-Americans and Hispanics than whites and Asians, yet rates for these groups are 20 – 30% lower.

woman holding tiny house

An overwhelming majority of people still desire to own a home and see it as the primary pathway towards the American Dream, yet fewer and fewer people actually own homes. Emmons said he believes this disconnect has far reaching implications and that at least part of the solution is removing some of the governmental and market incentives for buying homes. Emmons admits easy mortgage acquisition was part of the housing crisis:

“Mortgage terms probably were too easy in terms of setting people up for failure. Some increase in the stringency of those mortgages standards today probably is to the benefit, not just to those individuals, but to the population as a whole.”

graph of home ownership rates

Other contributors to both the rise in housing ownership rates and the subsequent housing bubble were institutions, like Fannie Mae and Freddie Mac, whose mandates were to stimulate home ownership, but whose “safe” policies helped get people into homes they couldn’t afford otherwise. In addition, these institutions helped keep home demand and prices artificially high, which kept the housing bubble inflated.

Along with the recent spike in long-term bonds, mortgage rates are rising again, with the average 30-year mortgage rate rising to 3.73% last week, according to Bloomberg, and some are anticipating rates making it to 4% by the end of the week. Although analysists are looking to Trump’s increased fiscal spending to spur more economic growth, higher borrowing costs could “further hinder first-time purchases at a time when rising values are already hurting affordability and pricing out buyers in many markets.”

Many Americans may still see home ownership as the path to financial security and the American Dream, but reality is few are able to afford it. The answer to affordable housing doesn’t lie in governmental intervention, subsidies or interest rates. It lies in giving the free market more room to determine interest rates and home prices.

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