Learning from the History of the Homeownership Rate

The homeownership rate and housing finance policy, Part 1: Learning from the rate’s history

JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY

DON LAYTON, SENIOR INDUSTRY FELLOW

Among the thousands of statistics that the government produces to describe the country’s economic and social health, the homeownership rate has an exalted place among policymakers in Washington. This single statistic – currently running about 65 percent – is regarded as one of the most important comprehensive measures of how well the country’s socioeconomic system is “delivering the goods” for the typical American family. A high homeownership rate reflects that many families have income large enough not only to cover monthly living costs but also to generate enough cash surplus to save for a downpayment and then to sustain homeownership. It also indicates that the cost of purchasing a house and financing a mortgage on it is affordable.

In addition, homeownership is regarded as causing an improvement in the quality of life of a typical family. It is the most common method for such a family to build wealth: by paying down mortgage principal each month and participating in the long-term appreciation of home values, a family can build wealth that can be used for retirement or other needs, including helping the next generation. Such wealth creation therefore provides a major social as well as economic benefit. Add in protection against being forced to relocate by a landlord due to unaffordable rent increases or other actions, and homeownership is validly seen as a source of family stability.

Not surprisingly, politicians and policymakers are therefore often focused on finding ways to push the homeownership rate higher. As a participant in the housing finance policy community since 2012, when I became CEO of Freddie Mac, I have heard often how crucial housing finance was in creating the much higher rate of homeownership that evolved after World War II – roughly 65 percent, compared to less than 50 percent prior to the Great Depression. I have also heard frequently from housing advocates how specific proposed change in housing finance, including some that seem quite limited to me, would result in many more families (“millions” is sometime claimed) becoming homeowners. Unfortunately, despite such claims, through decades of the government’s implementing various programs in housing finance aimed at increasing the sustainable rate of homeownership, it remains today at almost exactly the level achieved over fifty years ago – about 65 percent.

It thus seems time to step back, take stock, and look for fresh ideas.

Top 100 U.S. Cities Ranked by Homeownership Rate 2014-2018

Sources: U.S. Census Bureau, American Community Survey (ACS)

As such a step, my new paper “The Homeownership Rate and Housing Finance Policy: Part 1 – Learning from the Rate’s History,” reviews the history of the US homeownership rate over roughly the past 130 years. The objective of this review is to establish a foundation for determining what policy choices, especially in the field of housing finance, would likely be successful in finally raising the rate – which will then be explored in Part 2.

It would indeed be a major socioeconomic success for the United States if the homeownership rate could rise from its 65 percent level to 70 or 75 percent on a sustainable basis: about 6 to 13 million more families (respectively) would become homeowners, with all the economic and social benefits that increase would generate. (As will also explored in Part 2, that can’t realistically happen without addressing the major racial homeownership gap that exists.) But, as already noted, after so many programs designed to do just that have failed for the past half century, it obviously isn’t an easy thing to accomplish – in fact, one inescapable conclusion from the history is how incredibly hard it is.

Part 2 will include an examination of the proposal made by the Biden campaign to establish a large and generous downpayment assistance program with Federal government funding. That proposal, which represents a change in the thinking that has dominated policymaking for many years, does indeed have the potential to be a major component of a successful effort to, at long last, materially and sustainably raise the homeownership rate above its long-standing 65 percent level.

Click here to read the full paper from Harvard Joint Center for Housing Studies

Availability of Mortgages in the Pandemic

America's Housing Finance System in the Pandemic: The Causes and Policy Implications of Credit Tightening

JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY

DON LAYTON, SENIOR INDUSTRY FELLOW

As the economic impact of the pandemic continues, one of the biggest issues to emerge in housing finance is the availability of mortgages. Media reporting and policy discussions often imply that mortgage credit tightening – which has undeniably occurred – is a major problem, perhaps even on par with what happened in the financial crisis just over a decade ago. Additionally, especially in the housing finance policy community, the implication seems to be that somehow much or even all of the tightening is illegitimate, a failure of government policy; that it should be largely if not completely avoidable with the right government actions; and that those actions should not require the kind of subsidies we are seeing for small business or specific industries, like the airlines.

Is this view legitimate? Or is it all-too-common Washington wishful thinking? Or perhaps something in between?

In my (Don Layton) new paper, “America’s Housing Finance System in the Pandemic: The Causes and Policy Implications of Credit Tightening,” answers these questions by examining how mortgages get made in 21st-century America, who sets the credit standards, why those standards are not – and should not be – fully immune to economic conditions, and to what extent government policies other than overt subsidies can help mortgage credit resist unnecessary tightening.

The conclusions reached are: 1) that the mortgage credit tightening we are seeing is much less of an issue than encountered in the prior financial crisis; 2) that it is reasonable and appropriate that there should be tightening to a modest degree, even with the best possible government policy, as risks have gone up in the current economic environment; and 3) that the tightening we are seeing is overwhelmingly a byproduct of the private sector, as it performs its major role in housing finance, behaving as one would expect in an economic downturn – and it would be even worse if government played a lesser role than it currently does.

However, also exacerbating the tightening, and probably in a significant way, is the unintended consequence of the generous mortgage forbearance program established by the CARES Act in late March.  This is because it applies not only to then-outstanding government-supported mortgage loans, for which the forbearance program was originally designed, but to newly-made ones as well. This is explored in some depth, and is the cause of significant friction between the mortgage industry and the government mortgage agencies of Freddie Mac, Fannie Mae, and the Federal Housing Administration.

The paper also notes that the public perception of the causes and possible cures for credit tightening is too much driven by a combination of mortgage industry lobbying narratives and the media viewing the issue excessively through the lens of the prior financial crisis.

Click here to read more America's housing finance system