Yves here. Richter describes the consequences of turning homes into a financial asset, combined with policies that have neglected job and wage growth. If you look at his chart, you’ll see a rise in home ownership during the stagflationary 1970s. That was also financialization of residential real estate. Properties were an inflation hedge, while equities were flagging.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
Something happened on the way when the concept of “home” transmogrified to a financialized “asset class” whose price the government, the Fed, and the industry conspire to inflate into the blue sky, no matter what the consequences. And here are the consequences.
The Census Bureau, which has been tracking homeownership rates in its data series going back to 1965 on a non-seasonally adjusted basis, just reported that in the second quarter 2016, the homeownership rate dropped to 62.9%, the lowest point on record.
It matches the low point in Q1 and Q2 of 1965 when the data series began. At no time in between did it ever fall this low. And it was down half a percentage point from 63.4% a year ago.
The relentless slide has lasted for 12 years, from its peak of 69.2% in Q4 2004, which was when the Greenspan Fed’s low interest rates were boosting speculation in the housing sector, and prices were going haywire. At the time, the concept of “home” had already become an asset class that can never lose money, financialized and later shorted by Wall Street, subsidized by government agencies, and backstopped by the Fed.
And this is what happened to homeownership rates afterwards:
The 1.9 percentage point drop from Q3 2014 (65.3%) to Q2 2015 (63.4%) was the largest two-year drop in the history of the data series. It also coincided with steep increase in home prices.
On a seasonally adjusted basis, the homeownership rate dropped to 63.1% in Q2, the lowest in the non-seasonally-adjusted data series going back to 1985.
There are numerous reasons for this, some known and others still to be guessed at, including:
- Rising home prices in an economy of stagnant wages (for the lower 80%) have pushed entry-level homes out of reach for many people.
- Lower priced homes in many urban areas entail a huge and costly ($ and time) commute every day. And even then, these homes may be too much of stretch for big parts of the population in expensive urban areas.
- First time buyers are having trouble saving for a down payment since they spend their last available dime to meet soaring rents.
- Millennials have been blamed. They always get blamed for everything. They saw their parents deal with the American Dream as it turned into the American Nightmare, and they learned their lesson early in life.
- The super-low interest rate environment hasn’t made homes more affordable because home prices, in response to super-low interest rates, have soared, and in the end, mortgage payments are higher than they were before.
- Higher home prices entail other costs that are higher, including taxes, brokerage fees, and insurance.
The fact that Housing Bubble 2 in most urban areas is now even more magnificent than the prior housing bubble that blew up with such fanfare, even while real incomes have stagnated for all but the top earners, is a sign that the Fed has succeeded elegantly in pumping up nearly all asset prices to achieve its “wealth effect,” come heck or high water. In this ingenious manner, it has “healed” the housing market.
It’s two-year bout of flip-flopping about raising rates just puts some lipstick on these policies that include the purchase of agency mortgage-backed securities, which the Fed continues to buy to replace those that mature and roll off its balance sheet.
Just today, as part of its routine, it acquired $2.6 billion in agency mortgage-backed securities. On July 26, it acquired $2.0 billion. On July 25, $1.9 billion; on July 22, $1.3 billion, on July 21, $2.5 billion; on July 20, $1.9 billion…. and so on.
As MBS mature and are redeemed, the Fed takes this money and goes to its primary dealers (list) and buys more of them, which puts downward pressure on mortgage rates and prevents the free market from playing any kind of role, all in the religious believe that inflating home prices beyond all recognition is somehow good for the economy and Wall Street, despite the consequences, such as plunging homeownership rates, as America turns from a country of homeowners into a country of renters, often dwelling in a corporate-owned financialized asset class.
At the luxury end, something new is hitting the housing market: Manhattan and Miami are already getting mauled. Now it’s expanding to San Francisco, Silicon Valley, Los Angeles, San Diego, even Texas! Read… US Government Mucks up Money-Laundering in Real Estate, Puts Luxury Housing Bubbles at Risk