I am starting to pay attention to the homeownership rates again. I will be honest with you. Not everyone should own a home. It is unpopular, and some say unAmerican to say, but it catches my attention when I read about all the new programs to make home ownership “so much easier.” Have we learned nothing?
Homeownership Rates on the rise
Homeownership rates are up over last year and growing faster than the rate of renters. Homeownership rates are now 63.7% up from 62.9% from last year. That may not sound like much, but these numbers typically do not change very fast, except right before market crashes. Owner occupied homes grew by 1.26million over the last year while renting houses dropped by 700,000 during the same time frame.
Some are saying this is a good sign, home ownership is back on the rise, and that is a good thing…. isn’t it?
Here are the historical numbers of homeownership:
In 1960 home ownership was 61.9.
In 1990 it grew to 63.8.
In 1996 jumped to over 65% and was almost a straight line up until it peaked at 69% in 2005. Since then it has been steadily coming down to the 62.9%, it settled at last year.
Is 63.7 a horrible and scary number? Not in of itself as that is pretty close to what we were looking at in 1990. But it is an indicator we need to keep an eye on over the next couple of years.
Sure, we would love everyone to own a home, but the historical data shows two spikes where home ownership numbers rose above 65%, one around 1979 and one in the early 2000s. You may recall that they were followed by two of the worst markets for the last 70 years.
So why would 63 scare me?
While it is not a real scary number, we need to look at many of the first time home buyers for an indication of what is going on.
After the crash a decade ago lenders became much more conservative in their lending practice. Lenders started to require home buyers to have money down, to be able to prove they could afford the loan and not allow debt-to-income ratios to exceed 45% when lending. Is this still the case?
We are starting to see the signs that this is not always the case any longer. Lending restrictions have loosened some. Lenders are now running radio advertisements bragging how they will now lend on a 50% DTI ratio, which is more than 20% higher than before. There are also many programs now where lenders are approving mortgages with only 1% down payment.
Over the last couple of months, I have had several cases where the buyers have submitted offers with only 1-3% down and wanting the Seller to pay for all closing costs. When I asked if this was needed or just desired, I was told it was necessary. I heard things such as he just got his first job and they need money for their wedding and don’t have the money for closing costs.
Not everyone can afford to be a homeowner.
Yes, your $950 mortgage payment may very well seem cheaper than that $1050/mo rental payment for a house in the same neighborhood. Just because your payment is less does not always mean homeownership is cheaper than renting.
Let’s see, just this year I have had my hot water go out, I had a roof leak and got it repair by a contractor from the Roofing Brampton experts, I had a fan that needed replacing, I had an AC unit that started blowing warm air on an 118-degree day, and I had a pool chlorinator go out.
Ok, so it has been a rough year for sure, but these costs are all things that a landlord would have taken care of if I did not own the house. If I had been in a situation where I purchased a house for just 1% down and had no money for closing costs, I likely would not have had money for repairs.
And what if I lost my job in the first couple of years of owning a house with only 1% down? If I had purchased a home for market value and put only 1% down and lost my job, the outcome would be a lot worse if I owned the home than if I was just a renter. With only 1% equity, I would be relying on someone to either overpay for the house, or I would likely be selling it for a loss. Selling a home is not cheap. I tell my sellers to use an equity calculator and expect 8-10% of the sale price to go towards covering the cost of selling your home.
Does this mean we are headed towards the next crash? No, but if you like to watch the market, this is a number I would watch over the next year or two. If the home ownership rate were to settle in about where it is now, there likely wouldn’t be a big problem. But if it continues to rise, I would start paying a little more attention to other market signs.
The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
Your expression of caution isn’t lost on everyone. Freddie Mac recently announced that it will no longer accept loans where the lender is subsidizing a portion of the down payment (the construct that resulted in the 1 percent down mortgages you had been seeing).
Fannie Mae had been doing 50% DTI ratio mortgages for some time, but in cases where the DTI was above 45% there needed to be an explanation or reason that the loan was still not a risk. After studying their own losses on loans with DTIs between 45% and 50%, they concluded that there was no significant difference in risk and simply eliminated the requirement for paperwork explaining the need for the expanded ratio.
In most markets, what this housing market needs isn’t more mortgage underwriting flexibility that produces additional demand (there seems to be plenty already), but rather more homes available to those in the market that already meet reasonable credit and financial criteria.
It also bears consideration, although moving off recent bottoms, that the homeownership rate may have trouble moving much higher quickly due to both the lack of available homes to buy and the fact that many, many homes have been purchased by investors and are only available for rent, limiting options for potential homebuyers in many markets.
I have noticed a steep decrease in lending rates lately in the Mccalla area.
Recently purchased a new home and I think if I had waited I could’ve gotten an even better deal. Closed at about 3.2% which is unheard of at my age.
Great piece on this topic. I’m with you on homeownership not being for everyone. For sure, there are additional costs to owning a home and you don’t want to leave yourself with no cushion to deal with those down the road. Unfortunately, people often believe if the bank approved it, then they must be able to handle it financially. Bank lending standards have definitely loosened since the financial crisis, though thankfully not to the pre-crisis levels. I still believe one of the major issues is that many people don’t fully understand their own personal finances.