The Great American Dream, still deferred

The housing market has shown signs of life recently. Prices have risen, mortgage rates are very attractive and construction…

The housing market has shown signs of life recently. Prices have risen, mortgage rates are very attractive and construction is reviving.

But recall where the market has been over the last 20 years and you’ll start to see a less cheerful picture. In fact, from a longer perspective, it appears that the housing market, as it stands now, isn’t stable or sustainable. It is, arguably, still on artificial life support.

Return for a moment to November 1994. That’s when President Bill Clinton told the National Association of Realtors that many more Americans should own their own homes, because homeownership went “to the heart of what it means to harbor, to nourish, to expand the American dream.” He called on the nation to embark on a public-private effort to lift the homeownership rate, which then stood at just above 64%.

In Clinton’s vision, so-called government-sponsored enterprises — the mortgage-financing giants known as Fannie Mae and Freddie Mac — were to play an outsize role in providing affordable home mortgages to ever-widening groups of people.

To a surprising extent, that vision became reality. The homeownership rate began to soar — census figures show that it peaked in 2004 at a little above 69%. That was during the Bush administration, which also embraced the dream of expanding homeownership. Anyone who was awake during those years knows that America had a colossal housing boom, followed by a monumental bust that shook the global economy. The housing market is now much improved. But the trauma of the public-private housing industry isn’t entirely over.

That is evident in a startling statistic reported last month by the Census Bureau: The homeownership rate dropped all the way to 63.9% at the end of 2014. That’s lower than it was when Mr. Clinton said homeownership was too low. The rate has declined consistently for years now, a drop that accelerated with the wave of foreclosures set off by the housing crash.

With thousands of people still owing more on their mortgages than their houses are worth, national preferences have been shifting and fewer people say they believe they should buy a home. A national consumer survey conducted for Fannie Mae in December asked whether people would buy or rent if it were time to move. The share who said they would buy fell to 61% — a record low. Those who said they would rent rose to 34%. This sea change in attitudes might be proceeding even more briskly if it weren’t for national policy aimed at giving people an inducement to buy homes. Consider mortgage rates: The average rate for standard 30-year fixed mortgages is under 3.6%, an extraordinarily low rate made possible, in large part, by the intervention of governmental or quasi-governmental authorities.

First, there’s the Federal Reserve, which stepped into the market for mortgage-backed securities in 2009, filling the yawning gap that opened after banks and investors shunned that market after the subprime mortgage crisis. As of Feb. 4, according to data compiled by the Federal Reserve Bank of St. Louis, the Fed held $1.74 trillion in such securities, giving it a dominant position.

While it stopped adding to its holdings in October, the Fed is keeping those it owns, reducing supply. That, as basic economics tells us, tends to increase prices. In fixed-income markets, interest rates, or yields, move in the opposite direction of prices: The Fed is holding mortgage rates down. Until now, its actions have helped to fuel whatever housing recovery we’ve seen, but the Fed’s current policy bias is to tighten monetary conditions. As a result, mortgage rates are likely to rise.

That does not bode well for the housing market. As Barclays Research said in a report last Wednesday to clients on the outlook for housing: “History suggests a rise in mortgage rates causes a decline in housing demand and residential investment.”


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