What It Will Take to Sustainably Increase the Homeownership Rate?
The homeownership rate – currently around 65 percent, a level first reached half a century ago – is broadly regarded by policymakers as a core measure of whether the US socioeconomic system is delivering a good quality of life for the typical American family. As described in a paper I wrote last year, the benefits of homeownership are substantial. First, it is the primary mechanism for the typical family to build wealth for retirement and/or to help the next generation. Second, it brings social stability, as the homeowning family is no longer subject to landlord actions that might force relocation or undue rent increases.
Consequently, public policy in housing has long had an objective to sustainably increase the homeownership rate. Unfortunately, efforts in the last five decades to do this have failed; amazingly, the rate is the same today as it was back in the late 1960s. (Even worse, the much-applauded increase beginning in the early 2000s proved entirely unsustainable, with terrible damage to families and the economy when the mortgage bubble burst in 2007-08.) As a result, millions more families who could have enjoyed the benefits of an increased homeownership rate have missed out. My new paper, “The Homeownership Rate and Housing Finance Policy – Part 2: The Heavy Lift to Break the 65 Percent Barrier” outlines key policies that, if implemented, could accomplish such an increase, a challenge made more difficult by pandemic distortions that have dramatically raised the price of homes nationwide.
The history, also described in Part 1 and which goes back 130 years, makes clear that a permanent and sustainable increase of more than a few percentage points in the homeownership rate is a very difficult thing to accomplish.
- For the first forty years, starting in 1890, the rate stayed at 46.5 percent, plus or minus only 1.5 percentage points, despite major changes in the economy and the demographics of the country during those four decades.
- Beginning in 1930, under the extraordinary twin dislocations of the Great Depression and then World War II, the rate increased almost 20 percentage points by the end of the post-war era. This extraordinary increase reflected major changes in American life broadly and in housing finance specifically. First, amidst the economic programs enacted during the 1930s, there were various government interventions that resulted in a substantively different mortgage system, which was both low-cost and borrower-friendly, but which heavily relied on government support and subsidies. Second, the homeownership rate post-World War II benefitted from several non-mortgage developments: (1) the unprecedented investment in human capital via wartime military service and the GI Bill; (2) the invention, beginning in the late 1940s, of modern, low-cost commuter suburbs, based partly upon taxpayer-funded infrastructure; and (3) a long-term post-war economic boom that reflected America’s status as the only major country with its industrial assets not devastated by the war.
- By the end of the 1960s, reflecting all these changes, the homeownership rate leveled out at about 65 percent. There it has remained, plus or minus two percentage points (excepting the housing bubble in the 2000s) for more than a half-century.
Interestingly, while the role of government in housing and the broader economy was quite modest from 1890 to 1930, when the homeownership rate was stable, it has been large and active since the late 1960s, in part with the goal of increasing the homeownership rate beyond 65 percent. As described in my earlier paper, the government’s efforts were centered in unfunded mandates from Congress (e.g., the Community Reinvestment Act and the affordable housing goals for Freddie Mac and Fannie Mae) and in hidden cross-subsidies for mortgage interest rates by all four government mortgage agencies, which include the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). However, the impact of those efforts amounted to little, as the homeownership rate has remained firmly in that 65 percent range.
The only realistic conclusion is that the homeownership rate is extraordinarily sticky, and that limited or technical initiatives will not succeed in materially raising it. Instead, it is necessary to think big and put real dollars behind the effort; in particular, a successful policy would target families who are well-positioned to move from rental to ownership, rather than just supporting homeownership broadly. Such targeting, however, has not historically been a priority for the biggest subsidies to homeownership.
The housing-related fallout from the COVID-19 pandemic has unfortunately made raising the homeownership rate even more difficult. When the pandemic began to impact the economy in March 2020, there was fear that we might see a replay of the 2008 financial crisis, in which house prices declined by about 25 percent. To everyone’s surprise, the pandemic instead produced a major financial windfall for existing homeowners: home prices are up by more than 25 percent in just twenty months (from February 2020 to October 2021, the latest data available). They are also likely to keep rising for the next few quarters, although probably not as rapidly, producing a cumulative increase in just two years that will, amazingly, surpass the decline during the financial crisis over a decade ago. Unfortunately, what has been beneficial for existing homeowners has been a disaster for first-time homebuyers (FTHBs), whose plans to save enough for a downpayment were dealt a devastating blow. The unprecedented housing price increase will presumably press down hard on the homeownership rate, and we might see it for the first time since the 1960s shift materially away from 65 percent – but, sadly and unexpectedly, in the form of a decline rather than an increase.
In other words, the challenge of raising the homeownership rate – already very difficult given its 130-year history – just got even harder. Realistically, the first priority of the program described herein will be to help counter a likely price-driven decline in the rate over the next few years. In fact, if the rate does not go down in the next few years, given the recent surge in home prices, it will be a major policy success. A significant increase above 65 percent – for example, to 70 percent or more – would emerge only in the longer term.
Facing the high historical stickiness of the homeownership rate, I describe in the new paper three initiatives that could increase it; each is about a well-targeted and sizeable subsidy, plain and simple. In my view, this approach differs from those that have historically dominated policy discussion, which has focused mostly on the technical changes or unfunded mandates that have not worked in the last fifty years. Fortunately, however, there are large, well-established subsidies for homeownership, and two of my three initiative ideas redirect these subsidies towards first-time homebuyers, rather than broadly supporting homeownership: (1) the mortgage interest deduction for federal income tax payments, and (2) the interest rate cross-subsidies of the two GSEs. The third initiative would be to create a new subsidy in the form of a well-constructed and highly targeted downpayment assistance program in line with that proposed by President Biden during his election campaign. His campaign proposal has inspired a breakthrough in the thinking behind the design of this type of program, and it has great potential. Together, these subsidies could significantly reduce the downpayment and monthly interest payment for a typical targeted beneficiary.
In the new paper, I also address the related and important topic of the shortfall in the number of homes being constructed as, without eliminating barriers to the building of considerably more homes per year than we have in the past decade, downpayment assistance legislation will not be effective in raising the homeownership rate; it would likely instead further raise the price of housing, which is already too high relative to incomes. My conclusion is that the elimination of the shortfall requires a bipartisan, long-term push at the federal level to address its multiple and longstanding causes.
While this new paper is focused on the single, overall national homeownership rate, I also examine the impact the recommendations would have on today’s racial homeownership gaps. This is important to understand since, as the non-Hispanic white homeownership rate is already high, the potential for improving the national rate is noticeably concentrated in improving the rate among people of color.