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An Underappreciated Housing Number


Given that it's now easier to arrange a golf outing with Tiger Woods than it is to get a mortgage, it's reasonable to expect the ownership rate to revert to pre-credit bubble levels of about 65%.


Market moving numbers go in and out of fashion – graybeards will remember when the tension got unbearable just before the release of the latest numbers on… drum roll, please: M-2! Markets are pretty efficient over the long term, but on a daily basis they act like an adolescent at a sleepover. In recent years the "it" number seems to be the Fed's decision on interest rates, but other numbers, some of them very significant to the future fortunes of the economy pass almost unnoticed. Such was the case last week when the Census Bureau issued its quarterly release of the U.S. homeownership rate.

First the headline: The release showed that the homeownership rate for the third quarter was 68.2% -- a 0.8% drop from the third quarter of 2006 when the ownership rate was 69%. The bureau calculates the homeownership rate by dividing the number of owner occupied housing units (75.2 million) by the total number of occupied units (110.3 million). The total number of housing units in the U.S. is 128.2 million as of the third quarter of this year – leaving nearly 20 million units vacant or rented.

To put this in perspective, since 1965, the high water mark for homeownership was 69.2%, reached in the second and fourth quarters of 2004. Before 1998, the ownership rate never topped 66%. Then came exotic mortgage products and unscrupulous mortgage brokers. Suddenly a cohort of Americans who never before could qualify for mortgages found themselves in homes, and the homeownership rate marched steadily upward through the early 2000's.

Sadly, these newly minted homeowners quickly began to demonstrate why they couldn't get a mortgage before. Astonishing numbers of subprime borrowers in these exotic mortgages never even made the first payment. The predictable consequence is that the homeownership rate is once again declining. How far this goes will be hugely consequential for the economy.

Given that it's now easier to arrange a golf outing with Tiger Woods than it is to get a mortgage, it's reasonable to expect the ownership rate to revert to pre-credit bubble levels of about 65%. Even if no additional houses are built, that would shift another 3.5 million homes and apartments from the owner-occupied column to the rental or vacant columns. This is not what a market already groaning with 17.9 million vacant units needs.

Unfortunately, more houses are being built as homebuilders desperately try to preserve cash flow. Not to pile on, but it's also possible that the ownership rate will drop below 65% as it has many times in the past.

I raised the issue of homeownership rates reverting to the mean at one of those ubiquitous, investment bank-sponsored housing conferences last spring – in those halcyon days when words like "contained" were still all the rage, and ratings agency analysts still claimed that most mortgage backed securities merited triple-A ratings with a straight face.

My question did not endear me to the distinguished panel members (composed of an economist from a GSE, a big shot from the ratings agencies, etc.), who clamored for the microphone to put me in my place and make it absolutely clear that there was no reason the homeownership rate wouldn't rise well into the 70's. They may be right in the theoretical and highly conflicted world of housing economics, but if you left that conference and bet on those reassurances you would have lost your shirt.

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