WASHINGTON, Aug. 2, 2015 – Recently released data shows that the percentage of households that own homes fell to 63.4 percent in the second quarter of 2015, the lowest since 1967. Not only is that the lowest level in decades, but this homeownership rate confirms that the federal government was responsible for the financial crisis that led to the great recession.
Without government interference into markets, consumers who are willing and able are free to enter a market and make a purchase. They are also free not to enter the market. Similarly, business is free to enter a market and provide goods and services or not enter the market at all. Recognizing that each is motivated primarily, although not necessarily entirely, by self-interest, the market will seek a natural equilibrium.
The equilibrium involves two key values. One is the price of the product and the second is the quantity that is produced and consumed. Although fairness is always a difficult concept, most economists believe that the market equilibrium price and quantity represent a fair position, since no consumer was forced to purchase and no business was forced to produce.
The equilibrium price is where business will produce exactly the same quantity that consumers will purchase. That means everyone is happy, except occasionally the federal government. In the market for homes, the equilibrium quantity historically meant that about 63 to 64 percent of households freely chose to buy homes while the remaining 36 to 37 percent chose to be renters, although admittedly some renters would have liked to be owners but they simply didn’t have the resources for the down payment/closing costs and/or could not afford the monthly mortgage payments.
Beginning in the early 1990s, sociologists reported to Congress that many social problems like drug abuse, crime, teenage pregnancy and high dropout rates in high schools, were much less severe in neighborhoods where residents owned homes rather than rented them. So Congress, backed by Presidents Clinton and Bush, decided to pursue policies that would increase the home ownership rate nationwide to 70 percent.
In order to reach this ambitious goal about 10 million households would have to be converted from renters to owners. But the 10 million households had to deal with the problems of having insufficient resources for a down payment and having income that was not enough to make the monthly mortgage payment.
Virtually all banks and mortgage companies that originate mortgages do not keep them. After a number of mortgages are accumulated, they are packaged and sold primarily to two quasi-public agencies, Fannie Mae and Freddie Mac. These agencies said they would purchase mortgages that looked risky but would allow the 10 million renters to become owners.
These, now referred to as sub-prime mortgages, required no down payment and often allowed the closing costs to be financed and put into the mortgage. This meant that mortgages in excess of the value of the property were granted. So a household often ended up borrowing $210,000 to finance a $200,000 house. The logic (I think) was that housing prices were rising rapidly so that the negative equity would be eliminated as the value of the house rose.
Fannie Mae and Freddie Mac also said they would purchase mortgages from the originating bank or mortgage company that had a below market interest rate for a few years, as long as the rate was able to eventually adjust upward. Variable rate mortgages were then given to households that had very low interest rates and low monthly payments for the first few years of the mortgage. After that the rate and monthly payment would increase considerably.
The government’s plan worked. By 2005 the home ownership rate was near 70 percent.
But then the adjustable rates kicked in. Homeowners couldn’t afford the higher monthly payment so eventually they defaulted on the loan. By 2007 nearly all of the 10 million sub-prime mortgages were in or near default. Since each of the 10 million households borrowed an average of $200,000, $2 trillion in mortgage backed securities became virtually worthless, leading to the financial crisis.
The home ownership rate has fallen back to historic levels, where it would have been if the federal government had not interfered with the market. Without government interference, the entire financial crisis would have been avoided. It is big government that is responsible for the financial crisis.