The Housing Non-Crisis
The home ownership rate is a bad measure of economic prosperity.
Economic statistics have their uses, but they can also lead to mischief when they’re misread or misused. The trade deficit comes to mind, and now so does the falling rate of home ownership in America. The latter is causing the usual suspects to worry about a housing crisis that isn’t.
The Census Bureau kicked off the mini-panic when it reported two weeks ago that home ownership hit a 51-year low in the second quarter. The last time only 62.9% of U.S. households were occupied by owners, Barry McGuire was topping the pop charts. But this doesn’t mean we’re on the eve of destruction.
Far from it, unless you forget that the home ownership rate peaked at 69.2% in 2004. That was amid the late and unlamented housing bubble. Politicians had made a fetish of the ownership rate during the 1990s and 2000s as a symbol of upward mobility. We even fell for it ourselves once or twice.
But the ownership increase turned out to be a mirage built on the sand of subsidized mortgage credit peddled to borrowers who couldn’t afford the carrying costs. As the housing boom turned to bust, the ownership rate fell to 66.5% in late 2010, and it has kept falling. Banks aren’t making liar loans anymore and credit standards have tightened. Isn’t that what the politicians who passed Dodd-Frank wanted?
The home ownership rate is a largely meaningless statistic that has more to do with politics than economics. For starters, it promotes the myth that owning a home is the key to middle-class savings and a driver of economic prosperity.
A home is valuable as a form of shelter but it is not typically a good investment. In 2014 in these pages, the great financier Michael Milken cited research going back to 1890 showing that the annual inflation-adjusted return on houses was barely above zero. “Factor in real estate’s heavy transaction costs and that number turns negative,” Mr. Milken wrote, while stocks over the same period enjoyed a real average annual return of about 6%. Housing is best understood in economic terms as a form of consumption, not investment.
The home ownership rate becomes destructive to the larger economy when it is used to misallocate resources to housing from other parts of the economy. Government policy heavily subsidizes housing via the mortgage-interest tax deduction, the low down-payment rules of the Federal Housing Administration, and the taxpayer mortgage guarantees of Fannie Mae and Freddie Mac.
When these subsidies were supercharged by the Federal Reserve’s negative interest rate policies in the early and mid-2000s, they created the housing bubble. Those policies misdirected capital away from what might have been more productive economic uses. And in the end they created an unsustainable boom that ultimately took down the entire U.S. economy.
How quickly the housing lobby wants Americans to forget. Its echo chamber is busy using the falling home ownership rate to lament that too many Americans can’t afford a home.
But if that’s true, it isn’t because government doesn’t subsidize housing enough. It is because the economy isn’t growing fast enough to raise middle-class incomes. In certain markets in particular—California—government has also imposed barriers to cheaper housing with zoning laws, environmental rules and other building restrictions.
Our concern is that politicians will use the falling home ownership rate to once again ease standards for credit and down payments. Hedge funds and their pals in Congress are already lobbying to restore Fannie and Freddie to their former grandeur as purveyors of private profit but taxpayer risk, and the clamor will grow.
One bad sign is that Donald Trump lamented the falling ownership rate on Thursday in a speech to the National Association of Home Builders in Florida. To his credit he also put his finger on the larger economic problem caused by high taxes and a growing regulatory burden that lead to slower growth. But we hope Mr. Trump doesn’t join the parade in politically directing more scarce investment into housing. (Someone should tell him that he’d also have to let in millions of more Mexican immigrants to fill the construction labor shortage.)
Americans should buy or rent for shelter as they see fit. Politicians should keep their eye on the biggest American problem, which as John Cochrane writes nearby is the historically slow rate of economic growth. The home ownership rate is a false prophet.