Decreasing vulnerability

Why less homeownership is actually good news

You might have missed it amid the recent campaign 2016 turbulence, but there’s been a major development on the economic front. The U.S. homeownership rate has just fallen to its lowest level since the Census Bureau began tracking it in 1965.

During the second quarter of this year, only 62.9 percent of U.S. households were owner-occupied residences, down from the all-time high of 69.2 percent reached in the fourth quarter of 2004.

Contrary to entrenched conventional wisdom, however, the ongoing decline of the homeownership rate is actually good news.

Here’s why: Thanks to recovering real estate values, today’s homeowners as a group have the same equity in their property — roughly 58 percent — that the record-size cohort did back in late 2004, according to the Federal Reserve. Ergo, there’s now more equity, on a per-household basis; current homeowners’ tenure is that much more sustainable and secure.

“They are now more able to weather an economic disaster,” says Ralph McLaughlin, chief economist of Trulia.com, the online home-listing service.

To put it another way: The United States actually has more homeownership, in economic terms, than it did when the homeownership rate, a measure of mere legal ownership, was higher. Accordingly, the economy should also be less vulnerable to another real estate shock.

We’re still not back to the rock-solid days of 1983, when the homeownership rate was a hair under 65 percent and equity hit an all-time high of 70 percent. But the current situation approximates a happy ending to an unhappy story: the brutal real estate shake-out that impoverished and destabilized so many families across America.

To be sure, the reconcentration of home equity, while positive for those who own homes and for the overall stability of the economy, is regressive with respect to wealth distribution. This is especially so because African Americans and Hispanics remain less likely to own homes than whites.

However, the solution to that is not to pump up homeownership through subsidies in the name of expanding opportunity — as Presidents Bill Clinton and George W. Bush both did.

The typical instrument of government home-buying aid, a federally backed low-moneydown mortgage, is not the road to wealth. By definition, it confers little or no equity. In economic terms, it’s roughly equivalent to renting.

Yes, unlike a renter, someone who takes out a home mortgage might eventually get rich, if the house’s market value rises above the purchase price. Then again, unlike a renter, he or she might get wiped out in a market correction.

If the Great Recession taught anything, it was that, despite decades of rhetoric about the “American Dream” from real estate lobbyists, politicians and well-meaning low-income-housing advocates, homeownership is not a sure-fire ticket into the middle class. It can be downright risky. Our national return to Square One, homeownership-rate-wise, is thus an opportunity to rethink wealth-building strategies for people of modest means. We should de-emphasize house buying and explore alternatives that do not require people to bet on a single illiquid asset class — or make it harder to relocate in pursuit of opportunities, which is another drawback of home buying.

This, in turn, implies an even deeper ideological shift away from the age-old American belief — dating back to Thomas Jefferson’s claim that “small landholders are the most precious part of a state” — that widespread homeownership produces thrift, civic virtue and “the stable communities that are the backbone of this country,” as Sen. Elizabeth Warren, D-Massachusetts, put it in 2013.

Leave aside the fact that mass extension of low- or no-downpayment home loans, with and without federal backing, arguably destabilized communities. Other countries’ modern experience suggests no simple connection between a high homeownership rate and the “positive externalities” often attributed to it.

Germany and Austria, to name two solid democracies, have much lower homeownership rates than the United States, 53 percent and 57 percent, respectively.

Also relevant, perhaps: Germans and Austrians who do have their own homes are more likely to own them outright (unencumbered by a mortgage) than Americans are, according to a 2015 analysis by National Association of Home Builders economist Michael Neal.

The same is true, actually, in 24 of 28 European Union nations, including many that have higher homeownership rates than Germany and Austria — and the United States.

The upshot is that when Europeans own a house, they really own it — it’s a sustainable situation, for individuals and society. Europe has reached this point, for the most part, without special tax breaks, governmentbacked mortgage securitization or other U.S.-style market manipulations.

Americans, by contrast, have been goosing homeownership rates with subsidies for the past 50 years — and, as the latest data confirm, we have literally nothing to show for it.