Home Ownership Outlook . . .

   Those inside the Beltway are proud to boast that 75% of American’s own their own home. What they don’t know, or won’t admit, is that there are somewhere in the neighborhood of 8 million who are not presently making mortgage payments, and probably 6+ million of them will be foreclosed upon on the next two years. What the loss of these homes will mean is that less than 62% of Americans will own their own home, and number that harkens back to the early ‘90s. AND, recent studies suggest that about 5% of all households, or roughly 5 million people have no equity in their homes. This leaves only 56%, or so who do have equity. I don’t know about you, but I believe many of these people who have no, or negative equity will choose a strategic default, and give their homes back to the lender.

   John Burns, CEO at John Burns Real Estate Consulting, and the author of “The U.S. Building Market Intelligence” newsletter brings us the following information:
     Factors Pushing Homeownership Up
• Aging Demographics - If we built a fence around the U.S. and did not let immigrants in, homeownership would go up due mostly to the fact that homeownership rises as you age.
• New Households - Every year, millions of young people reach the age where they leave their parents and go out on their own. This far exceeds the households lost to death. The actual numbers cycle with the economy, however, as they won't leave if they can't find a job or can't afford housing.
• Great Affordability - Approximately 58% of homeowners can afford the median priced home vs. 45% historically (assuming a 31% front-end DTI ratio and a 95% LTV). Affordable housing and generous mortgage terms impact housing greatly.
• Social Policy - Elected officials seem to be very much in favor of high homeownership because it builds equity and provides neighborhood stability. While that's correct in theory, they need to balance that goal with the fiscal reality that not everyone is financially responsible enough to save some money for a down payment and to make their mortgage payment every month!
     Factors Pushing Homeownership Down
• Immigration - Immigrants tend to rent first before buying. A rule of thumb is that immigrants average 7 years as a renter before becoming a buyer. The higher the immigration, the lower the homeownership rate.
• Lending Policies Tightening - Fannie Mae, Freddie Mac and FHA have tightened standards, but it is still much easier than usual to get a mortgage. For most of the last 50 years, 20% down payments or 10% down payments with mortgage insurance, 32% front-end and 40% back-end debt to income ratios were the norms. Fannie and Freddie will still buy loans in some states over $700,000. Fifteen years ago, the maximum was only $203,000. Thanks to government mandates to get more aggressive, mortgages have become much easier to obtain, with default risks borne by the taxpayer.
• Defaults - As mentioned above, 8 million homeowners are not paying their mortgage, and this number grows every day. The loan modifications have little prayer of helping, primarily because so many of these consumers have too much additional debt. As an example, the homeowners who have received permanent modification pay more than 30% of their income to service debt that is not their mortgage.

   As we said at the beginning, the official homeownership rate stands at 67%. (75% less 8% who are not paying their mortgage) That’s a level consistent with the turn of the millennium. Now that the economy has sagged lower than expected, many people who may have been potential homebuyers have gone underground and pulled the hole in after them. It is really a shame, because today we have a very large supply of exceptionally affordable homes. Mortgage rates are better than they have been in 60 years. But not many are even shopping for a home. Jobs are too scarce or too tenuous. There are just far to few people who have the income to take advantage of the situation. Until jobs return the real estate market with its housing glut will continue its morbidly sluggish pace.