the rentership society...
Posted by
x (aka dmuck)
Feb 3 '11, 10:33
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"Economists Ed Glaeser, Joshua Gottleib, and Joseph Gyourko have presented convincing evidence that interest rates probably aren't responsible for big increases in housing prices. From this chart, however, it does look as though interest rates have a big impact on homeownership rates. Homeownership tumbled as mortgage rates rose above 16% in the early 1980s. They levelled off as rates fell back to around 10% between 1985 and 1990, and then around 1994, as rates slipped below 8%, homeownership surged again. That's one interesting thing.
Another interesting thing is that from 1994 to 2005, the homeownership rate rises steadily, with no real trend break and almost no change in slope. This is funny for a couple of reasons. First, mortgage rates rose back above 8% in 2000, and the country then slipped into recession. You'd be hard-pressed to see any sign of that in the chart above. And second, after 2001, rates fell to near 5%�incredibly cheap by historical standards�and yet there's no acceleration in growth in homeownership.
This, I think, is one of the best arguments for a minor role for interest rates in the housing bubble. At some point in that long, last upward surge (and probably by the end of the 1990s), most everyone who could get a prime mortgage had one. After that, falling rates would generate a boom in refinancing, but not in homeownership. To get more people in homes, mortgage standards had to fall, and fall they did. There was your ownership society, the period from 1998 to 2005 during which households that couldn't previously get a mortgage got one (or often, several).
We've now come full circle. The homeownership rate is back to 1998 levels. Meanwhile, the rental vacancy rate is falling steadily. I suspect homeownership will fall a bit more for demographic reasons in the years ahead. And then, when interest rates rise, it will fall some more. The hope is that by that time, enough supply will have shifted from owner-occupied to rental housing to prevent a drop in ownership from producing more housing market havoc. Because if there isn't a big supply adjustment, there will have to be a big price adjustment."
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