Posted on July
29, 2016 by Yves Smith
Yves here. Richter describes
the consequences of turning homes into a financial asset, combined with policies
that have neglected job and wage growth. If you look at his chart, you’ll
see a rise in home ownership during the stagflationary 1970s. That was
also financialization of residential real estate. Properties were an inflation
hedge, while equities were flagging.
By Wolf Richter, a San
Francisco based executive, entrepreneur, start up specialist, and author, with
extensive international work experience. Originally published at Wolf Street
Something happened on the way
when the concept of “home” transmogrified to a financialized “asset class”
whose price the government, the Fed, and the industry conspire to inflate into
the blue sky, no matter what the consequences. And here are the
consequences.
The Census Bureau, which has
been tracking homeownership rates in its data series going back to 1965 on a
non-seasonally adjusted basis, just reported that in the second quarter 2016,
the homeownership rate dropped to 62.9%, the lowest point on record.
It matches the low point in Q1
and Q2 of 1965 when the data series began. At no time in between did it ever
fall this low. And it was down half a percentage point from 63.4% a year ago.
The relentless slide has
lasted for 12 years, from its peak of 69.2% in Q4 2004, which was when the
Greenspan Fed’s low interest rates were boosting speculation in the housing
sector, and prices were going haywire. At the time, the concept of “home” had
already become an asset class that can never lose money, financialized and
later shorted by Wall Street, subsidized by government agencies, and
backstopped by the Fed.
And this is what happened to
homeownership rates afterwards:
The 1.9 percentage point drop
from Q3 2014 (65.3%) to Q2 2015 (63.4%) was the largest two-year drop in the
history of the data series. It also coincided with steep increase in home
prices.
On a seasonally adjusted
basis, the homeownership rate dropped to 63.1% in Q2, the lowest in the
non-seasonally-adjusted data series going back to 1985.
There are numerous reasons for
this, some known and others still to be guessed at, including:
Rising home prices in an
economy of stagnant wages (for the lower 80%) have pushed entry-level homes out
of reach for many people.
Lower priced homes in many
urban areas entail a huge and costly ($ and time) commute every day. And even
then, these homes may be too much of stretch for big parts of the population in
expensive urban areas.
First time buyers are having
trouble saving for a down payment since they spend their last available dime to
meet soaring rents.
Millennials have been blamed.
They always get blamed for everything. They saw their parents deal with the
American Dream as it turned into the American Nightmare, and they learned their
lesson early in life.
The super-low interest rate
environment hasn’t made homes more affordable because home prices, in response
to super-low interest rates, have soared, and in the end, mortgage payments are
higher than they were before.
Higher home prices entail
other costs that are higher, including taxes, brokerage fees, and insurance.
The fact that Housing Bubble 2
in most urban areas is now even more magnificent than the prior housing bubble
that blew up with such fanfare, even while real incomes have stagnated for all
but the top earners, is a sign that the Fed has succeeded elegantly in pumping
up nearly all asset prices to achieve its “wealth effect,” come heck or high
water. In this ingenious manner, it has “healed” the housing market.
It’s two-year bout of
flip-flopping about raising rates just puts some lipstick on these policies
that include the purchase of agency mortgage-backed securities, which the Fed continues to buy to replace those that mature and roll off
its balance sheet.
Just today, as part of its
routine, it acquired $2.6 billion in agency mortgage-backed securities. On July
26, it acquired $2.0 billion. On July 25, $1.9 billion; on July 22, $1.3
billion, on July 21, $2.5 billion; on July 20, $1.9 billion…. and so on.
As MBS mature and are
redeemed, the Fed takes this money and goes to its primary dealers (list) and buys more of them, which puts downward pressure
on mortgage rates and prevents the free market from playing any kind of role,
all in the religious believe that inflating home prices beyond all recognition
is somehow good for the economy and Wall Street, despite the consequences, such
as plunging homeownership rates, as America turns from a country of homeowners
into a country of renters, often dwelling in a corporate-owned financialized
asset class.
At the luxury end, something
new is hitting the housing market: Manhattan and Miami are already getting
mauled. Now it’s expanding to San Francisco, Silicon Valley, Los Angeles, San
Diego, even Texas! Read… US Government Mucks up Money-Laundering in Real Estate, Puts
Luxury Housing Bubbles at Risk
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