Is the Rate of Homeownership Nearing a Bottom? by ProQuest


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									P R E S i d E n t ’ S               m E S S a g E

James Bullard, President and CEO
Federal Reserve Bank of St. Louis

Is the Rate of Homeownership Nearing a Bottom?

T     he housing crisis has been central to our
      current recession. An economist at the
Federal Reserve Bank of St. Louis, Carlos
                                                   mortgage insurance premiums were not
                                                   deductible until 2007. The homeownership
                                                   rate increased from 63.8 percent in early 1994
                                                                                                     refinancing denials started to increase well
                                                                                                     before the peak of the housing boom, suggest-
                                                                                                     ing that lenders were uncomfortable with the
Garriga, has devoted much of his research to       to 68 percent in 2002.                            values being assessed to homes.1
understanding the intricacies of mortgage             Over the following three years, the rate          These borrowers obtained financing
markets and loan choices.                          increased to 69.2 percent, in the heart of the    through risky tools. If all borrowers who
   What insight might his research bring to        housing boom. Over this period, subprime          could obtain financing through standard
the current environment? To begin, he has          lending took off and additional mortgage          financing options (i.e., not zero down-
examined the evolution of homeownership            products were introduced and became               payment loans, interest-only loans, etc.) had
rates and their connection with mortgage           popular. These included zero down-payment         already entered the homeownership arena,
market innovations. For about a quarter of         loans, interest-only adjustable-rate mortgages    they would have already been captured
a century, the homeownership rate hovered          (ARMs) and payment-option ARMs. The last          within the 2002 rate of 68 percent.
around 64 percent. In 1966, it was at 63.5         loan type allowed borrowers flexible monthly         The homeownership rate is now down
percent. Twenty-seven years later, in 1993, it     repayment strategies, including full amorti-      below the 2002 level; it has remained at
had barely budged to 63.8 percent. However,        zation of principal with either zero or even      roughly 67.5 percent for three quarters
over the past 15 years, a significant change       negative amortization.                            (Q4 2008 through Q2 2009). Although fur-
occurred, largely the result of government                                                           ther data are needed, this suggests the decline
policy and innovations in mortgage markets.        “ a natural question is to                        might now have bottomed out, provided the
   Politicians pushed to increase the home-                                                          economic environment doesn’t pull down
ownership rate on the premise that home-
                                                     wonder whether the severity                     otherwise well-positioned homeowners.
owners are more likely to maintain their             of the price decline will force                    A natural question is to wonder whether
property than a renter would. And, of course,                 
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