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1. What do home ownership rates look like when viewed in a very long term perspective?
1.1 The United States
Chart 1 shows the hundred year history of the U.S. home ownership rate:
A century ago, in 1910, the U.S. homeownership rate was 46%. It rose to 48% in the great boom of the 1920s, then called “the Coolidge Prosperity,” after the U.S. President of the time. This was when the U.S. government had its first home ownership promotion: the “Own Your Own Home” campaign, begun in 1922 under then-Secretary of Commerce (later President) Herbert Hoover.
With the great bust of the 1930s, U.S. home ownership had dropped to 44% in 1940. The decade brought numerous government programs to support home ownership, from the creation of the Federal Home Loan Banks under Hoover, to the Roosevelt administration’s New Deal creations of the Home Owners’ Loan Corporation (dissolved with a small cumulative net profit in 1951), the federal savings and loan charter, federal savings and loan deposit insurance (became insolvent in the 1980s), the Federal Housing Administration, and in 1938, the Federal National Mortgage Corporation, now called Fannie Mae (went broke on its 70th anniversary in 2008).
U.S. home ownership really took off in the renewed and extended boom which followed the end of World War II. It rose to 55% in 1950 and 62% in 1960, a huge step-function increase which has not been repeated. It kept increasing, though at a much slower rate, in the next decade, to 63%.
This was the golden age of the savings and loan associations as the principal U.S. mortgage lenders. In those days there were more than 5,000 savings and loans. Their total assets multiplied by more than 38 times between 1945 and 1975. Their trade association, then called the “United States League of Savings Institutions,” became a national political power to be reckoned with. (Today it no longer exists, having been merged into the American Bankers Association. The number of saving and loans has fallen by about 85% from 1975.)
As the runaway Great Inflation caused by the 1970s Federal Reserve neared its end, by 1980 home ownership had reached 64%, and houses had proved to be a good hedge against the inflation. But also by then, the savings and loans in the aggregate were insolvent on a mark-to-market basis. The decade of the 1980s saw their collapse, including the collapse of their federal deposit insurer.
Into the vacuum left by the failure of the savings and loan sector stepped Fannie Mae and Freddie Mac, nationwide mortgage companies with special Congressional charters conferring special privileges, which became the newly dominant forces in U.S. mortgage finance. While they were in process of taking over the mortgage market, the home ownership rate ended the financially disastrous and eventful 1980s where it began, at 64%.
Now began the golden age of Fannie and Freddie. In the 1990s, they were greatly admired, especially by themselves, and often told politicians that a mortgage sector based on mortgage-backed securities [MBS] guaranteed by “government-sponsored enterprises,” as Fannie and Freddie were called, was “the envy of the world.” Their assets and profits grew rapidly, their stock prices boomed, and they amassed formidable political power and clout.
In the mid-1990s, the administration of President Clinton decided that home ownership should be pushed higher, and that this could be done by what they called “creative” mortgage lending, in other words, by lowering mortgage credit standards. It ordered Fannie and Freddie to buy many more so-called “affordable,” i.e. lower credit quality, mortgage loans, and promoted the idea to private lenders, who energetically joined in what was for some years a profitable venture (until it was a disaster). The subprime MBS expansion had begun. In time, Fannie and Freddie became the biggest buyers of subprime MBS.
By 2000, home ownership had reached 67%, and the spectacular American housing bubble was under way. The peak home ownership rate came in 2004, when it reached a temporary 69%. Then the housing bubble shriveled in the crisis of 2007-2009, which included a previously unimaginable level of mortgage defaults and the failure of both Fannie and Freddie.
By 2010, home ownership was back down to 67%. Continuing down, it fell to 65% in 2013, close to where it had been in 1980. Overall, looking across the bubble rise and fall, there has been a 40-year plateau in the mid-60% range, during which time the U.S. has experienced two housing finance disasters.
How do these home ownership developments compare to those of two other economically advanced, financially sophisticated, and similar countries, England and Canada?
The history of the home ownership rate since 1918 in England, along with the U.S., is shown in Chart 2. They display very different paths, but end up in about the same place.
A century ago, England was primarily a nation of renters, with home ownership at 23% in 1918, half the U.S. level at the time. (We may speculate that this at least partly reflects the American national experience of having expanded into new frontier lands for over two centuries.)
By 1939, as World War II began, English home ownership had risen to 32%. It was at the same level in 1953, but progressed quickly during the next three decades, reaching 58% by 1981. At that point, it was still 6 percentage points below the U.S. rate.
During the years of Prime Minister Thatcher’s reforms, English home ownership first matched and then surpassed that of the United States, reaching 68% in 1991. After a housing bust in the early 1990s, it rose again to 70% in 2002. Interestingly, this is slightly higher than the peak rate that was reached two years later in the U.S.
Then to England also came the housing finance bust and international financial crisis, and the first run of the 21st century global panic was on an English mortgage lender, Northern Rock, in 2007. By 2011, English home ownership was back down to 64%, very close to where the U.S. is now.
Canada and the U.S. both settled vast frontiers, share a 3,000-mile border, and are very similar economically though with about a 10:1 difference in scale. They have very different banking and housing finance sectors, with Canada bank-centric and the U.S. MBS-centric, but have an extremely similar home ownership history, which has parted company directionally only recently.
Chart 3 shows the long-term paths of Canadian and U.S. home ownership. The similarity is obvious.
In 1921, Canada’s home ownership rate was 46%, the same as the U.S. The two lines of the subsequent history of these rates track very closely, as they rise over time. Canada reaches 69% in 2006, as the U.S. did in 2004.
But then the histories diverge. Canada had a housing price correction in 2008-2009, but not a housing bust. It did not have a housing finance collapse. Its house prices recovered, and then have gone marching upward to ever higher levels up to now. Its home ownership rate held at 69% in 2011, our most recent report.
Are Canadian house prices now in their own bubble? Many observers think so. Will it deflate or collapse? If so, home ownership will probably fall, as happened in the U.S. and England–perhaps back to the mid-60% range?
2. Closing questions
In the post-bubble markets of the U.S. and England, without making credit mistakes, can home ownership rates increase again? Or does the mid-60% range represent some sort of limit? What may we learn about home ownership from an upcoming soft or hard landing to Canada’s house price escalation?
A future update of this interesting history may tell us.
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