Homeownership Rate and Sub-Prime Mortgages - A Positive Correlation?

By: Paul Kasriel | Fri, Feb 23, 2007
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Chart 1 shows that the national homeownership rate (the percentage of occupied housing units that are owner occupied housing units) started rising sharply around 1995, hitting a record high in 2004. Why this sudden rise in homeownership?

Chart 1

Was it because of a sudden and steady rise in housing affordability, which is a function of the price of a house, the mortgage rate and the income of the buyer? Well, housing affordability did start to rebound in the early 1980s. But, as shown in Chart 2, housing affordability topped out in 1993 - before the rapid ascent in homeownership. Moreover, the homeownership rate remained near its record high of 69% (set in 2004) even as housing affordability was falling significantly in 2005 and 2006.

Chart 2

What is interesting is that about the time the national homeownership rate was rising, the homeownership rate for the relatively young - under 35 years old - was rising relative to that of the homeownership rate of seniors - 65 years old and over. This is shown in Chart 3.

Chart 3

Was there a sharp increase in the incomes of adult children relative to their parents that could explain the increase in the kids’ relative rate of homeownership? Yes, there was some increase in the ratio of the median incomes of the 25-to-34 year old set to seniors starting in 1996 (see Chart 4). This may have accounted for some of the relative increase in homeownership rates for the under 35ers.

Chart 4

Unfortunately, I do not have data on the relative increase in sub-prime mortgages relative to prime. But if any of you out there in cyberland do, I would like to look at it. My hypothesis is that the sharp increase in homeownership rates in the past ten years or so is positively related to the amount of sub-prime and "exotic" mortgage products originated in this time period - products that most likely were marketed to younger potential homebuyers. If my hypothesis is correct, I would predict a sharp drop in homeownership rates as the underwriting standards for sub-prime and/or exotic mortgages are tightened significantly in the quarters ahead. And, oh yes, if my hypothesis is correct, the term homeownership might be a misnomer for the younger set. "Renters with options to buy" might be more accurate.



Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

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