by Calculated Risk on 12/24/2009 06:52:00 PM

From NY Fed economists Andrew Haughwout, Richard Peach, and Joseph Tracy: The Homeownership Gap

The authors argue that the official homeownership rate from the Census Bureau is overstated in the sense that owners with significant negative equity act more like renters. The authors further argue that the official homeownership rate will probably follow the homeownership gap to lower levels.

Click on graph for larger image in new window.

The homeownership rate was 67.6% in Q3 2009, about the same level as Q2 2000.

Note: graph starts at 60% to better show the change.

The second graph shows the author's calculations of the homeownership gap (closer to 63%). This is a rough estimate, but does suggest the homeownership rate might fall significantly.

From the conclusions:

The current severe house price cycle, combined with borrowers who had little or no equity at origination of their mortgages, has led to a dramatic rise in homeowners with negative equity and, therefore, a large gap between the measured and effective homeownership rates. In some of the worst hit metropolitan areas, effective homeownership rates are 25 to 45 percentage points below the measured rate. This situation is likely to put downward pressure on future homeownership rates, and has potentially important implications for the maintenance of the housing stock, the stability of neighborhoods, and future household saving behavior.

A significant increase in the saving rate will hold down the growth of household consumption. And a falling homeownership rate has significant implications for homebuilders and construction employment.

From a post I wrote a few months ago: The Impact of the Declining Homeownership Rate

[The] increase in the homeownership rate, from 1995 through 2005, meant the homebuilders had the wind to their backs. Instead of 800K of new owner demand per year (plus replacement of demolished units, and second home buying), the homebuilders saw an additional 500K of new owner demand during the period 1995 to 2005. This doesn't include the extra demand from speculative buying. Some of this demand was satisfied by condo conversions and owner built units, but the builders definitely benefited from the increase in homeownership rate.

Looking ahead, if the homeownership rate stays steady, the demand for net additional homeowner occupied units would fall back to 800K or so per year (assuming steady population growth and persons per household). However the homeownership rate is declining, and this is now a headwind for the builders.

It appears the rate is declining at about 0.5% per year. This means the net demand for owner occupied units would be 833K minus about 500K per year or about 333K per year - about 25% of the net demand for owner occupied units for the period 1995 to 2005. (Not including replacing demolished units and 2nd home buying).

Although we can't compare this number directly to new home sales (because of 2nd home buying, replacement of demolished units, and other factors) this does suggest new home sales will probably remain at a low level until the homeownership rate stops declining.

If the Fed economists are correct, this has significant implications for construction employment and household construction, in addition to public policy.

Note: the authors provide some estimates of the "homeownership gap" for a few key cities: Las Vegas, Los Angeles, Phoenix and Miami.

by Calculated Risk on 12/24/2009 03:14:00 PM

From the WSJ: U.S. Uncaps Support for Fannie, Freddie

The Treasury said it would provide capital as needed to Fannie Mae and Freddie Mac over the next three years, in a move aimed at soothing investors' concerns about the government's continued support of the mortgage giants.

Treasury also will suspend its purchases of the companies' mortgage-backed securities ...

Under the new terms announced Thursday, the cap on Treasury's support would increase according to how much each firm loses in a quarter, beginning the first quarter of next year and through 2012. The cap in place at the end of 2012 would apply thereafter.

A press release before the holiday ... I was wondering what would come out today.

Update: Here is the press release: TREASURY ISSUES UPDATE ON STATUS OF SUPPORT FOR HOUSING PROGRAMS (ht Steelhead)

by Calculated Risk on 12/24/2009 01:15:00 PM

Here is an interesting story in the Denver Post by Bill Johnson: Credit-card squeeze stirs elderly couple's anger

Lawrence Rickman ... is 81 now, seven years his wife's senior. They have had a Bank of America credit card for 20 years. They never once in all that time ... missed a payment.

Rickman slides his December bill across the table, with instructions to read it. ... Look at the interest rate, he says.

Sixteen-point-nine percent, it reads.

"I was paying 5.9 percent, which is what I have paid for years," he says. "I always paid them $500 a month without complaint. Now, they want $1,074 this month. I can't pay it. I won't pay it."
...
"When I got this month's bill," Lawrence Rickman recalls, "I got on the line and told them they were getting out of hand on this interest rate, that I wanted to negotiate."

The conversation, he says, went something like this:

"Lower my rate, or I'll file bankruptcy," he told them.

"But sir, if you do, it will destroy your credit rating."

"So what? I'm almost 82 years old ..."

The interest rate increase is outrageous, but also notice that Mr. Rickman was apparently not paying off his credit card balance every month. I suspect he has been running a fairly large balance compared to his income (only Social Security at this time according to the article), and just making the minimum payment on his credit card. Although the 5.9% interest rate was somewhat reasonable, it is still far more than Rickman could earn on any conservative investment.

Credit cards are great if the holder pays off the balance every month - or if the holder infrequently needs to spread an unexpected bill over a few months. But routinely running large credit card balances is hazardous to the holder's financial health. IMO there is something inherently wrong with a business that encourages customers to make bad financial decisions. (I'll get off my soapbox ...)

by Calculated Risk on 12/24/2009 10:09:00 AM

I linked to this in early November ...

From Greg Gordon at McClatchy Newspapers: How Goldman secretly bet on the U.S. housing crash

And now from the NY Times: Banks Bundled Bad Debt, Bet Against It and Won

by Calculated Risk on 12/24/2009 08:30:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending Dec. 19, the advance figure for seasonally adjusted initial claims was 452,000, a decrease of 28,000 from the previous week's unrevised figure of 480,000. The 4-week moving average was 465,250, a decrease of 2,750 from the previous week's revised average of 468,000.
...
The advance number for seasonally adjusted insured unemployment during the week ending Dec. 12 was 5,076,000, a decrease of 127,000 from the preceding week's revised level of 5,203,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 2,750 to 465,250. This is the lowest level since September 2008.

Although falling, the level of the 4 week average is still high, suggesting continuing job losses.