From a small northwestern observatory…

My meanderings on housing equilibrium are about to become even more muddled, in a way, and clearer in others.

To wit… in the middle of the just-past decade, before the market started melting down, it was already apparent to researchers that the housing market looked decidedly different than it had before. It was clear that prior to about 1994, the homeownership rate had hovered around 64% for many years. Why, then, did it apparently take-off to higher ground and make a nearly non-stop upward run from then until about 2004?

The “run up” was the topic of a great paper by Matthew Chamber, Carlos Garriga, and Don Schlagenhauf of the Atlanta Federal Reserve Bank, produced as part of their working paper series in September, 2007. For a copy of it, go here.

Their focus was on the “run-up”. Our focus today is on the “run-down”. In short, if they can explain why ownership rates ballooned up in the past decade, then perhaps we’ll have some idea of how far down they will drop in the coming decade.

They find that as much as 70% of the change in homeownership rates can be explained by new mortgage products which came on the market during that period. “Easy money”, which is how this has been described in the press, made homeownership possible for millions of new owners. The remainder of the changes, in their study, are explained by demographic shifts.

There is some intuitive logic in all of this (as there usually is, ex-post, in good empirics). The American population got a bit older during the period in question, as the baby-boomers came into their own and also into an age bracket when homeownership makes a lot of estate and tax planning sense. Since these demographic shifts are still with us, and indeed continue to move in ownership-positive directions, it would suggest that a new equilibrium will probably fall out somewhere higher than the old one.

As of the most recent American Housing Survey, the current homeownership rate in America is 66.7% (down from 69.8% at the peak a few years ago). During the 80’s and 90’s (the boom which followed the 80’s recession), the rates held nearly constant at 64%. The FRB-Atlanta study thus suggests a new equilibrium somewhere between 64% and 66.7% (where we are today). In fact, if you concur that 70% of the boom came from mortgage products (which are no longer available) and the remainder from factors which ARE still at play, then one might surmise that the new equilibrium is close at hand.