This is a syndicated repost published with the permission of Confounded Interest. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.
The world was surprised when the Bank of Japan announced they were going into negative interest rate territory, joining the European Central Bank (ECB), Sweden and Switzerland.
Japan’s home prices have not recovered from their bubble in 1991 despite the lowering of the Bank of Japan target rate.
But that is at the short-end of the yield curve. The United States housing market largely depends on the 30 year mortgage rate.
Here is a chart of the US home ownership rate relative to the 30 year mortgage rate and real median household income. From 1965 until 1980, the home ownership rate rose from 62.9% to 65.8% as real median household rose gradually until 1979.
The 1980-1983 period was notable for two recessions and mortgage rates climbing to over 18% (actually reaching over 20% in some areas of the country). High mortgage rates result in high mortgage payments relative to income making housing more UN-affordable. Not to mention that real median household income fell from 1979-1983. This resulted in declining home ownership rates until 1985.
From 1985 until 1995, home ownership rates remained fairly flat. Then in 1995, the Clinton Administration introduced The National Homeownership Strategy: Partners in the American Dream. This Department of Housing and Urban Development (HUD) initiative called for lenders to “streamline” the mortgage lending process, lower credit standards and market home loans to those who had not been mortgage borrowers before.
Note that other economic factors were in play in 1995. The 30 year mortgage rate fell from 9.18% in December 1994 to 7.11% in December 1995, a 200 basis point drop in rates. Plus, real median household income rose from 1993 to 1997 contributing to the rise in the home ownership rate. Declining mortgage rates, rising incomes and softening credit standards were doing their magic.
Then came the 2001 recession. Real median household income peaked in 1999, fell slightly in 2000, and then fell through 2004. 30 year mortgage rates fell from 8.22% in June 2000 to 5.53% in June 2005, a decline of over 270 basis points. Subprime lending and adjustable-rate mortgages were in full swing allowing home home ownership rates to peak at 69.2% in Q4 2004.
Then the “invisible foot” of the market kicked in. Real median household income has been declining since 2007. Mortgage rates have fallen again from 6.67% in June 2007 to 3.79% today, almost 300 point drop. Home ownership rates have fallen to pre-housing bubble levels of 63.8% despite the almost 300 basis point drop in the 30 year rate.
Where do we go from here? Both the US and Japan are near or under zero on their target rates (Japan actually abandoned theirs in 2013). The 30 year mortgage rate has fallen from over 18% in 1981 to under 4% today. How much lower can US mortgage rates (and the 10 year Treasury benchmark rate) go? We shall see if the US follows Japan and goes into negative territory … and introduced MOAR quantitative easing.
So, Federal Reserve and US Federal government policies have pushed us into our current situation. And the national home ownership rate is back where they started in 1994.
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