If this is a housing recovery, why is the homeownership rate falling? At 65.1%, the national homeownership rate is at its lowest since 1995, according to the L.A. Times. So where’s the recovery?
Of course the homeownership rate, both nationally and in California, has fallen far below its bubble-year peak. The national peak was in Q2 2004 at 69.4%. California homeownership peaked in 2006 at 60.7%.
Prices are approaching their bubble peak in certain California markets, but the homeownership rate continues to slip. If homeownership is such a hot ticket, why aren’t more end user buyers showing up at the party?
You knew we were going to say it: speculators.
And the consensus is building. Earlier this week, Fitch Ratings reported home prices in California’s metro regions have been inflated into a mini-bubble by speculation. Now the L.A. Times is reporting on the homeownership variable, and they’ve reached the same conclusion:
The fact that homeownership has fallen during the housing rebound shows investors have been a major force in sending home prices skyrocketing. Individuals and Wall Street players have descended on the housing market, looking for bargains and cash flow. They have scooped up many lower-priced homes to flip or rent out.
Media reports on the housing recovery are quick to conflate rising home prices with an increase in end user housing demand. And, normally, that’s the case. But in this recovery, well-heeled investors used cash offers to aggressively outbid their end user competition. In other words, the so-called rise in California home prices wasn’t due to a massive clamoring for homeownership.
Although the price gains we’ve seen in California will fall back, the speculators have done some good. Many real estate owned properties (REOs) have been sold, cleaning up lenders’ balance sheets considerably. A lot of negative equity homeowners were relieved by increasing prices and happily sold to investors making cash offers with no contingencies.
In short, speculators and investors cleared up much of the debt overhang plaguing the market. Their bet that end users are going to come along to pay even higher prices won’t pay off for most. However, a large contingent of frustrated flippers will become buy-to-hold investors by necessity. In turn, their rental properties will become incubators for homeownership.
So, the recovery didn’t pan out as fast and hot as many hoped – but it’s continuing nonetheless, down its idiosyncratic (upward tilted bumpy plateau) path.