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Home ownership rates in the U.S. stood at 63.4% in the second quarter of 2015, continuing a downward trend in the sector over the last year or so. But more importantly, the rate of home ownership is getting close to historic lows. The second quarter rate is the lowest since 1967. And with a continuing tight market for mortgages, it doesn’t appear that the home ownership rate will resurge in the near future.
Wharton adjunct real estate professor Sam Chandan and David Hansel, president of Alpha Funding Solutions, a private and direct asset-based lender, recently appeared on the Knowledge@Wharton radio show to discuss trends in the U.S. home ownership and rental markets. The K@W show airs 10 a.m.-12 p.m. Eastern time Monday-Friday on Wharton Business Radio on SiriusXM channel 111.
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2 Comments So Far
Edward Dodson
Sadly, this is yet one more exchange between people who ought to have a better understanding of how property markets actually work. What I learned during my own 35 years working in the financial services sector (managing the residential mortgage loan program for a regional commerical bank, then 20 years at Fannie Mae) is that the primary driver of property markets is an underlying 18-year land market cycle. A small group of economists have traced this cycle with remarkable consistency back over nearly two centuries. Read Mason Gaffney (U of California), Nic Tideman (Virginia Polytechnic) and Fred Foldvary (San Jose State) as a few examples.
The last cycle peaked in 2007 and then crashed in 2008. The signs were clear to me and many others working in the trenches. All one had to do was examine property appraisals to see the trend: land-to-total value ratios were skyrocketing. In many markets the land cost component raced past 50 percent. Thus, buyers of residential property were paying over half the cost just for land. The land markets were driven by credit-fueled speculation that could not be sustained by businesses who leased space, by apartment dwellers who faced demands by landlords for higher “rents” at a time when household incomes were stagnant or declining, and by potential first-time homebuyers who lacked sufficient savings to make even a 5 percent cash down payment. Recession and rising unemployment then caused widespread mortgage loan defaults and foreclosures.
Fannie and Freddie did not cause the crash. The crash was inevitable, repeated for the 11th time since the end of the SEcond World War. The crash was deepened and intensified by a long period of wrong-headed deregulation that began in the 1970s with the creation of the first money market mutual funds (a major cause of the S&L crisis of the late 1980s). However, as the median price of residential property rose (note I use the term “property” and not “housing”), Fannie and Freddie met annually and agreed to increase maximum loan limits, which accommodate the speculation-driven land markets.
A side-effect was that Fannie and Freddie began to take a larger share of the jumbo market from the banks, who “retaliated” by pouring more and more financial reserves into the sub-prime mortgage loan market and with Wall Street and the bond rating agencies fueling a rapid expansion of the private label MBS market. Most of us knew from about 2002 on that these were nothing more than junk bonds plagued by massive criminal fraud and predatory conditions.
As I have reviewed the changes in Federal Reserve oversight policies and other regulatory changes, I see nothing that is preventing the land market cycle to repeat. If anything, the Fed’s low interest policy jump-started the rise in land prices in order to bail out mortgage loan investors and some consumers. The longer term consequences are already underway, as investors have taken over the residential property market in anticipation of flipping properties once land prices have renewed their upward climb.
Peter Rockett
11 crashes on 18 year cycle since World War II
11 times 18 = 198 years, year 2015 – 198 = year 1817?? WWII ~ 1945??
So, Land – market cycle is rather consistent @ 18 years but what about
crash cycle? Does it vary? 2015 -1945 (WWII) = 70 years/ 11 = 6.4 year crash cycle?? probably not because if so, we’d be in a crash about now; last crash 2008 + 6.4 year cycle = 2014.5 (year of next crash after 2008)
Land to building(residential single house) value:
Generally cost of materials is consistent (three toilets in New York, NY cost the same in Bismark, ND. Construction labor may vary but land prices are hugely different.
Say a 2000 sq ft house @ $100/ft is $200,000 then on a 1/4 acre lot in suburbia could be $300,000. so if the price goes up to $450,000 then
are we getting into the danger zone of > 50% land value??
So when present residential land to building(house) value ratios rise somewhere in the 1:1 range today’s residential investors will dump theproperties and the land to building value ratios will drop back to something like 1:2 ??
The next crash in Bismark, ND will probably not coincide with the next one in suburbia??
Thanks for the interesting article,
Peter Rockett