Homeownership Rates and Housing Subsidies

Numbers can be really enlightening when you start moving around the pieces. Let’s take a look at some the homeownership numbers over the past few decades.

Last week, homeownership data released by the U.S. Census showed that there were fewer Americans that owned a home at the end of 2010 (66.6%), than did before the housing bubble (67.9% in the first quarter of 2002). Any gains that were thought to be added to the system by the housing bubble have since been wiped away—prices have plummeted, less people have homes, vacancies are skyrocketing, and rental is expanding.

We haven’t seen homeownership rates this low since 1998, and overall the homeownership rate has increased barely one percent from 1980 (65.5%) to 2010 (66.6%). To be fair, if you start the data at the beginning of 1994 when the Clinton Administration’s housing programs that exacerbated the GSE mess began to get the housing bubble rolling, homeownership has gone from 64.1% to today’s rate, an increase of 2.5%. It is not a lot, but some might say it is something.

There has been a lot written on what caused this small growth (that was actually large growth for a while since the homeownership rate nearly hit 70% at the height of the boom) but what about the cost of this growth? Sure we have more homeowners than in 1980 and 1994, but has the cost of this been worth it?

To answer that we have to first assess the costs. Roughly speaking, the bailout of Fannie Mae and Freddie Mac has cost the U.S. taxpayers $150 billion. The U.S. government will also likely loose about $20 billion on the TARP bailout of banks.

The GSEs were undoubtedly key players in the boom that boosted the homeownership rate. To what degree is still heavily debated (as was evidenced by the official view presented in the Financial Crisis Inquiry Commission report and the split dissent from Republican panel members), but they were certainly players. Financial institutions that were brought back from the brink also heavily contributed to the housing boom, though the exact degree is also still not firmly agreed upon.

In any event, whether it was the banks, the regulators, or the GSEs—or some combination of the three (which is my own view)—the U.S. taxpayer has been left in the red because of public policies that promoted homeownership as a end all be all to be pursued.

Some of those policies caused the GSEs to take on risky mortgages, leading to short term homeownership growth, but heavy losses from Fannie and Freddie. Some of the policies drove regulators to ignore the toxic build up of debt in the system, since no one wanted to stop the incredible expansion of the housing industry, but the result has been a crippled construction industry and taxpayer bailout losses to cover that toxic debt. And some of the policies were the product of regulatory capture by the mortgage bankers, the home builders, and realtors who all wanted federal subsidies to drive their businesses, and made a serious profit in the boom time, only to have the house of cards come crashing down on their heads, and the taxpayers.

Now, let’s assume for the moment that the losses to the taxpayers are only $150 billion—we don’t have final figures on TARP yet, and the GSEs are paying a dividend to Treasury as a part of the conservatorship that slightly complicates the loss figures. And I want to limit the potential criticisms.

Also, we’ll generously assuming that the GSEs have actually boosted homeownership by 2.5%, since we’re using end of 1993/beginning of 1994 numbers as the starting point.

But here is where numbers don’t lie: even with these generous assumptions, it still means that taxpayers have paid out $60 billion in losses to subsidize each percent gained in homeownership.

That’s $60,000,000,000.00 per one percent benefit.

Such a huge number is hard to really wrap one’s mind around, so let’s turn the cube of numbers again to see what we find. Between 1994 and 2010, the Census Bureau reports that 19,207,000 housing units were added to the inventory of homes. That’s a lot of places to live, so could it be that the $150 billion in losses were worth it?

We’ll, a little division reveals that the taxpayer subsidy breaks down to just $7,809.65 per housing unit. Which further breaks down to a little over $20 bucks a month over 30 years (plus the amortized interest on the mortgage). That kind of benefit doesn’t quite seem worth the massive cost. And consider that the losses are likely higher and the homeownership gains really aren’t that strong. So it is likely even less worth the cost.

* As a side note, all of these numbers are seasonally adjusted by the Census Bureau. The Census Bureau puts out separate homeownership data, but the story is basically the same. Check out the Census data yourself here.