Would Higher 30 Year Fixed-Rate Mortgages Hurt Homeownership

At the center of the debate over Fannie Mae and Freddie Mac reform is the question of 30-year fixed-rate mortgages. The industry and progressive left argue that without some kind of government guarantee for housing finance, rates on 30-year mortgages will sky rocket to unaffordable levels and hurt homeownership.

While the question of exactly how much rates would go up is an important one that will be discussed at length on this blog over the next several months, I first wanted to look at how homeownership has been influenced historically by the 30-year fixed-rate mortgage (FRM). If the theory that higher mortgage rates would hurt homeownership (by increasing the price of mortgages and decreasing demand for housing) were to hold true, then when mortgage rates rise homeownership should fall. And vice versa. So what does the historical data say?

You will note that there is barely limited correlation between the 30-Yr FRM and homeownership. Both rates rose in the 1970s. Then in the early 80s homeownership began to decline while mortgage rates rose, as you might expect if there was causation. However, by the end of the 80s mortgage rates dropped back down to about where they started the decade, but the homeownership rate continued to fall.

More recently, it is clear that mortgage rates on the 30-year fixed have been falling somewhat steadily since the mid-90, starting at a 9 percent average down to today’s sub-4 percent rate. However, the homeownership level shot up from 64 percent in 1995 to 69 percent in 2004 only to fall back down again to just above 67 percent last year with official numbers for this year still pending but certainly another year of decline.

There is little doubt that mortgage rates are an influence on homeownership rates at some level. The more expensive mortgages are, the less homes are bought, and the less contribution to homeownership. However, just because 30-yr FRMs are more expensive does not mean that home buyers can’t get other mortgages, which is why there is no clear causation or correlation between homeownership and the rates on 30-Yr FRMs.

There is a deeper question of whether or not federal policy should be targeting a homeownership rate. And it shouldn’t be. Homeownership and affordable housing goals are inherently prone to creating bubbles, like our last boom and bust. So ultimately we shouldn’t be concerned about the classic 30-Yr FRM getting a bit more expensive. But as the chart above shows, even if the price on 30-Yr FRMs were to jump 50, 100, or 250 basis points, we’d still be well below historical averages and uncorrelated with homeownership rates.