Partners (Number 1, 2007)
Partners (Number 1, 2007)
Vol. 17, No. 1, 2007
Achieving the American Dream: Are We There Yet?Courting the Creative Class: New Strategies for Urban Revival
For as long as I can remember, purchasing a home has been celebrated as a pivotal point in one's life, as a sign of prosperity and personal success. One of our goals as a society has been to make it possible for more people to achieve the American dream of homeownership. And while we've been successful in bringing the percentage of homeowners to new heights, the causes for this shift are difficult to pinpoint.
According to the U.S. Census, the national homeownership rate was approximately 63 percent in 1965 and remained fairly stable for the next thirty years. However, in the mid-90s a housing boom raised the percentage of those owning homes higher each year until it topped out at close to 70 percent in 2005. More than 12 million joined the roster of new homeowners in just over a decade.
Exactly what has caused this rapid increase? The answer varies, depending upon whom you ask. Some studies indicate that lower interest rates allowed more people to enter the housing market. From the late 1980s through the early 1990s, interest for fixed-rate mortgages hovered around 10 percent. By the mid-1990s, rates began dropping rapidly, bottoming out at just over 5 percent for a fixed 30-year mortgage in 2002.
Other studies indicate that the aging of the population has been a strong factor in higher levels of homeownership. According to a study from the San Francisco Fed, a greater percentage of Baby Boomers compared to past generations have entered the housing market. The study additionally shows a direct correlation between longer lifespans and higher homeownership rates.
We have also seen a dramatic shift in the types of mortgage products on the market. In a testimony before the Senate Banking Committee in February 2007, the Government Accountability Office estimated that the proportion of nontraditional mortgages rose from 10 to 30 percent of the mortgage market between 2003 and 2005.
Federal agencies have expressed concern about risks inherent in several nontraditional mortgage products. A recent statement proposed on subprime mortgage lending practices highlights potential risks associated with particular adjustable rate mortgage products including interest-only loans and option ARMs; simultaneous first and second mortgages called "piggy back" loans; and products that do not require verification of income or assets, known by the industry as "low doc" or "no doc" loans.
Whether the higher homeownership rate is primarily due to an environment of lower interest rates, to people getting older and living longer, or to the creation of new mortgage products is unclear to me. One thing that's certain is that the mortgage industry has changed dramatically and will probably continue to evolve. While a larger percentage of families in the U.S. enjoy the American Dream today than ever before, risks are also greater as marketplace complexities increase. One of the biggest challenges ahead is to manage risk in a way that promotes and preserves housing opportunities.
Juan C. Sanchez
Community Affairs Officer