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America's Second Housing Boom

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Document date: February 01, 2007
Released online: January 30, 2007

Brief #7 in the Opportunity and Ownership Project series.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in PDF Format.

The text below is a portion of the complete document.


Abstract

The prime mortgage market largely fueled America's first housing burst after World War II. Low- and moderate-income households, largely excluded from this earlier movement, are getting swept into the second housing boom. This brief details how homeownership has again expanded, this time fueled by the development of the subprime market. Rising interest-payment burdens for many subprime borrowers, however, might mean delinquencies and foreclosures.


Introduction

The American landscape changed dramatically after World War II, as homeownership rates rose from 45 percent to 65 percent in little more than a decade. This burst was fueled by the opening of mortgage credit and ownership to the middle class, symbolized by the now-classic 30-year fixed-rate mortgage. Millions of American households were able to purchase their split-level homes in the suburbs and send their children to the public schools there.

Low- and moderate-income households were generally excluded from this earlier movement. Either they could not get mortgage credit at all, or could not afford the down payment or monthly payments. Minority families often faced discrimination on top of these other factors. As a consequence, the national homeownership rate stabilized at about 65 percent for 35 years.

But recently, homeownership again expanded. The share of Americans who owned homes rose from 64 percent in 1994 to 69 percent by 2005. This time the new homeowners were largely lowand moderate-income groups, and minorities. Over the decade, the homeownership rate in the lowest tenth of the income scale rose 4 percentage points to 43 percent, the second lowest rose 4 percentage points to 49 percent, and the rates for blacks and Hispanics rose 7 and 8 percentage points, respectively, to 49 percent. About 12 million new homeowners have emerged, roughly half of them blacks, Hispanics, and others of mixed race. The overall rate of 69 percent moves the United States into the top rung in world homeownership rates.

The Subprime Mortgage Market

While the first surge in ownership involved the prime mortgage market, the second surge has been largely fueled by the development of the subprime mortgage market. This subprime market can render down payments as low as zero. Subprime borrowers have lower incomes and inconsistent credit histories, forcing them to pay high interest rates, sometimes double-digit interest rates, to get their loans. Points and fees are higher for subprime mortgages and prepayment penalties are almost universal, making it much more costly for borrowers to get out of subprime mortgage loans.

This subprime mortgage market is a reasonably new financing option. Subprime mortgage originations were a mere $35 billion in 1994, less than 5 percent of total mortgage originations. By 2005, subprime originations had risen to $625 billion, now up to 20 percent of total originations and 7 percent of the total outstanding mortgage stock. Over the decade, subprime originations increased 17-fold, a whopping 26 percent annual rate of increase.

Just as the middle classes did at the close of World War II, these new low- and moderate-income homeowners now have a chance to build wealth, invest in their neighborhoods, have their children attend better schools, and reap other advantages of homeownership. Both presidents Bill Clinton and George W. Bush have engaged in significant cheerleading for the growth in homeownership. At this point most of the cheerleading has been from the bully pulpit, since there has been very little new federal money behind the growth in homeownership.

But any social change this large is likely to have some mixed blessings. Overall delinquency rates for subprime mortgages are on the order of 7 percent, 10 times as high as the normal rate in the prime market (Joint Center 2006). Various indicators suggest that another 10 percent of subprime borrowers could be flirting with credit problems, even if not in actual delinquency or foreclosure status (Schloemer et al. 2006). And foreclosures have likely been held down by the recent period of very low short-term interest rates and the proliferation of financing instruments that take advantage of these rates. Now that short-term rates establish more normal levels, interest payment burdens for many subprime borrowers are rising sharply, and further increases in delinquencies and foreclosures are almost sure to follow.

Indeed, early reports show exactly that happening in late 2006. Three subprime lenders have recently declared bankruptcy, and an intensive study of six million recently made subprime mortgages forecasts sharply higher foreclosure rates (Schloemer et al. 2006). The numbers are not large enough to threaten the macro-economy, but even a small rise in foreclosures could damage the prospects of millions of low- and moderate-income households.

Note: This report is available in its entirety in PDF Format.



Topics/Tags: | Economy/Taxes | Housing


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