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The homeownership rate hasn't bottomed

There’s almost nothing more central to the American dream than owning a home, but the homeownership rate has been in near-steady decline from its peak of 69.4% in 2004. And we may not be done yet.

In an interview with Yahoo Finance, Fannie Mae’s Chief Economist Douglas Duncan said, ““It wouldn’t surprise me if it dropped another percentage point.” And what’s more, Duncan said, he’s happy with a homeownership rate around 64%.

“I think it is [OK]. The question is, what’s the profile demographically of the country.”

The homeownership rate peaked at 69.4% in 2004 during the housing bubble and has been declining since.
The homeownership rate peaked at 69.4% in 2004 during the housing bubble and has been declining since.

Duncan pointed out that Baby Boomer homeownership peaked in the 80 percentile range. Now Generation X is in its home buying prime, but, compared to Boomers and Millennials, Gen X is a small portion of the population. “Even if they have a high homeownership rate on a weighted average you’re going to see some decline in that [overall] rate.”

Then there’s the Millennials. Unless you’ve been living under a rock (and even still) you know Millennials have been slow to enter the housing market for a variety of reasons. A lag in first-time homebuyers is one of the most common laments amongst economists, policy makers and just about everyone else.

Related: Help Wanted: First-time home buyers

“They say, we eventually want to own a home, but we’re not sure what the hurry is,” Duncan said. For them, “Renting is OK, it makes me flexible if I need to change jobs.” Millennials are keenly aware that there’s a long payback period with a mortgage and, considering that Millennials are more likely to change jobs frequently, signing up for that kind of commitment may not always make sense. “They’re more conservative going into this, so we may see [their homeownership rate] lower for longer.”

But knowing all of this about the housing market, Duncan still believes it’s a good time to buy a house.

The Obama administration has been pushing to create easier access to homeownership in the wake of the financial crisis. Following the housing meltdown, lenders tightened credit standards making getting a home loan difficult for anyone without near-perfect credit. That’s now changing.

It’s led some critics to say the White House is fueling another housing bubble. Loans like Fannie Mae’s new loan-to-value mortgage allow Americans to buy homes with as little as 3% down. In a recent Wall Street Journal op-ed, former Fannie Mae Chief Credit Officer Edward Pinto wrote, “Government programs to make mortgages more widely available to low- and moderate-income families have consistently offered overleveraged, high-risk loans that set up too many homeowners to fail.” That would theoretically leave everyone else on the hook for those government-backed risky loans.

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But Duncan says low down-payment loans don’t have to be risky. “The underwriting criteria to qualify for those are going to be very rigorous. So going in with a small down payment, you’ll still have financial strength that will suggest it will be a successful mortgage.

Duncan used himself as an example, saying 25 years ago his first mortgage required a 5% down payment. Eventually he built up equity, and the last house he purchased he put some 40% down. That’s the goal of these types of loans and underwriting is key. “Is there a change in the documentation required [to get these mortgages], which was one of the biggest issues in the run-up to the bust? People got easier on validating components on someone’s financial profile.”

But even with this push, Duncan isn’t convinced the homeownership rate will jump any time soon; 64% may be the new normal.

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