BLOG VIEW: One of the central themes of the recent housing cycle was the sharp increase in mortgage delinquencies and foreclosure rates. That is why the housing downturn became known as a “foreclosure crisis.”
The foreclosure crisis was a major driver of the rapid collapse in home prices and lower homeownership rates. After peaking in 2009-2010, both delinquency and foreclosure rates have been trending down. The winding down of the foreclosure crisis is one reason I am confident that homeownership rates will rebound to historically normal levels over the next few years.
According to the quarterly national delinquency survey conducted by the Mortgage Bankers Association (MBA), new loans going into foreclosure (called the foreclosure start rate) increased from 1.7% in the early 2000s prior to the housing downturn to a peak of more than 5.4% in 2009. Since then, the foreclosure start rate has been trending down gradually. In 2014, it fell to 1.75%. The latest survey, covering the third quarter of 2015, shows that this rate is now back to the level last seen in the second quarter of 2005.
How Did The Foreclosure Crisis Affect Homeownership?
Households can choose either to own or rent. Historically, American families have aspired to homeownership – it is the bedrock of the American Dream. In fact, the homeownership rate has never fallen below 60% since 1960.
The loose lending standards and rapid home price appreciation during the last housing boom drove many more individuals and families into homeownership, pushing the homeownership rate to a peak of 69% in 2006. That means out of more than 110 million households that year, 76 million were homeowners. The rest (34 million households) rented. Mortgage financing is critical to the housing market, and the MBA reported 50 million first-lien home loans in 2006 – meaning that almost two out of three homeowners had an outstanding mortgage.
A number of factors drive homeownership rates. One is household formation, which brings new homeowners and renters into the housing market. The other is the flow between the renter group and the owner group. Most people rent before they own, so there is a natural flow from renters to owners that increases with age. One measure of this flow is first-time home buyers. According to the National Association of Realtors, 36% of the 6.5 million existing-home sales in 2006 were closed by first-time buyers. That means as many as 2.3 million renters became homeowners (although some of the 2.3 million first-time home buyers probably skipped the renting step, considering 2006 was at the height of the housing boom).
There is also a flow in the opposite direction of homeowners becoming renters. And this is where the spike in the foreclosure start rate becomes important because it is a proxy for the flow from homeowners to renters. In 2006, 1.9% of mortgages entered the foreclosure process. By this measure, over 900,000 homeowners left their homes, and although we do not know exactly how many, our assumption is that a significant number of them became renters. These two measures, first-time home buyers and foreclosure starts, tell us that back in 2006, the flow into homeownership was strong, while the flow out of homeownership was weak. It explains in part why the homeownership rate peaked that year.
How Did This Dynamic Change During The Foreclosure Crisis?
During the foreclosure crisis and after, the flow into homeownership weakened, while the flow out of homeownership picked up. At the height of the foreclosure crisis in 2009, the foreclosure start rate rose to historically high levels, and first-time home buyers retreated. In 2009, a total of 2.8 million homeowners left their homes due to foreclosure starts, while 2 million families became homeowners for the first time.
The flow out of homeownership would have been stronger if the federal government had not offered tax incentives to first-time home buyers. The First-Time Homebuyer Tax Credit boosted first-time home buyers to nearly 50% of existing-home sales in 2009 and 2010. As a result, the homeownership rate, which had been rising since the mid-1990s, started to fall during the crisis, and the decline has continued until recently. In the first three quarters of 2015, the homeownership rate has averaged below 64% – essentially wiping out all of the progress made during the 1990s and early 2000s. Between 2006 and 2015, more than 8 million American households became renters.
Foreclosure starts have been moving in the right direction since 2009 and are down from 5.4% in 2009 to an estimated 1.7% this year, meaning that the number of households moving from owning to renting each year is down from 2.8 million in 2009 to just 800,000 households in 2015. First-time home buyers are also beginning to increase, although more gradually, rising from 1.6 million in 2014 to an estimated 1.7 million in 2015.
Here in the private mortgage insurance industry, we, too, see the resurgence of first-time home buyers. We have helped many first-time home buyers get a mortgage with less than a 20% down payment. Our company saw its best quarter in the third quarter of 2015 in terms of new insurance written since the first quarter of 2008.
Housing and mortgage markets both follow cycles. In 2006, the mortgage lending criteria were too relaxed, the economy was booming, and home prices were at a peak. Everyone, including potential first-time home buyers, wanted to become a homeowner. These conditions created the foreclosure crisis and drove the homeownership rate to its lowest point in a generation.
After nine years, the market is moving to the other side of the cycle. The foreclosure crisis is winding down, and with it, fewer homeowners will be forced into renting. This is one of the reasons why I am optimistic about homeownership increasing over the next few years.
But, more importantly, people rent before they own. The 8 million-plus rental households created in the last 10 years, as well as other families who have delayed becoming homeowners, will eventually get back on the path to owning. And the mortgage industry – and private mortgage insurers in particular – will be here to help.
Tian Liu is chief economist for Genworth’s U.S. Mortgage Insurance division.