The New Reality Of The Housing Market

Fewer Americans now own homes than at any time in the past 13 years. Skittish banks are tightening the purse strings and requiring larger down payments. That means many people are putting off or abandoning the idea of owning a home.

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LINDA WERTHEIMER, host:

From NPR News, this is WEEKENDS ON ALL THINGS CONSIDERED. I'm Linda Wertheimer. Guy Raz is away.

There were anti-government demonstrations today in Morocco and news of increasing violence in Libya. We'll have the latest. But first, the number of Americans who own their own home is falling.

Close to 70 percent of Americans owned their own homes in 2004, riding the housing bubble. Ownership was down to 66 percent at the end of 2010, and it is still dropping.

Drastic as that sounds, it's still historically high. Our national norm is closer to 64 percent. Economists tell us that this is a correction. And that's our cover story today: the new reality of the housing market.

Lending institutions are making it harder to buy a house, frustrating buyers across the country. Here are some of their stories.

Ms. TIA YOUNG(ph): My name is Tia Young, and I currently live in St. Louis, Missouri.

Ms. BETSY HEDLEY(ph): My name is Betsy Hedley, and I'm from Chicago, Illinois.

Ms. JESSICA LEWIS(ph): My name is Jessica Lewis, and I live in Alexandria, Virginia.

(Soundbite of music)

Ms. LEWIS: We tried to buy a house last year, our first home. And we were pre-approved for a reasonable size mortgage. And we were...

Ms. HEDLEY: We were all set to buy our first condo. My boyfriend and I had been searching for a few months. They told us, absolutely, it should be no problem.

Ms. YOUNG: I anticipated that I would move to St. Louis and immediately jump into a new home. As - when we got here, we were suddenly told by the home lenders that my credit was great, but I didn't make enough money, and my husband, his credit was mediocre, and he made great money, and we don't qualify for a home loan.

Ms. LEWIS: It all happened in a 48-hour period. We put a bid on the house. We won it. I think it was like a Thursday evening. We woke up Friday morning to find out that the money couldn't come. What had happened was they looked at our credit scores, which were fantastic, but they didn't go through and actually look at our history, which didn't show a debt-to-income ratio that they were comfortable with.

Ms. HEDLEY: We had good jobs. We were making good money. We had the 20 percent down payment. We had good credit. Everything looked fine on paper. It was just the two-year job history with the same company or in the same field. And he basically said that we wouldn't be able to get the loan.

(Soundbite of music)

Ms. YOUNG: So now we're renting our town home with the same square footage except that our rent is double what I paid in a mortgage. So I'm offended. I feel like the mortgage lenders have suddenly decided that I'm a second-class citizen.

WERTHEIMER: Borrowers seeking conventional mortgages, loans with no component of federal help, are finding they need better credit scores, better earnings, and one important hurdle is getting higher: Down payments that were very low in the bubble years are now headed back up.

This past week, The Wall Street Journal reported that the median down payment in nine major U.S. cities was at 22 percent.

Mr. BRIAN WESBURY (Chief Economist, First Trust Portfolios): And that means lots of people are moving toward rental activity rather than ownership activity.

WERTHEIMER: That's Brian Wesbury. He is the chief economist at First Trust Portfolios in Wheaton, Illinois. He told me:

Mr. WESBURY: One of the problems that people have had over time - it's always nice to literally borrow 100 percent of the value of the house and have it go up in value. But in reality, then, you're not a homeowner. You're, in a sense, you're a speculator.

And so having a bigger down payment kind of shows an ability and a willingness to become a homeowner. The risks fall for everyone. Yes, it costs the homeowner more to do it this way, but they become more vested rather than just being a speculator, which is what we saw a lot of back in 2005, 2006, 2007.

WERTHEIMER: Well, now, a lot of the concern, as people look at these higher down payments, is that lots of people will be excluded from the possibility of homeownership. Is that a good thing, a bad thing? What is that?

Mr. WESBURY: Well, it's probably a neutral thing, in a way. Too many people were qualifying. It was too easy to qualify to get a mortgage before. And so, now, the reaction is probably to go a little bit overboard the other way. It's very human. It's human nature for this to happen.

And the government is not helping because they've put a lot more regulations. Anyone who's tried to refinance their house or get a new mortgage today knows that you have to prove way more things about your income and where your monies come from and what your finances are than you did before. The paperwork has doubled or tripled in some cases.

And I believe that over time that we will see things slide back. Twenty percent down has always been traditional, I've always thought. That's what my grandparents had to put down. That's what my parents had to put down. So even though the bank might want 25 or 30 percent from me today, I expect, as an economist forecasting the future, that it will eventually drift back to that 20 percent area.

WERTHEIMER: One of the ways in which people have confronted borrowing money to buy houses in the last few years is not to look at the total debt, not to look at the down payment, but just to look at the payment, as if it were rent. If they could make the payment, they could take the loan and they didn't have to think about the possibility that they owed, you know, $400,000.

Mr. WESBURY: And, you know, when that got us in trouble back in 2003 and 2004, when the Federal Reserve lowered interest rates to 1 percent, and that's when the real problems began in housing.

I think we enticed a lot of people into the market to do things that were a little bit further of a reach than they should have tried for because interest rates were low. And then when that went away, the game was up, so to speak, and that's when the trouble began.

WERTHEIMER: That's Brian Wesbury. He is chief economist at First Trust Portfolios, a financial services firm in Wheaton, Illinois, and that's where we reached him.

Mr. Wesbury, thank you so much.

Mr. WESBURY: Well, it was great to be with you today. Thank you.

WERTHEIMER: So what does it mean for the USA if fully one-third of us cannot buy a home?

Felix Salmon, who is a financial blogger for Reuters, suggests we look on the bright side of shrinking homeownership.

Mr. FELIX SALMON (Financial Blogger, Reuters): It's great that homeownership is going down because homeownership is actually bad for the economy. What homeownership does is it keeps people stuck in one place. And what you need when you have an economy with high unemployment, like we have right now, is labor mobility.

We want people to be able to up and leave to where the jobs are as easily as possible, and it's very hard to do that when you own your own home, and it can take months to sell it, even if you're lucky.

WERTHEIMER: Do you think that homeownership contributes to consumer spending, I mean, to a...

Mr. SALMON: It did during the housing bubble. When everyone was refinancing their houses and adding wings and putting in those granite countertops and building like there was no tomorrow because house prices only went up, then that created a sort of artificial boost, and all of that money would have been put to much better use in just about any other part of the economy.

Construction is the least productive part of the economy you can find. If you want to go out and make stuff and sell stuff and create things, which the rest of the world wants to spend money on, that is going to be much better for the economy in the long term.

WERTHEIMER: Hmm. So the Census Bureau says that homeownership has gone down from the all-time high of close to 70 percent during the housing boom to about 66.5 percent now, and that's the lowest it's been in 13 years. Is 66 percent good or bad by your standards?

Mr. SALMON: It's better than 68 percent. And remember, these percentages are huge. If you drop just one percentage point in an economy with 100 million households, that's a million homes we're talking about. We're talking massive numbers here.

The peak was in 2004, interestingly enough. It wasn't at the very top of the housing bubble. And it's been sliding steadily ever since then. And as it continues to erode, that just increases the number of renters, and I'm quite happy with that.

What I would love to see is an end to what I call the rental ghetto of these cities, where you have neighborhoods, which are generally the nicer neighborhoods, where everybody owns, and then other neighborhoods, which are much less nice neighborhoods with worse schools, where everybody rents.

And that makes it unpleasant to be a renter. And if you want a nicer life, you more or less have to buy your home because there's no rental housing stock in a nice neighborhood.

And what we're seeing with the housing burst is people are putting their nice houses on the market for rent for the first time, and that's a great development.

WERTHEIMER: So you think that defining homeownership as wealth, as we've been doing, that goes?

Mr. SALMON: I think that homeownership on a practical level, that homes are much more - they behave much more like liabilities than they do like assets. You know, they - the roof breaks, you've got to replace the boiler, you've got to pay insurance, you've got to pay taxes. It's - you keep on writing checks all the time.

And the idea that this is some kind of an asset is kind of crazy because, A, they're very hard to sell; and B, if you do sell it, given this sort of cultural idea that you have to just buy somewhere else, you're never going to be able to turn that into cash and spend it. You're just going to have to swap it for some other house.

WERTHEIMER: So are you rushing right out and buying three...

Mr. SALMON: Many houses.

(Soundbite of laughter)

WERTHEIMER: Oh, yeah, I was going to say three or four, three-bedroom houses, and renting them out?

Mr. SALMON: Well, I would like to, but I don't have that kind of down payment, you see.

(Soundbite of laughter)

WERTHEIMER: Well, thank you very much for talking to us today.

Mr. SALMON: Thank you.

WERTHEIMER: Felix Salmon. He writes a financial blog for Reuters. He joined us from our studios in New York.

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