The capital structure of U.S. real estate assets has been in a long process of change. In 1945 homeowners owned 84% of their homes, with average mortgage to value ratios being 16%. Fast forward 65 years to 2010, and we now live in a country where the average homeowner has only a 38% equity stake in his property. How did this happen, and what does it mean for U.S. real estate?
They say that a picture is worth a thousand words (Data Source: Federal Reserve Flow Of Funds):
You can click on the picture to enlarge it, but even from this vantage point we can see the general trends of declining equity ownership. The blue line represents the rate of change in equity positions, which highlights the problem periods. From 1945 to 2006, the homeowner equity rate declined by an annual average -0.4%. That rate accelerated to an insane -7.2% in 2007 and -11.4% in 2008, as property markets across the country collapsed.
We can explain the rapid declines in homeowner wealth with the real estate bubble bursting in 2007, but how can we explain the general shifting in real estate capital structures going from 84% equity in 1945 to a mere 38% in 2010? The answer is that the federal government has aggressively promoted mortgage debt starting in the 1930's with the creation of the Homeowners' Loan Corporation (HOLC), Federal National Mortgage Association (Fannie Mae (FNM)), and the Federal Housing Administration (FHA).
Since then you can add mortgage interest tax write-off legislation that lowers the cost of real estate debt capital through preferential tax treatment, Ginnie Mae, Freddie Mac (FRE), the Federal Housing Finance Agency, and the Department of Housing And Urban Development (HUD).
All of these entities serve to reduce the cost of mortgage capital relative to equity by transferring risks from lenders to taxpayers. Not all of these institutions are public, but they have been created, supported, and perpetuated beyond economic sanity by deliberate public policies.
The federal government has methodically transferred this nation's real estate ownership from individuals to lending institutions, publicly sponsored intermediaries, and finally, to itself (or rather, the Federal Reserve, which is not even formally part of the government). A finer conspiracy could not have been dreamed up!
The ultimate consequences are real estate markets bereft of the stability rendered by an individual stake in losses. Banks and mortgage lending institutions have a 62% stake in national real estate assets, the downside risk being shifted to taxpayers through federal guarantee and insurance programs, and to U.S. dollar users through Federal Reserve secondary mortgage market purchasing programs.
Essentially, the people living in America's homes are increasingly disenfranchised from the financial outcomes of their values. Delinquency rates will remain high, if not methodically creep higher. Sadly, it looks like America has long been marching down the road to serfdom.
Disclosure: No positions