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Renters, Not Homeowners Dominate the U.S. Housing Market

Renters, Not Homeowners Dominate the U.S. Housing Market

Despite the U.S. government push for home ownership, renters will continue to dominate the market for the next five years, says A. Gary Shilling in a three-part opinion piece that posted to Bloomberg.com. Shilling, one of the  economists who predicted the subprime mortgage crisis and author of The Age of Deleveraging, points to several factors that will keep home ownership depressed, including:

Refinancing woes: “Refinancing is highly unlikely for 8 million owners who are underwater — owing more than the value of their homes — because new terms are treated as new loans.” Stricter lending standards prevent many from qualifying, while new fees can negate any savings garnered from refinancing.

Growing Delinquencies: “In the second quarter of 2011, at least 3.6 million mortgages were delinquent and at risk of foreclosure; that could climb to 5 million with further house-price declines and if the recession I forecast for this year takes hold,” notes Shilling.

High Inventory: While many believe that house inventories are decreasing in relation to sales for new and existing homes, Shilling argues that these calculations don’t take into account the roughly 5 million units with delinquent mortgages, the 3.6 million foreclosed vacant houses that haven’t been listed yet, or imminent foreclosures.

Meanwhile, federal programs designed to keep homeowners afloat abound, including the Home Affordable Modification Program (HAMP), the Home Affordable Refinancing Program (HARP), and the Emergency Homeowners’ Loan Program (EHLP).

However, Shilling says “sadly, these efforts to keep people in houses they can’t afford are simply prolonging the process of repairing the housing mess and getting rid of excess inventories.”

If historical trends hold, the total homeownership rate will return to its earlier base level of 64 percent by the fourth quarter of 2016. Continuing the average annual growth in households over the last decade of 891,000 would increase the total number by 4.5 million by the fourth quarter of 2016. This is enough to increase the number of new homeowners by 550,000 even with that further drop in the homeownership rate.

But it also means the addition of 3.9 million new renters, or 780,000 per year. This doesn’t suggest that we are becoming a nation of renters. Instead, it reflects the elimination of the widely held belief that house prices always rise and the end of loose lending practices that drove the homeownership rate to its 2004 peak. In fact, the reversal to falling prices and the extraordinarily tight lending standards may push the homeownership rate below that 64 percent norm; it would now be 60.9 percent if all those with mortgages that are delinquent or in foreclosure become ex-homeowners.

Part 1, Part 2, and Part 3 of this series.


A. Gary Shilling is the author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation. He is President of A. Gary Shilling & Co., an economic consulting firm and a registered investment advisor. He has been a columnist for Forbes magazine since 1983, frequently appears on business news programs, and is quoted regularly in the print media. Shilling has been warning about the long-term threat of deflation for several years and has even created a board game, aptly titled The Deflation Game.

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