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Mark's Market Blog

Part VI: Home Ownership

By Mark Lawrence

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In Money Part I, we saw that money is mostly electronic, and it's created out of thin air by banks. In Money Part II we saw that charging interest on loans requires that the entire economy grow: there must be more and more people borrowing more and more money to consume more and more stuff, or the entire system collapses. In Money Part III we saw that the value people place on money depends on the amount they already have, and that this valuation drives important parts of our country's investments and lotteries. Money Part IV was about the trade deficit and the recent Internet, stock market, and housing bubbles. Money Part V was about income distribution in the US, where we learned the top 20% of the people are paying 83% of the taxes, and the bottom 20% are doing less than a quarter as much work, earning a third as much money, and paying 1% of the taxes. In today's blog we'll talk about home ownership, the most valuable asset for most American households.

About 67%, a bit more than two-thirds of the households in the US are homeowners. Most of these home owners are over 35 years old. Eighty percent of 65-plus Americans own their homes, an ownership percentage far above the national average. The distribution of home ownership by age has not changed very much in the last 20 years.

About two-thirds of all homes have mortgages, one-third are owned free and clear. Most Americans buy their first home in their mid-thirties, with the clear goal of paying the mortgage off by retirement. Most Americans manage to do this. Seventy-six percent of age 65+ homeowners own their homes free and clear. In the charts below, we see that through 1995 more than half of everyone had their home paid off by age 55. However, since then the housing bubble and financial crisis means that it's not until age 65 that current Americans have their house paid off. In the charts below "LTV" means Loan To Value, the percentage of your home's value that is mortgaged. As you can see below, up until 2000 more than half of everyone had their home paid off by age 55; today it takes until 65 to get to more than half.

The trend to having larger mortgages for a higher percentage of the home's value is a long term trend. Below we see that both mean and median loan-to-value has been rising for 40 years. The median started rising much more quickly after Clinton made changes in Fanny Mae and Freddy Mac to make more mortgages available to lower income people. Some think that the fast rise in mortgages to lower income people is substantially responsible for our current banking crisis; however those who read this blog know that the trade deficit and poor risk assessment on securitized loans played a much bigger part. While it's true that today over half of the sub-prime loans have been foreclosed, because these were typically low income people the value of the houses was not that great on average. Also in the chart below we see that the fraction of yearly income devoted to mortgage payments has been steadily increasing for 20 years.

About a third of all houses in the US are owned free and clear with no mortgage. Of the two-thirds that are mortgaged, the median mortgage is $101,000, 55% of the value of the house. The median house is 1876 square feet, and is worth $191,000, 3.2 times the median owner's $59,000 yearly income.

For some groups home ownership is almost universal. Married couples who earn over $80,000, whose head was 45-54 years of age, and with children have a home ownership rate of 97 percent. This is true for both whites and minorities. In the cart below we see that as income raises home ownership also raises. However, for people in the top 20% of households by income, mortgages slightly decline - people in the top 20% of households on average made a larger down payment and are more likely to pay off their home.

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