Overview of the Housing and Mortgage Markets

It has been a long-standing public policy to promote homeownership for all socioeconomic and racial groups across the nation. To facilitate the purchase of homes, a variety of financial instruments and institutions have come into existence over the years. The myriad types of housing units and mortgage products available in the marketplace have opened the door to homeownership for millions of families, offering them the chance to steadily build wealth over a lifetime.

Owning a home can bestow a sense of security and autonomy—but today, in a cruel twist, many Americans now regard their homes as the source of worry and dashed expectations. How did everything change so suddenly and dramatically?

Before we examine the factors that led up to the mortgage meltdown and its spread throughout the financial sector and into the real economy, a bit of historical context is in order.

Housing Units, Mortgage Debt, and Household Wealth

There were 130.4 million housing units in the United States at the end of the third quarter of 2008, as shown in Figure 2.1. To put this number in perspective, the nation's total population was 304 million, and there

Figure 2.1 Three of Five Housing Units Are

Owner Occupied (Q3 2008)

Total = 130.4 Million Housing Units

Vacant: seasonal

Vacant: and other for sale 9.5%

Vacant: for rent 3.1%

Figure 2.1 Three of Five Housing Units Are

Owner Occupied (Q3 2008)

Total = 130.4 Million Housing Units

Vacant: seasonal

Vacant: and other for sale 9.5%

Renter-occupied 27.5%

Owner-occupied 58.2%

Sources: U.S. Census Bureau, Milken Institute.

Renter-occupied 27.5%

Sources: U.S. Census Bureau, Milken Institute.

Owner-occupied 58.2%

were 111 million households, or 2.7 persons per household.1 There were 18.9 million more vacant housing units than households. (See Appendix Table A.2 for further detail.)

Most housing units (58 percent) are owner occupied.2 Renter-occupied units account for 28 percent of the total, while vacant units account for the remaining 14 percent. Some of the vacant units are for sale or rent, while others are used on weekends or similar short periods by their owners or seasonally by vacationers. The mere fact that some housing units are vacant is not a cause for alarm. However, when the number of vacant units rises significantly above the normal level, this does become a warning signal that home prices may be in for a tumble and home construction may be headed for a slowdown.

The vast majority of buyers cannot possibly pay the full price for a home all at once,3 so obtaining a mortgage is their key to achieving the American dream. Mortgage debt has made homeownership a reality for a greater number of households and allowed for an expansion in the number of housing units. Moreover, in the process of using mortgages as a tool to purchase homes, individuals are able to accumulate wealth; as they make payments on interest and principal, they build equity in their homes and increase their net worth. Because mortgage interest is tax deductible, they also enjoy significant tax benefits along the way.

Figure 2.2 Mortgage Debt Enables Homeownership and Leads to Wealth Accumulation (Quarterly, 1952-Q2 2008)

US$ trillions

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