The labor market is short several millions of jobs, long-term unemployment remains near record highs, and families have a hard time affording rising health care costs, while becoming more mired in debt on a daily basis. Not to worry, says President Bush. The economy is in great shape, he says. Just look at the increases in homeownership rates that my tax cuts have created, the president trumpets at every opportunity. The problem is that much of it would have happened anyway, and what happened was the result of other people's work. Home ownership rates have been on an upward trend for years and recent increases likely resulted from interest rate cuts enacted by the Federal Reserve. In fact, the Bush administration's policies were more likely to hinder gains in home ownership than to help them.

Homeownership rates have been rising for the past two decades. In the mid-1980s, home ownership in the United States fell below 64 percent. For a number of years, the rate of homeownership remained stable. However, starting in 1995, home ownership rates started to gain momentum. From 1995 to 2000, the rate of homeownership grew by 0.48 percentage points each year. Since 2000, these increases have slowed by 24 percent to 0.37 percentage points per year. That is, during President Bush's tenure, improvements in homeownership have actually slowed, not accelerated.

Many factors come into play when people consider buying a home. A family's average age, its size, or its preferred location, among other things, determines whether a family will want to buy a house or not. These factors probably explain much of the gains in home ownership rates in the 1990s. Economic factors, such as income and interest rates for mortgages, will ultimately determine if families can afford to buy a home.

Economic policy at the federal level can really only affect these economic factors. Clearly, policy can do little about the age of a family or the family size. And the desirability of a particular location is determined by regional economic policies more than by what policymakers in Washington do. That leaves federal policymakers with trying to move incomes and interest rates in one direction or another if their goal is to help or hinder home ownership.

A closer look suggests that home ownership has risen in the past few years, despite the administration's policies not because of them. Take, for example, income growth, which has been comparatively low for the past few years. While real income growth exceeded 3 percent in every year between 1995 and 2000, real income growth hovered around 1 percent for the past three years. If the administration had not stubbornly favored large tax cuts tilted towards wealthy tax payers and instead enacted short-term spending increases, job and income growth would likely have been stronger, making it easier for families to purchase a home.

Because job losses have mounted in the past three years, families had to borrow more to make ends meet. Household debt has reached record highs as has the level of debt service relative to household incomes. Consequently, the default rates of households on their loans have been comparatively high, despite low interest rates. That is, families may not get to enjoy their new homes as they struggle to repay their debts.

The administration's policies have also put low interest rates in jeopardy. Since 2000, the long-term outlook for the federal budget has worsened substantially. A study by the Fed published in May 2003 found that for each one percentage point increase in the government's deficit outlook relative to the size of the economy, long-term interest rates will rise by a quarter percentage points. That is, because the Congressional Budget Office and others have calculated that the government is on track to run ever larger deficits for the foreseeable future, long-term interest rates, including mortgage rates, may not have fallen as fast as they otherwise would have or they may rise sooner than would be the case otherwise. There is evidence that long-term interest rates, such as mortgage rates, initially did not react to the Fed's slashing of interest rates in 2001. The Fed cut interest rates in early 2001. Yet, mortgage rates did not decline until early 2003. This happened at a time when the Bush administration was pushing for its first tax cut with a price tag of $1.3 trillion over the first decade.

The only positive sign for potential home buyers are lower interest rates. However, mortgage rates by and large are out of the purview of policy makers, especially of the federal government. The Fed determines short-term interest rates in the hopes that long-term interest rates, such as mortgage rates, will follow suit, but it has little control over when and how far long-term interest rates will actually fall. And the administration has no direct control over interest rates, short-term or long-term.

Hence, President Bush's touting of the rise in home ownership is the equivalent of the home owner's proclamation that a garden is blooming because he had the good foresight of letting the sun shine and the rain fall, while conveniently omitting the fact that he forgot to fertilize.

  • Change in Home Ownership Rate, 1995 to 2003
    Since the end of 1994, home ownership has increased, including the past three years. Thus, the increases in the past few years continued the trend of the prior six years, albeit at somewhat slower rates.
    Source: Census Bureau, Homeownership Rates for the U.S. and Regions, Fourth Quarter 2003, Washington , D.c=: Census Bureau
  • Annual Real Income Gains, 1995 to 2003
    Due to the tax advantages that home buyers enjoy, it is pre-tax income that matters for the actual purchasing power to buy a home. Inflation adjusted, real, income growth has been substantially slower than in the previous years due to the poor performance of the labor market.
    Source: Bureau of Economic Analysis, National Income and Product Accounts, Washington , D.C.: Bureau of Economic Analysis
  • Household Credit Relative to Disposable Income
    Households have borrowed increasing amounts of debt to make ends meet as home prices, health care costs and the costs of education have risen, while income growth was low. By the end of 2003, households owed 110% of their disposable income.
    Source: Board of Governors, Federal Reserve System, Flow of Funds Accounts of the United States, Washington, D.C.: Board of Governor

Christian E. Weller is a senior economist at the Center for American Progress.

The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here. American Progress would like to acknowledge the many generous supporters who make our work possible.


Christian E. Weller

Senior Fellow

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