DataPoints

Tuesday the Census reported another drop in U.S. homeownership, taking the proportion of Americans who own rather than rent back to the pre-housing boom level. The rate had bubbled up above 69% in 2005; now it's down nearer 67%.

It's no mystery, of course, that homeownership should recede under a tidal wave of falling prices, foreclosures and the worst recession in decades. But the news did raise a question that, as far as I know, has never been answered: What should the homeownership rate be? Or in economic terms, is there an optimal rate? And if so, what?

Until the recent unpleasantness, of course, the near-universal consensus held that anyone able to purchase a house should do so—and that those who could not deserved society's help, via tax breaks, mortgage subsidies and all the financing tricks that Wall Street's best and brightest could conjure up, to become homeowners themselves.

Well, so much for that idea. Even a Congressman now seems to be able to tell homeownership from apple pie:

“Some people will never own. There will be people who choose not to own; there are people who for economic circumstances will not be able to own. And there is no conflict between promoting homeownership and recognizing that decent, affordable rental housing will also be very important indefinitely for tens and tens of millions of Americans.” -- Barney Frank

Ok, then. So if up isn't the only right way for homeownership rates to go, it stands to reason that a "sweet spot"—the aforementioned optimal level—exists. Or, as this blogger put it not long ago:

Just as every nation has a ‘natural’ unemployment rate, every nation therefore has an ‘optimal’ homeownership rate, one that balances population growth, rates of household formation and dissolution, labor and employment mobility, and large-scale demographic shifts. We don’t know what that rate is, and it can shift over time.

I can see where such a calculation could be quite challenging, requiring assumptions about demographic trends, income levels, industrial composition and quite a bit more. But does that mean the concept must remain merely theoretical? Is an optimal homeownership rate any more elusive than NAIRU or the long-run potential rate of GDP growth?

I don't know. I do think that such a target, if it could be even roughly calculated, might have a fairly important role to play in housing policy. If, as Cong. Frank suggests, there's a good reason to encourage some proportion of the population to rent, we might want to know when a host of currently sacred political cows, from the FHA to the mortgage-interest deduction, would serve us better as hamburger.

Still looking for the light at the end of that long, long, housing tunnel, Mark Z. talks with CNBC:

The following is scheduled for publication in Sunday's Philadelphia Inquirer:

The Good, the Bad and the Ugly in Regulatory Reform

by Mark Zandi

Our financial system has failed us. It’s not a stretch to blame today’s 10 percent unemployment rate on the trillions of dollars in loans made during the housing bubble that subsequently went bad. Financial institutions aren’t solely to blame for this mess, but they were a big part of it, and they need substantive reform.

The reforms proposed by the Obama administration last year were roughly right. Giving the Federal Reserve responsibility for overseeing risk throughout the financial system; creating a new way to shut down troubled institutions, and establishing a new agency to advocate for consumer financial protection make sense. Even the president’s new plan to tax the nation’s largest banks to pay for the Troubled Asset Relief Program has merit. But the proposal made this past week to effectively break apart the largest banks does not. More significantly, it suggests the administration is set to take reform efforts too far.

The good

The TARP tax is a good idea. Indeed, the administration’s proposed levy on financial institutions should be made permanent to pay for the subsidy taxpayers provide those large and complex banks considered too big to fail.

The TARP was a success; without it, the system would likely have collapsed. Initial fears that the $700 billion allocated for TARP would vanish were misplaced; taxpayers will get back all but an estimated $117 billion. Much of the TARP money injected into financial institutions has been or will be repaid, with interest. Money the government won’t get back includes the amount used to take over insurer AIG and to support the auto and housing industries.

Asking the banks to ante up to cover other TARP beneficiaries may seem odd, but it is appropriate. The institutions that survived the financial crisis benefited enormously from taxpayer largesse extending well beyond TARP. And given the industry’s consolidation during the crisis, bank profits now flow to a much smaller group of shareholders, employees and executives.

The TARP tax would also be a step in the right direction toward mitigating too-big-to-fail risk. Large, complex institutions can borrow more cheaply because, with the implicit backing of taxpayers, investors believe their money is safe. It is appropriate for taxpayers to be compensated for this subsidy.

True, bank shareholders and executives would not bear the full cost of the tax themselves: part would be passed through to consumers and businesses in the form of higher borrowing costs or tighter loan standards. This effect can’t be completely avoided, but it should be modest, as many of the country’s 8,000 smaller banks would step up if big institutions were to raise rates or curtail lending too much.

The bad

On the other hand, breaking large institutions apart, as the president proposed this past week, is a bad idea. If adopted, banks with FDIC-insured deposits would be barred from many kinds of trading and investment. The administration seems to believe these activities are too risky, and that without them, banks and presumably the entire financial system will be safer.

To be sure, banks’ securities portfolios lost a boatload of money during the crisis, much of it from the kind of trading the president wants to prohibit. But the banks also lost a lot from traditional lending. Of the 140 banks that failed last year and the 550 currently on the FDIC’s troubled list, nearly all stumbled because of bad residential and commercial mortgage lending, not because of risky trading.

The administration would still allow banks to trade for clients, but it won’t be easy to tell which trades are for clients and which are not. If a hedge fund client of a bank wants to sell a security, and the bank can’t find a ready buyer and instead buys the security itself, is that good customer service or inappropriate proprietary trading?

Security holdings also give banks an important way to keep their customers’ money readily available, a feature known as liquidity. A sound bank is one that has sufficient capital and sufficient liquidity, and banks need to hold securities to manage liquidity prudently. Owning securities means being able to trade them when necessary; that in turn requires a healthy proprietary trading operation.

The administration seems to believe that pushing trading activity outside of the banks will make the entire financial system more stable. This is also questionable. It stands to reason that nonbank trading operations and global financial firms will grow bigger if the reform passes. Will the Federal Reserve and other regulators be better able to monitor and manage the risks taken by these very secretive, privately held institutions? It’s hard to see how.

The ugly

The president’s frustration with big banks is understandable; the financial system needs reform but financial institutions are using their substantial resources to prevent it. But while it may be good politics to bash the banks — particularly in an election year when unemployment is in double digits — using voter anger to fuel reform could get ugly. It is rare that good policy is made when politics trumps economics.

E-mail Mark Zandi at help@economy.com

Using data generated by Moody's Economy.com, MSNBC has been tracking the recession's impact across the U.S. for almost a year now. And while we see the picture as improving, the headline jockeys over there claim the economy is "stuck in neutral."

Judge for yourself:

“... To examine the causes, domestic and global, of the current financial and economic crisis in the United States.”

That's the point of the hearings beginning today in Washington, where bankers, policymakers and (ahem) economists will be testifying about the roots of the recent meltdown. The Financial Crisis Inquiry Commission's own site is here; a rundown on the panel from the liberal American Prospect is here. An alternative take on the panel's work is here.

And Mark Zandi's testimony (in pdf, with charts & graphs such as this one) is here.