How The Foreclosure Crisis Impacted Homeownership

BLOG VIEW: One of the central themes of the recent housing cycle was the sharp increase in mortgage delinquencies and foreclosure rates. That is why the housing downturn became known as a “foreclosure crisis.”

The foreclosure crisis was a major driver of the rapid collapse in home prices and lower homeownership rates. After peaking in 2009-2010, both delinquency and foreclosure rates have been trending down. The winding down of the foreclosure crisis is one reason I am confident that homeownership rates will rebound to historically normal levels over the next few years.

According to the quarterly national delinquency survey conducted by the Mortgage Bankers Association (MBA), new loans going into foreclosure (called the foreclosure start rate) increased from 1.7% in the early 2000s prior to the housing downturn to a peak of more than 5.4% in 2009. Since then, the foreclosure start rate has been trending down gradually. In 2014, it fell to 1.75%. The latest survey, covering the third quarter of 2015, shows that this rate is now back to the level last seen in the second quarter of 2005.

How Did The Foreclosure Crisis Affect Homeownership?

Households can choose either to own or rent. Historically, American families have aspired to homeownership – it is the bedrock of the American Dream. In fact, the homeownership rate has never fallen below 60% since 1960.

The loose lending standards and rapid home price appreciation during the last housing boom drove many more individuals and families into homeownership, pushing the homeownership rate to a peak of 69% in 2006. That means out of more than 110 million households that year, 76 million were homeowners. The rest (34 million households) rented. Mortgage financing is critical to the housing market, and the MBA reported 50 million first-lien home loans in 2006 – meaning that almost two out of three homeowners had an outstanding mortgage.

A number of factors drive homeownership rates. One is household formation, which brings new homeowners and renters into the housing market. The other is the flow between the renter group and the owner group. Most people rent before they own, so there is a natural flow from renters to owners that increases with age. One measure of this flow is first-time home buyers. According to the National Association of Realtors, 36% of the 6.5 million existing-home sales in 2006 were closed by first-time buyers. That means as many as 2.3 million renters became homeowners (although some of the 2.3 million first-time home buyers probably skipped the renting step, considering 2006 was at the height of the housing boom).

There is also a flow in the opposite direction of homeowners becoming renters. And this is where the spike in the foreclosure start rate becomes important because it is a proxy for the flow from homeowners to renters. In 2006, 1.9% of mortgages entered the foreclosure process. By this measure, over 900,000 homeowners left their homes, and although we do not know exactly how many, our assumption is that a significant number of them became renters. These two measures, first-time home buyers and foreclosure starts, tell us that back in 2006, the flow into homeownership was strong, while the flow out of homeownership was weak. It explains in part why the homeownership rate peaked that year.

How Did This Dynamic Change During The Foreclosure Crisis?

During the foreclosure crisis and after, the flow into homeownership weakened, while the flow out of homeownership picked up. At the height of the foreclosure crisis in 2009, the foreclosure start rate rose to historically high levels, and first-time home buyers retreated. In 2009, a total of 2.8 million homeowners left their homes due to foreclosure starts, while 2 million families became homeowners for the first time.

The flow out of homeownership would have been stronger if the federal government had not offered tax incentives to first-time home buyers. The First-Time Homebuyer Tax Credit boosted first-time home buyers to nearly 50% of existing-home sales in 2009 and 2010. As a result, the homeownership rate, which had been rising since the mid-1990s, started to fall during the crisis, and the decline has continued until recently. In the first three quarters of 2015, the homeownership rate has averaged below 64% – essentially wiping out all of the progress made during the 1990s and early 2000s. Between 2006 and 2015, more than 8 million American households became renters.

Foreclosure starts have been moving in the right direction since 2009 and are down from 5.4% in 2009 to an estimated 1.7% this year, meaning that the number of households moving from owning to renting each year is down from 2.8 million in 2009 to just 800,000 households in 2015. First-time home buyers are also beginning to increase, although more gradually, rising from 1.6 million in 2014 to an estimated 1.7 million in 2015.

Here in the private mortgage insurance industry, we, too, see the resurgence of first-time home buyers. We have helped many first-time home buyers get a mortgage with less than a 20% down payment. Our company saw its best quarter in the third quarter of 2015 in terms of new insurance written since the first quarter of 2008.

The Outlook

Housing and mortgage markets both follow cycles. In 2006, the mortgage lending criteria were too relaxed, the economy was booming, and home prices were at a peak. Everyone, including potential first-time home buyers, wanted to become a homeowner. These conditions created the foreclosure crisis and drove the homeownership rate to its lowest point in a generation.

After nine years, the market is moving to the other side of the cycle. The foreclosure crisis is winding down, and with it, fewer homeowners will be forced into renting. This is one of the reasons why I am optimistic about homeownership increasing over the next few years.

But, more importantly, people rent before they own. The 8 million-plus rental households created in the last 10 years, as well as other families who have delayed becoming homeowners, will eventually get back on the path to owning. And the mortgage industry – and private mortgage insurers in particular – will be here to help.

Tian Liu is chief economist for Genworth’s U.S. Mortgage Insurance division.


  1. This is a very thoughtful, thorough article except for lack of discussion of the following points:

    1. These days, most people don’t have the “choice” to be either renters or homeowners. Barriers to home ownership include flattening of incomes for all but the top 5% since the late 1970s while rent skyrockets in many parts of the country, and staggering student debt levels that greatly increase the difficulty of young people saving for a home down payment. Many people are also hampered from buying homes by ruined credit ratings following bankruptcy and foreclosure during the Great Recession.

    2. It is a sanguine assumption that the housing market will gradually revert to former high rates of home ownership. There are many indications that the current exceptionally long period of economic expansion has just about run its course. Other dark clouds on the economic horizon include destabilization of China’s shaky economy and the potential for a drastic widening of the wars in the Middle East. Debt overhang from excessive lending for oil gas exploration and extraction are also a heavy drag on the economy and cause of high unemployment in these sectors in spite of lower oil and gas prices for consumers.

    3. Even in a wealthy city like Seattle, where 20% of homeowners are still underwater, yet many people are are desperate to buy real estate in what is arguably another housing bubble that exhibits 20% annual increases in home valuation in some neighborhoods. Under these conditions, any serious economic downturn regardless of its cause(s) could plunge many homeowners back underwater, more deeply underwater, or into foreclosure.

    Because of these factors, it seems premature to think home ownership will return to historical levels any time soon.

    • I agree with all you say above but would like to add that the previously foreclosed on ex-homeowner or their spouse (in the case of divorce)(which Nationwide is around 19 Million foreclosure since 2007… X’s 2 people usually in a household) is likely never to invest his own time, money and energy into another property the same as he did the one that was taken. This is a moral issue that no one seems to want to face but denial helps no one.

      Further, Courts all over the Nation are slowly waking to the fact that the largest percentage of these foreclosures were instituted by institutions who had no legal rights to do so and quite a few of these foreclosures have been voided. We don’t hear the total amount of which because it is settled out of court and the homeowners are financially rewarded only if they’ll sign non-disclosure agreements.

      Knowing now that the Banks and Lenders foreclosed on millions of properties when they had no legal right to… and that the only legal remedy to an illegal foreclosure is to VOID that foreclosure, a side issue then becomes the millions of properties recorded in each County with illegal representation of ownership on them. In short, in the words of Essix (mispelled on purpose)County Mass. Recorder John O’Brien “our property records are a crime scene”. Ergo, the property you buy today, if it has ever had a mortgage against it since around the early 90’s… you can’t really tell who owns the thing!

      At the Sheriff auctions the Lenders/Banks have been getting around this issue by only giving “Limited Warranty Deeds” instead of the age old standard “General Warranty Deed”.

      Now, more than ever before, buying a property is in reality a very real case of “Buyer Beware”

      And now, more than ever before, we’re dealing with a generation that has instant access to this type of information.

      I personally only see the continual destruction of property values across the US until the court system wakes up completely and starts back filing new decisions on all those properties that were illegally obtained by the Banks sua sponte (which means without litigation from anyone).

      Until the rule of law is re-instituted across the land… home ownership is just a sucker bet.

      I would also like to mention to the author of the article… the financial crisis, according to every financial expert who has done a serious investigation of it and according to every govt. report published since around 2010 all agree was not caused by sub-prime loans. It was caused by the Banks/Lenders first inflating house prices illegally (felony)(google 2001 11,000 Appraisers deliver to FBI petition stating Banks to told them to over appraise or lose their work), Banks structuring trusts so that for the Banks to Profit the Trusts had to fail, Banks inventing a schema for over-payment to mortgage brokers (yield spread premium) and then Banks pushing (through media and advertising) Sub-Prime loans… and oh yea… Originators, Lender’s, Banks, trust Depositors and the Trust’s themselves doing NO Due Diligence on the loans they accepted.

      In short… the best and the brightest minds that Education America could create were hired by the Banks… and then used against the American people. These people were of the highest education quality and could not have acted in a way contradictory to the “C” suites (CEO, CFO, etc.) permission.

      Anything else is just part of the con. Or in other words… its just asto-turf.

  2. Very interesting stats, especially the % of renters vs. homeowners evolution. I might not be so bullish about the expected growth of homeownership rates in the upcoming years. I believe a generation of young adults saw very clearly for the first time in real estate history – that home values can decline. There might be pause in their buying for a while. However, if they do become homeowners, they should be more likely to buy what they can more easily afford, than stretching their budgets like their parent may have done. The pain of foreclosure sticks around awhile.


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