The Trump administration recently signed an executive order to scale back the massive Dodd-Frank Wall Street Refrom Act. Many advocates are concerned its repeal could lead to another recession. However, it’s important to understand that the executive order does not repeal the act.
Instead, it calls for an evaluation and review of the various agencies that oversee the law’s implementation. It is likely that the administration will seek to significantly curtail some aspects of the law, although a full-scale repeal remains improbable.
Under Dodd-Frank, banks and other institutions coveted debt capital, lending it only to those borrowers with the highest credit scores, which strengthened the mortgage market and resulted in the lowest default levels of defaults in history.
Combined with higher fees due to increased oversight for banks, this also meant a reduced availability of loans, and a corresponding drop in homeownership rates. As a result, current homeownership levels are near the lowest in history, with owner-occupied homes accounting for 63% of all single-family rental properties.
First-time homebuyers still make up a smaller share than traditional levels, with only 32% purchases in 2016 made by buyers new to the market. At the peak, first-time homebuyers accounted for 45% of purchases. The long-term average for first-time buyers is close to 40%.
Should Dodd-Frank be amended, the immediate loosening of loan standards will lead to a short-term increase in homeownership rates. However, as the Federal Reserve is expected to raise interest rates three times this year, it is unlikely that this will continue as a long-term trend.
Currently, 30-year fixed rate mortgages are projected to end the year in the high 4% range, nearly 75 basis points higher than current rates. Combined with existing student loan debt, this jump in mortgage rates will keep the homeownership rate low.
Millennials, who would traditionally begin graduating into homeownership, owe nearly $800 billion in student loans. Across all age groups, Americans have more than $1 trillion in student loan debt. Furthermore, builders are not building new homes in price ranges affordable for first-time buyers. In December 2016, the median sale price for new homes exceeded $300,000, while the median sale price for existing homes was $230,000. Owner-occupied homes in December of 2016 across both new and existing categories came in at $256,300, up 9.1% from the year prior. This lack of affordable inventory will continue to push homeownership levels down for first-time buyers.
In addition to lower levels of first-time homebuyers, homeownership in the U.S. is declining. In 2016, 63.5% of Americans owned their home, down 20 basis points from the year prior. Peak levels were reached in 2005 when 69.1% owned a home, with levels declining steadily ever since.
Combined, all these factors ensure that demand for single-family rentals will remain strong. Furthermore, the constrained supply of properties only serves to increase demand. The rental market has already weathered numerous political cycles, and remained prosperous for investors. Barring a major capital market crisis, it is unlikely that the rental real estate market will soften, allowing investors access to a solid investment asset that will weather any political storms 2017 may create.
While the review of Dodd-Frank will likely free up additional capital for lending purposes, a second housing crash due poor lending practices is unlikely for a variety of reasons, including the forecast for a strong housing market in 2017.
As mentioned earlier, despite declining homeownership levels, the number of households is growing, due to increased job growth. In 2017, the U.S. economy is expected to grow by 1.7%, representing an addition of more than 2.7 million new jobs. According the U.S. Census Bureau, more than 800,000 households were formed in 2016, with more than half of those classified as renter households.
Vacancy for single-family renter households is also on the decline; this year, vacancy is projected to drop 30 basis points to 6.4%. Rent growth for the same sector will slow slightly to 3.5%. The growth in renter households, combined with low construction levels, especially in the entry-level housing sector, will lead to further compacted supply in single-family properties ensuring operators will be able to lift rents and profitability.
If a majority of Dodd-Frank is gutted and lending institutions have the ability to suddenly participate in risky lending practices, the volume of bad loans they transact won’t have a significant impact on the housing market because of its ongoing stability in the current economic cycle. Additionally, repealing aspects of Dodd-Frank is unlikely to create the large-scale access to capital necessary to increase the homeownership rate nationally.
