This is a dubious stat and I'd like to know exactly how he arrived at it considering 40% of the housing stock in this country is wholly owned with no mortgage:
Traditionally, fewer than 5 percent of homeowners pay off their mortgage," Legas said.
Maybe he means 5% of those taking out a mortgage today will eventually pay it down according to the terms. Considering the average time people hold a mortgage is around 7 years, then I can see where he arrives at that conclusion except for the sticky fact that you have to pay off the mortgage before they let you sell the house or refinance it!
When I first moved to my current house I was surrounded by paid off houses. Most of the housing stock in the area was over 30 years old owned by one owner, some much older than that and little turn over. In order to find a house for sale in this area you had to read the obits or find out who was getting a divorce. Now we have an explosion of building, with the average house three to four times the size of the older housing stock. If the area has a lower percentage of equity on average it is because a lot of these high priced behemoths frequently start out with maxed out loans. It has skewed the percentage for the whole area, while little has changed in the existing stock except I do see quite a few more additions and improvements than I did when interest rates were high so I have to assume they are financed with cashouts and HELOCs.
Which brings out another subject, the amount of money spent on improvements and additions is roughly 60% higher than that equity strip out figure cited in the same time frame. This is not to say anyone gets a dollar for dollar increase in sale price for money spent on additions and improvements. Needless to say, numerous individuals are eating their house in an effort to maintain their lifestyle, but on a macro level, far more money is flowing into housing than is coming out with equity in aggregate at an all time high even while the average percentage of equity on each house fell. The cost to the economy on the whole is that money spent on housing now and in the future, as these houses are paid down, could be spent somewhere else in the economy that has a much higher productive return. Housing is sucking funds away from other sectors that would have a better future return.
In defense of housing and the mortgage markets, 70% of all small businesses are started with borrowings that are secured on RE. No bank that ever gave me an equipment loan secured the loan strictly on the equipment (the collateral is worthless to them even though it is worth something to me), they give you the loan based on the fact that when you own a home you have a tie to the community (they know where to find you) and something significant that you don't want to lose, your credit rating. The poorest countries in the undeveloped world are those where clear title to RE is difficult to impossible to obtain and for which there is no way to convert RE to an asset on which borrowing can be secured.
In some countries 80% of the housing exists outside any legal framework and so do the small businesses these people use to support themselves. They don't lack energy or entrepreneurship, they lack the legal framework to secure property rights, something we take for granted in this country even though there was a time when our system was as primitive. The legal framework securing property rights are what allows western developed countries to turn RE holdings into capital. It also allows you to make reasonably secure transactions with strangers and makes RE more fungible.
A really good book on this subject is The Mystery of Capital:
amazon.com |
