Deflation Hurts Demand for Home Ownership
March 12, 2003
After decades of fighting inflation, the Federal Reserve is worried it has a new, tougher problem to fight -- deflation. Economist Gary Schilling says this could affect the housing market. Additionally, a further downturn in economic growth and attendant job losses would shrink housing demand.
The number of homeowners under the age of 25 increased in the mid-1990s and lending standards have been tightened -- thus, any significant income loss from layoffs will reduce demand for ownership, says Schilling. Recent figures show:
- The delinquency rate on Federal Housing Administration mortgage loans has risen from 8 percent to 12 percent in the last five years.
- The delinquency rate on Veterans Affairs loans is now 8 percent, compared with only 3 percent on conventional home mortgages.
The lower end of the market could become vulnerable, despite programs that require little or nothing in down payments to become a homeowner. As a result, potential buyers will remain renters and even some owners will become renters.
"The subprime market is one of the phenomena that's coming unglued. It wrecked manufactured housing. It's making trouble in credit cards," he said.
Source: Scott Burns, "Deflation may be lurking: Economist says there may not be much that the Fed can do," Dallas Morning News, March 11, 2003.
Browse more articles on Economic Issues