After eight years of historically low interest rates, and with the unemployment rate having fallen to a point near what experts consider to be full employment, it would be logical for home ownership to be at an all-time high.
It’s not. In fact, it was recently at its lowest level in 50 years.
In 2016, there were nearly a million fewer homeowners in the U.S. then there were in 2006, even while the number of households rose by 7.5 million, according to “Homeownership in Crisis: Where are We Now?“ a new report from Rosen Consulting Group and the Fisher Center for Real Estate & Urban Economics.
If the housing market had returned to normal levels by 2016, according to the report, more than $300 billion would have been added to the national economy, which would have boosted growth in gross domestic product by 1.8%. In other words, instead of the anemic 2% growth we’ve experienced over the past eight years, growth could be exceeding the 3.3% average.
As recently as 2004, 69.2% of Americans owned homes. As of 2016, only 63.4% were homeowners. While there are recent signs of improvement, why has home ownership been so low?
The Housing Bubble
Many factors had an impact, as we noted when we wrote about the housing market a couple of years ago. Ironically, a major one was the government effort to increase home ownership.
The Community Reinvestment Act (CRA), which became law in 1977, was meant to encourage lenders to make more mortgage loans to low-income Americans. While the CRA initially helped many struggling Americans become homeowners, over time it morphed into an abandonment of lending standards.
Before the housing bubble burst in 2007, practically anyone with a pulse could walk into a bank and qualify for a no-doc mortgage (even a pulse may have been optional). In many cases, lenders provided mortgages with no money down – and were praised by regulators for doing so.
Under the CRA, lenders were graded for their willingness to lend to those who couldn’t afford to pay their mortgages. Then they could bundle their mortgages into tranches and sell them to Fannie Mae and Freddie Mac, passing the risk on to taxpayers. Fannie and Freddie executives were rewarded for all of the new business they brought in, regardless of how toxic the mortgages may have been.
When people who can’t afford a mortgage get one, it shouldn’t be surprising that at some point, they are subject to foreclosure.
“A variety of factors contributed to the prolonged decline in homeownership,” according to Homeownership in Crisis. “In particular, the drop in homeownership was undoubtedly related to the excessively lax underwriting standards during the mid-2000s, which were compounded by job losses during the Great Recession. To date, the impact of this decline proved far reaching, disrupting community stability with high levels of foreclosures and many households shifting from owning to renting. Moreover, longer-term damages are still being assessed and remain opaque.”
So the CRA and other factors made home ownership levels artificially high, but then they fell too far. They would be higher today if not for the foreclosures and job losses that followed.
More than 9.4 million homeowners lost their homes through foreclosure, short sales and deed-in-lieu transactions from 2007 through 2015, according to CoreLogic and the Joint Center for Housing Studies. The percentage of mortgages that are seriously delinquent is still high (2.96% as of the third quarter of 2016) but down from 3.57% a year earlier and from the 9.67% peak in the fourth quarter of 2009, according to the Mortgage Bankers Association.
Low Inventory. With the drop in home ownership and lower home prices resulting from the housing bubble, builders built fewer homes. While the home building market appears to be recovering, inventories are at historic lows, according to a Trulia report, which found that U.S. home inventory has tumbled to a new low after the eighth straight quarter of decline.
High Prices. When inventory is low and demand is high, prices increase. Trulia found that during the past year, the number of starter homes fell 8.7%, while availability of trade-up homes dropped 7.9%.
“The persistent and disproportional drop in starter and trade-up home inventory is pushing affordability further out of reach of homebuyers,” the report says. “Starter and trade-up homebuyers need to spend 2.9% and 1.6% more of their income than this time last year.”
Income Still Down. Nationally, median home prices appreciated by an average of 8.2% a year from 2012 through 2015. In comparison, nominal median household income increased by an average of just 2.5% per year during the same period.
Median household income increased by 5.2% to nearly $56,500 in 2015, adjusted for inflation, yet household income remains below the pre-recession high of more than $57,400, according to the U.S. Census Bureau.
The decline in income was especially steep for those of prime home-buying age. For those 25 to 34 years old and 35 to 44 years old, real income dropped by 18% and 9%, respectively, between 2000 and 2014. At the same time, student loan debt nationwide skyrocketed to $1.3 trillion, making housing all the more unaffordable, especially for young people.
As home prices started to recover, Homeownership in Crisis notes, “the combination of rising prices, tighter mortgage standards and weak income growth reduced affordability, particularly for low and moderate income households. Indeed, considering price appreciation and current mortgage rates, RCG (Rosen Consulting Group) estimates that as of year-end 2016, only 56% of households in major markets nationwide could afford to purchase the median-priced home.”
Demographics. Many millennials are either not at the income level where they can afford a home or they’re moving too often to make home ownership feasible, so they’re renting instead of buying.
“The decline in homeownership, particularly among young adults in the millennial generation, also reflects shifts in lifestyle choices,” according to Homeownership in Crisis. “The ages at which younger adults are first getting married and starting child-bearing have been on the rise for decades, representing long term shifts that are contributing to a delay in household formation and first-time buying.”
Meanwhile, baby boomers are selling their homes and downsizing, often living in condos or even apartments.
“During the past 10 years, the number of adults over 30 years old increased by five million, but the number of households in that age group rose by just 200,000,” Homeownership in Crisis says.
Increases in single-parent households and reductions in the number of immigrants are also a factor, according to the report.
Regulation. And, finally, the same regulators who made it too easy to purchase a home have compensated by now making it much more difficult. For example, in 2014, the Consumer Finance Protection Bureau (CFPB) established a 43% debt-to-income requirement.
“This is a difficult hurdle to clear, particularly for young households early in their careers and those with student debt,” according to Homeownership in Crisis. “As a result of the tightening in credit standards, a large share of previously eligible homeowners were cut out of the housing market as lenders sought to reduce risk.”
In addition to creating the CFPB, the Dodd-Frank Wall Street Reform and Consumer Protection Act included provisions that allow consumers who obtain a mortgage to later sue the lender on the grounds that they should not have qualified for a mortgage, because they can no longer afford it.
Because lenders can’t predict the future, they tightened up their lending standards to prevent being sued, so “instead of providing mortgages to borrowers who can’t afford them, lenders are not providing mortgages to those who can afford them,” according to Banker & Tradesman.
Dodd-Frank also was initially going to include a requirement of a 20% down payment, but that restriction was removed under pressure from community activists.
“So now,” according to Banker & Tradesman, “if you have a low income and poor credit score and can’t afford a home, government standards allow you to purchase one without a 20% down payment. If you have a higher income and a high credit score and want to purchase a home, a 20% down payment will be required.”
Another housing bubble may be in our future.