National homeownership rates haven’t been this low since the Dow Jones skyrocketed to a record high 3,793, junk-bond king Michael Milkin dined cafeteria-style with a prison-issued spork, and Nancy Kerrigan got whacked with a collapsible baton an inch above her right knee.
With just 64.5 percent of Americans signing on the dotted line last year, any gains in homeownership have been wiped out since 1993. While high rents, immigration and the aging of millennials may boost prospects for single-family demand, recovery in the housing market still hinges on several hard-to-read factors.
That’s according to Harvard University’s recently released State of the Nation’s Housing Report, which found that ownership rates peaked above 69 percent in 2004, several years into federally financed initiatives to create an “ownership society” that floated on lender innovations such as home-equity lines of credit and subprime and no-document mortgages. The market has yet to recover from the ensuing defaults, foreclosures and recession.
The report says the major metros with the largest decline in homeownership are all within the Sunbelt states, with the exception of Detroit.
According to the report, several other factors have contributed to the decline. Steady erosion in income is one key factor, making it difficult to save for a down payment as prices rise amid low supply. In addition, lenders burned by delinquent loans have been reluctant to cater to those with less-than-stellar credit. The Urban Institute estimates for 2001-13 show a 37 percent drop in mortgages among borrowers with FICO credit scores between 660 and 720. That compares with a 9 percent dip among borrowers with higher scores. The “magnitude of the declines—along with the pristine performance of recently originated loans—suggests that a significant portion reflects undue tightening of credit,” the report says.
The flip side of decreasing homeownership has been strong demand for rental units. The U.S. Census Bureau’s Housing Vacancy Survey finds that the pace of renter growth sped to an average of 900,000 annually between 2010 and 2014, putting this decade on track to be the strongest in history for renter growth. The explosion of multifamily development in major metros has been heavily attributed to an influx of job-seeking millennials, classified as those under the age of 30, who prefer renting to owning. But according to Harvard’s report, it’s not only millennials who are responsible for low homeownership levels; it’s also gen-Xers, or adults between the ages of 31 and 50.
These are the people who were in their prime home-buying or trade-up years when the market crashed.
Danielle Hale, director of statistics at the National Association of Realtors, said gen-Xers were slammed when home prices plummeted because they didn’t have time to rack up much equity in their homes. “They probably were the most likely to be adversely affected by the subsequent housing crash,” she said.
Homeownership rates among gen-Xers have dropped more than any other age group since the recession, and are between 4 and 5 percentage points lower than they were 20 years ago, according to the Harvard report.
That trend holds true in the Charlotte area as well. From 2009 to 2013, the number of homeowners in Charlotte between ages 35 and 54 fell 8.8 percent to 270,882 from 296,862, the National Association of Realtors said. The number of renters in that age bracket grew nearly 17 percent in the same period to more than 138,350.
The “drop in (gen-Xers) homeownership rates may well be a more critical factor in the ongoing weakness of the owner-occupied segment than the slow transition of the millennial generation (born 1985-2004) into homebuying,” the Harvard report said.
But Hale said rising rents could slow the declining homeownership rate among gen-Xers. In addition, sufficient time has passed for some that experienced a foreclosure to repair their credit. “We may not get back up to the peak homeownership rates that we saw before but I think the decline will stop in those older age groups,” she said.
Rents, according to the Harvard study, rose 3.2 percent last year as vacancies dipped to 7.6 percent, the lowest point in nearly 20 years. This occurred even as developers expanded the multifamily supply by 1.2 million units since 2010 and institutional investors flooded the markets with single-family rentals.
A lack of affordability, meanwhile, has made it difficult for millennials to take the plunge into homeownership. Wages have remained stagnant and many people are saddled with student debt, which rose some 50 percent from 2004 to an average of $30,500 in 2013. Still, millennials are impacting ownership rates thanks to their sheer numbers: At 86 million, the group already exceeds the baby-boomer generation at similar ages and will only increase as the pace of young-adult immigration picks up. In 2013, millennials accounted for the largest portion of all home purchases at 31 percent, and 76 percent of those were first-time purchases, according to NAR.
Over the next two decades, the Harvard report says, aging millennials will increase the population in the key 30-to-49 year-old age group by 17 percent.
Still, the market’s future hinges on continued employment growth and the lifting of household incomes, the report said. Much depends on looser mortgage-lending criteria. In the past year, Fannie Mae and Freddie Mac have sought to expand access to low-down-payment loans. The two government-sponsored entities lowered down-payment minimums on the loans they underwrite to 3 percent from 5 percent in an effort to aid low-income and first-time buyers.
And in December, the Federal Housing Financing Agency directed Fannie Mae and Freddie Mac to alter their policies on the sale of some 121,000 foreclosed properties in their portfolios. Under the new rules, Fannie Mae and Freddie Mac are allowing foreclosed homeowners to repurchase their former properties at fair market value, a policy that had already applied to other purchasers of foreclosed properties owned by Fannie Mae and Freddie Mac. Previously, foreclosed homeowners seeking to buy back their properties had to pay the two companies the entire amount owed on the mortgage.
Fannie Mae and Freddie Mac determine the fair market value and absorb the loss if the foreclosed mortgage-holder owes more on the mortgage than what the property is worth, the FHFA has said.
But, the Harvard report said, severe cuts in the federal HOME Investment Partnerships Program have hampered the ability of local governments to add affordable-housing units. The program is the largest federal block grant designed exclusively to create such housing for low-income households. And the affordability periods of more than 2 million assisted-housing units are set to expire within 10 years, which will require a renewal of federal assistance.
Also, there’s no end in sight to renter growth. The booming supply of new apartments is unlikely to saturate most metros, the report said, keeping rents high. Meanwhile, the shortage in affordable housing is boosting the number of cash-strapped, lower-income renters, many of whom skimp on food and healthcare to pay the landlord. The prospects for an “ownership society,” where people invest in their future by building equity and feel pride in their surroundings are inscrutable. According to the report, change will “require a firm recommitment of the nation to the goal of secure, decent, and affordable housing for all.”