As my regular readers know, I have often written about access to credit, the consequences of the federal Dodd-Frank Act, the impact of Federal Reserve policy on housing demand, how demographics affect local housing demand, and how these factors influence our lives in southern Beaufort County. I hope to provide some insight into the long-term prospects of what for many of us is our largest single asset — our homes.
For the past 27 years, the Joint Center for Housing Studies of Harvard University has published an annual assessment titled “The State of the Nation’s Housing.” The study is widely used by both public policymakers and private decision-makers in the housing industry. This year’s study is one of the most interesting in the publication’s history because it indicates that we are at a strategic inflection point as our nation examines — and re-examines — the role that homeownership plays in building wealth.
The center’s 2015 report spotlights the continued decline in the overall rate of homeownership, now at a 20-year low of 64.5 percent. This was the 10th consecutive year of decline. In the first quarter of 2015, homeownership continued its downward march to 63.7 percent, the lowest quarterly rate since 1993.
So what does the center say are the major causes for the reduction in the U.S. homeownership rate?
First, one “number behind the numbers” is the fact that those in Generation X, who are 35 to 44 years old, are down another 5.4 percent from the 1993 level, back to a level not seen (for ages 35-44) since the 1960s. This is the generation that will follow the baby boomers heading off into retirement, and many of them could be expected to one day buy the homes of baby boomers. It is a simple supply-and-demand question: If there are fewer buyers, there will be less demand, which may not bode well for some Beaufort County homeowners as they look to sell their homes in the future.
Second, despite the fact that home values are beginning to recover from the Great Recession and interest rates are at 70-year lows, affordability continues to be the greatest problem. One out of four owners spends more than 30 percent of his household income on housing; one in 10 spends more than 50 percent. If mortgage interest rates creep up in the near future, as most observers expect them to do, that problem will not abate unless household incomes also increase.
The third issue identified by the center’s study is the fact that new home construction continues to lag. Just 1 million housing units were started last year. This pace has not changed in the past several years, but it is the slowest rate in the past half-century. The sale of new single-family homes increased just 2 percent last year.
Negative equity also continues to plague many homeowners. Although the number of “underwater” owners (owners whose homes have lower market values than their mortgages) is down 25 percent from its 2011 peak, 5.4 million households still have negative equity. These homeowners are “stuck in place” and unable to move up or out, thus negatively impacting both demand and supply for housing.
Finally, access to credit remains a problem for many Americans. Despite recent efforts by Fannie Mae, Freddie Mac and the FHA, mortgage credit remains tight as lenders, who struggled with massive mortgage loan defaults during the Great Recession, retain more stringent underwriting standards, requiring credit scores in excess of 700, debt-to-income ratios below 43 percent and lower loan-to-value ratios. As a result, overall mortgage debt in the U.S. has actually declined by 13 percent from 2010 and now stands at $9.4 trillion.
But let me conclude with the good news, according to the study:
Household growth is expected to rise. The fourth-quarter 2014 pick-up brought annual household growth to 800,000, closer to the long-term trend of 1 million.
Hispanic and Asian households continue to move into the homeownership ranks at an ever-increasing pace. As this segment of the population grows, overall homeownership declines will reverse course.
Americans still want to own their own homes. Roughly 84 percent of the respondents to a Fannie Mae survey thought owning made more financial sense than renting, and 92 percent of renters between the ages of 19 and 39 expect to someday be homeowners.
Our local economy is driven by tourism and real estate, so it is important that we are all aware of national trends. The study is an excellent reference source.
Elihu Spencer is a banking expert with a long business history in global finance. His work has been centered on understanding credit cycles and their impact on local economies. The information contained in this article has been obtained from sources considered reliable but the accuracy cannot be guaranteed.