«Contesting the streets Volume 18, number 1 • 2016 U.S. Department of Housing and Urban Development | Office of Policy Development and Research ...»
Young adults are most sensitive to current market conditions because they are newly purchasing homes. In contrast to this young cohort, households with members over the age of 55 typically bought their homes a decade or two earlier, well before the housing bubble. In fact, the first to be impacted by the recent crisis were the new buyers at the height of the boom, households that purchased when prices were most inflated and that had very high debt ratios enabled by a lax regulatory regime that permitted very loose underwriting and even predatory lending. Casualties of the 4.4 million foreclosures from 2007 to 2013 were most concentrated among households that were unfortunate to be the right age to buy homes in this dangerous period. These householders were members of Generation X (born between 1965 and 1979), then aged 25 to 39. Also harmed were minority households and moderate-income families who used life savings to finally enter the ranks of homeowners late in middle age. These groups stretched to purchase homes at the worst possible time, and they suffered the most in the subsequent collapse. When the housing market began to falter and ultimately crashed, these new owners, who were the last to make it in, had very little equity and were the first to be ejected from homeownership. Having lost all their equity and with damaged credit, a significant portion of these cohorts may never rebuild their housing assets.
The Millennials (born between 1980 and 1999) following behind Generation X were much less damaged in the crisis, as noted by Kolko (2014), Emmons and Noeth (2014), and the Joint Center for Housing Studies of Harvard University (2015). That is largely because the Millennials were fortunate they were mostly too young to buy during the bubble and so they avoided equity and These annual homeownership rates are taken from the HVS that is taken in conjunction with the CPS. The historical time series by age group is in Table 12; http://www.census.gov/housing/hvs/data/histtabs.html.
credit losses in the foreclosure crisis. Viewing the carnage of homes purchased by older brothers and sisters and suffering their own crises of unemployment might have left the Millennials psychologically risk averse and reluctant to take on the mortgage obligations of homeownership. Available research (Drew and Herbert, 2013) finds that the Millennials’ desire for homeownership, as expressed in Fannie Mae surveys, remains strong and their knowledge expressed of the Generation X setbacks does not curb their desire to purchase a home. Nonetheless, their economic resources remain very limited in the post-recession period, and, at the same time, the mortgage underwriting standards are much stricter.4 It is too early to say that the Millennials have established a clear track record of home purchase, so any projection of their future is still circumspect.
The difference between old and young age groups sheds light on the future, but not in the way envisioned by Mankiw and Weil (1989), who assumed age differences would be preserved into the future. Their modeling embedded the assumption that the Baby Boomers (born between 1946 and
1964) were destined to descend to lower housing consumption after 1990, when they began to cross age 45, because that was implied by the current lower status of their elders (observed in 1970 and 1980 census age cross-sections). What is faulted as the “age cohort fallacy” (Pitkin and Myers,
1994) lay at the root of the Mankiw-Weil error and is not a safe guide to the future. Instead, we should rely on cohort legacy and momentum, assessing each generation by its own level and trajectory of homeownership and carefully considering shifts between earlier and later cohorts.5 Whereas middle-aged people in 1980 did not fall to the level exhibited by their elders when they reached that age in 2005, neither will today’s young people necessarily rise to their elders’ level by 2050.
The difference is that today’s senior generation has accumulated a legacy of advantage from buying their homes before the rapid gains in house values and before income growth began to stagnate.
These economic advantages or disadvantages are accrued by cohorts, and broad generations, and are not fixed in the age groups through which they travel over time.
Insights From a Cohort-Based Projection Our conclusions on the prospective future homeownership rate of the nation are rooted in the long-term, dynamic perspective just described. We draw on the cohort tradition of forecasting housing demand first developed in the late 1970s and 1980s by George Masnick and John Pitkin at the Joint Center for Housing Studies of Harvard University (Pitkin and Masnick, 1980).
Following this tradition and our own extensions of housing demography, we develop a method for long-range, cohort-based projection of homeownership that was first presented in a June 2014 conference hosted by the Lincoln Institute of Land Policy, the research sponsor (Myers and Lee, 2014).6 Our method, unlike other demographic-based forecasting models, takes explicit account One indication of stricter mortgage credit access is provided by the Mortgage Bankers Association’s Mortgage Credit Availability Index, which stood at 126 in September 2015 compared with 850 in 2006 at the height of the bubble and 400 in
The general advantages of the cohort-longitudinal approach adopted here are detailed in Myers (1999) and Pitkin and Myers (1994).
The Myers and Lee (2014) Lincoln study of changing housing and urban demography was later expanded and published in a volume of conference proceedings (Myers and Lee, 2016).
of the housing bubble, the Great Recession, and the prolonged recovery. This article benefits from 2 years of additional source data that reveal continued slow recovery in the housing market, leading us to modify our near-term view and discard previous, overly optimistic scenarios that required faster recovery. The projections also are extended to 2050 for current purposes, and we reestimate the model on the basis of Current Population Survey (CPS)/Annual Social and Economic Characteristics (ASEC) data,7 rather than census/American Community Survey (ACS) data, to accommodate the challenge of projecting homeownership decline from the 69-percent peak in the CPS/HVS data.
As noted previously, use of census/ACS data would exaggerate homeownership decline relative to the CPS/HVS peak. The CPS/ASEC data also allow us greater flexibility and historical depth in the selection of time periods for measuring cohort progress.
Our method, introduced in Myers and Lee (2014), is built on 5-year segments of cohort progress, measuring the increment in homeownership that is achieved when, for example, a cohort passes between ages 30 to 34 and 35 to 39, as observed in 1995 and 2000. The increments (or decrements) measure the net acquisition of homeownership by each cohort in the passage through time between periods spaced 5 years apart. These segments are observed both during the recessiondownturn and aftermath of 2007 to 2012 and in earlier segments back to 1985. We deliberately skip 2 years between our intervals of 1995 to 2000 and 2002 to 2007 because of a significant revision in the source data series in 2002, which could distort calculations that straddle old and new series. The 2002-to-2007 interval corresponds well to the housing bubble commencing after the 2001 recession and ending with the sharp downturn beginning in late 2007.8 The 5 years from 2007 to 2012 then serve as our period for market downturn and falling homeownership rates, with 2012 to 2017 marking the period of recovery, slow as it has been, and 2017 to 2022 representing the presumed new period of normalcy. Subsequent periods through 2052 are assumed to yield the same rate of cohort progress as 2017 to 2022.
Projections launch from observed values in 2012 that pertain to each cohort at its given age in that year. The strength of cohort projections is that the method builds on the accumulated status unique to each cohort at their age in the launch year, building on the established base. A weakness of cohort projections, however, is in regard to cohorts that have not yet entered young adulthood and, therefore, for whom no cohort observations exist on which to build. In the special case of these entry-level cohorts, cross-sectional comparison of 15- to 24-year-olds is made across survey The analysis in this article is based specifically on the ASEC file issued each March from the CPS (also the source for the HVS widely used by housing analysts). The Joint Center for Housing Studies of Harvard University (McCue, Masnick, and Herbert, 2015) found this source to be the most reliable for analysis with a long time series. The previous Lincoln model (Myers and Lee, 2014) relied on ACS data linked to decennial census data, creating some small discrepancies and posing difficulty in creating 5-year cohort intervals before 2000. A total population universe was estimated from the ASEC file based on the ratios of age-specific total population to civilian household resident population from the 2000 census. In addition, 3-year moving averages were used for headship and homeownership rates to smooth year-to-year fluctuations.
More specific matters of timing may be relevant. The ASEC data are collected in March of each year, but we use a 3-year moving average centered on the designated year. Data from March 2008 accordingly form a portion of the 2007 estimate.
Although this date is past the peak of the housing bubble, it precedes the onset of the recession and sharp homeownership declines. Moreover, tenure status recoded in March 2008 lags tenure choices made the previous year. In the second quarter of 2008, the national homeownership rate was still 68.1 percent (HVS).
Cityscape 135Myers and Lee
years from 1985 to the present, and adjustments are made for the changing demographic mix of the cohort occupying the age group in future years, as projected by the U.S. Census Bureau.
The large Millennial generation currently occupies this entry position, and the unusual degree of uncertainty about the housing and economic behaviors that can be expected of this group in the next several years makes analysis challenging.9 Added to the uncertainty for projection purposes is a growing discrepancy between data sources with regard to the homeownership status of the 15-to-24 and, to a lesser extent, the 25-to-29 age groups.10 We contrast three scenarios for estimating the future homeownership gains to be added to each cohort as it passes through successive age groups in future time periods.
Scenario A assumes that household formation and homeownership increase within cohorts at close to the same pace as the average of 1985 to 2007; that is, before the Great Recession. In the initial recovery period of 2012 to 2017, the model uses a weight of 25 percent prerecession cohort progress and 75 percent based on 2007 to 2012, which seems to track experience to date. From 2017 to 2022 (and beyond), rather than assume a full return to boom times, the model uses a weight of 75 percent prerecession and 25 percent based on the 2007-to-2012 period. This scenario is both bullish and moderately restrained.
Scenario B assumes a more modest return to the former pace of homeownership growth within cohorts, adopting the same assumption in the recovery period as Scenario A, but imposing a postmix of cohort progress that is equally weighted between recession and pre-2007 boom periods.
This scenario affords a distinctly more cautious or even pessimistic outlook for the long-term future.
Scenario C assumes no recovery from the recession period. The cohort gains in the 2007-to-2012 period are repeated every 5 years through 2052. The one adjustment is that negative net gains within cohorts are transformed to zero change (as they are in other scenarios). Rather than compound expected losses in each interval, the explanation given is that the negative progress in older ages is assumed to be an adjustment to the excessive expansion in the immediately preceding bubble period.
Such adjustments would not be warranted in the absence of a bubble in future forecast periods and so we have not projected these negatives. Nonetheless, the assumption of no recovery from the recession-era housing market and no increases in the rate of homeownership acquisition in future periods, and the results portrayed here, are both extremely pessimistic and very unrealistic.
The key insight into these alternative projections is supplied in exhibit 1. The pace of homeownership accumulation is much more rapid when cohorts pass through young ages and it steadily declines through middle age. (Ages older than 59 are not shown for reasons of space.) This pace has not been constant in all historic periods but quickens in every age group simultaneously under favorable conditions (such as better prices and financing terms, stronger investment expectations, The unexpectedly long recovery from the Great Recession has created the greatest uncertainty for the Millennial generation, with great debate over how much of its current behavior represents new preferences by young people versus temporary economic disruptions because of the recession (Myers and Lee, 2016).
The ACS and ASEC data reveal very different levels of homeownership and a growing divergence between 2010 and
2014. The percentage of homeowners in 2014 was 21.3 in ASEC but only 12.6 in ACS. Between 2010 and 2014, the ASEC homeownership rate declined by 0.4 and the ACS rate declined by 2.1 percentage points. A modeling decision was made to “borrow” the ACS trend and apply it to the ASEC data for the 15-to-24 age group.
20.0 16.0 12.0 8.0 4.0 0.0