«Contesting the streets Volume 18, number 1 • 2016 U.S. Department of Housing and Urban Development | Office of Policy Development and Research ...»
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Laurie S. Goodman Urban Institute Susan M. Wachter The Wharton School, University of Pennsylvania Between the 1940s and the 1960s, the U.S. homeownership rate increased by nearly 20 percentage points, from mid-40 to mid-60 percent. The self-amortizing 30-year, fixed-rate mortgage, introduced by the Federal Housing Administration/Veterans Administration (VA—now the U.S.
Department of Veterans Affairs) transformed the United States from a nation of renters to a nation of homeowners (Acolin and Wachter, 2015; Fetter, 2013).
For three decades, from the mid-1960s through the mid-1990s, the homeownership rate remained stable, at around 64 percent (U.S. Census Bureau, 2015a), until recent volatility. Although aggregate homeownership rates were remarkably steady, so were gaps across demographic groups.
The “majority-minority” gap is about 20 percentage points (U.S. Census Bureau, 2015a). The persistence of this gap has important consequences for the national homeownership rate in the future, because the United States is expected to become a majority-minority nation in the next 20 years.1 In this article, we look back to explain the decades of homeownership stability and ask whether, after housing markets complete their recovery from the excesses of the housing market expansion and collapse, we will return to the post-WWII normal in which nearly two out of three households own or whether homeownership is likely to continue its postrecession fall over the coming decades, with an end result that we are no longer a nation of homeowners.
To be specific, this article addresses this proposition: “By 2050 the U.S. homeownership rate… will have fallen at least 20 percentage points.” If this proposition is true, it will mean that within less than 40 years, the United States will transform once again, this time from a nation of homeowners to a nation of renters. Is this scenario possible? Is it likely? To address these questions, we undertake a forecasting exercise based on demographic predictions of the composition of U.S.
households. In two separate scenarios, we assume the persistence of rents and prices and the lending conditions of 1990 to 2000 and 2000 to 2010, and we then assume a scenario of rising rents Based on census projections (U.S. Census Bureau, 2015d).
and prices to capture the possible impacts on homeownership of more recent trends in housing costs that may persist going forward. While it is not our base case, a set of circumstances exists under which the homeownership rate could fall below 50 percent.
The first section of this article reviews the literature on recent historical trends in the homeownership rate in aggregate and by region and demographic category. The second section describes baseline scenarios for homeownership, starting with a framework put forth by Goodman, Pendall, and Zhu (2015) and developing that to forecast homeownership to 2050. The third section discusses how rising rent trends may affect the base cases. A final section concludes.
Historical Changes in Homeownership, by Region and Demographic Group After increasing from 44 to 62 percent between 1940 and 1960, the homeownership rate remained relatively stable through the 1990s (exhibit 1).2 It then increased from 64 to 69 percent between 1994 and 2004 and maintained that level until 2006 and fell back to 64 percent in 2009, declining to 63.4 percent in 2015.3 Both periods of stability and volatility are the outcomes of multiple and
Homeownership Rate, U.S. Decennial Census (1900–2010) Versus CPS/HVS (1965–Q2 2015) Homeownership rate (percent)
CPS = Current Population Survey. HVS = Housing Vacancy Survey. Q2 = second quarter.
Sources: U.S. Census Bureau (2015a, 2015b) These figures are based on data from the U.S. Census Bureau’s decennial census.
These figures are based on data from the Census Bureau’s Housing Vacancies and Homeownership Survey. The survey provides quarterly and annual estimates of the housing stock by tenure, region, income, and minority status. The series goes back to 1965 (1994 for the estimates by income, race, and ethnicity). Despite the large sample size for this survey, results differ from those obtained using the Census Bureau’s decennial census and American Community Survey (ACS) data shown in exhibit 1. For the projections, we use the decennial census and ACS data.
146 Point of Contention: Declining Homeownership A Renter or Homeowner Nation?
diverging demographic and economic forces. The literature on homeownership emphasizes both the role of demographic changes that occur over the long run and of market forces that can result in relatively fast adjustments (Fetter, 2013; Gabriel and Rosenthal, 2005, 2015; Goodman, Pendall, and Zhu, 2015; Green, 1996).
Fetter (2013) provided evidence of the role of changes in the mortgage market in the rise in homeownership rate that occurred in the post-WWII period. This increase took place in part through households’ accessing homeownership earlier in the lifecycle (exhibit 2) as shown by the shift from a linear to a concave relationship between age and the homeownership rate during that period.
An important contributor was the home loans benefits given to WWII and Korean War veterans, broadening the potential homeowner base. Structural changes in the mortgage market implemented in response to the Great Depression also contributed through the newly available fixed-rate, longterm mortgage with a downpayment of 20 percent. Fetter (2013) estimated that about one-half of the increase in homeownership in the post-WWII period can be directly attributed to changes in the mortgage market. The remainder of the increase is attributed to increasing income, favorable age structure, and earlier household formation, which itself may be due to policy shifts, along with declining transportation costs that expanded access to newly formed suburbs (Baum-Snow, 2007).
The stability of the homeownership rate between the mid-1960s and the mid-1990s has received limited attention. Nonetheless, the literature is clear on the factors that determine the underlying demand for housing and homeownership. The demand for housing services is determined by socioeconomic characteristics, such as income (determined in part by skills), age, and household size, with which households are “endowed.” After the level of demand for housing services is determined, the user cost of owning relative to renting (Goodman, 1988; Henderson and Ioannides, 1983) provides a Exhibit 2 Homeownership Rate by Age Group, U.S. Decennial Census and American Community Survey (1900–2014) Homeownership rate (percent)
Sources: 1900–2000 decennial censuses (excluding census data on homeownership for 1950, which are not available);
American Community Survey 2001 through 2014, extracted from Ruggles, Steven, J. Trent Alexander, Katie Genadek, Ronald Goeken, Matthew B. Schroeder, and Matthew Sobek. 2010. Integrated Public Use Microdata Series: Version 5.0 [Machinereadable database]. Minneapolis: University of Minnesota.
Cityscape 147Acolin, Goodman, and Wachter
framework to analyze tenure choice. Equilibrium in the housing market is reached when the marginal household is indifferent between owning and renting, requiring the cost of obtaining housing services through either tenure to be equal. In addition, for households, the decision to own or rent is affected by household characteristics and, importantly, expected mobility, because moving and transaction costs are higher for owners than for renters. Borrowing constraints also affect tenure outcomes if they delay or prevent access to homeownership (Linneman and Wachter, 1989).
Offsetting demographic and market forces explain the relative stability of the homeownership rate from the 1960s to 1980s. The increase from 62 to 65.5 percent during the 1970s was due in part to demographics (the entry of the Baby Boomers and the increase in the younger-than-35 age group from 23.5 to 31.2 percent of household heads). In addition, high inflation in this period was accompanied by lower real mortgage rates, with the result that homeownership rates increased somewhat across all age groups.4 This increase was followed in the 1980s by decreases in the aggregate and age-specific homeownership rates when mortgage interest rates increased and wage growth slowed among low- to moderate-income first-time homebuyers (Wachter, 1990).
Homeownership rates started increasing again in the late 1990s. Gabriel and Rosenthal (2005) analyzed the drivers of this increase with probit models of homeownership, taking into account the existence of borrowing constraints (through self-reported answers on ability to obtain credit).
Given the relative stability in borrowing constraints, they found that socioeconomic changes rather than housing market changes are the main reason for the growth in homeownership in the late 1990s, with changes in individual demographic and economic attributes predicting a 4.5-percentage-point increase in homeownership between 1989 and 2001, from 63.0 to 67.5 percent. By contrast, Gabriel and Rosenthal (2015) examined the change in homeownership rate in 2000, 2005 and 2009. They found that changes in headship rates and access to homeownership among young households drove the changes in homeownership during that period, contrary to their finding for the previous decade (Gabriel and Rosenthal, 2005). This finding is consistent with results in Barakova, Calem, and Wachter (2014), which show the impact of the loosening of credit constraints from 2004 to 2007. It is also consistent with findings of a positive relationship between the supply of nontraditional mortgages and homeownership during the housing boom, particularly in areas with a concentration of younger households (Acolin et al., 2015a). Recent work (Acolin et al., 2015b) estimates the impact of the tightening of credit in the aftermath of the housing bust.
Findings indicate that the tightening in mortgage credit have played a substantial role in the recent decline in homeownership.5 Regulated deposit rates effectively lowered mortgage interest rates through the 1970s while also causing periods of financial disintermediation (Green, 1996; Wachter, 1990).
Between 2007 and 2014, the United States added 5.9 million new renter households but lost 0.7 million owner households (U.S. Census Bureau, 2015a). The increase in the number of renter households is formed from new households and former homeowners who lost their houses in foreclosures. It is estimated that, between 2007 and 2014, in the aftermath of the housing bust, in addition to borrowers having difficulty in obtaining credit, 7.5 million borrowers’ mortgages (both owner-occupiers and investors) were liquidated (HOPE NOW, 2015), which contributed to the decline in homeownership through a forced transition to rentership for these borrowers who were owner-occupiers. Given the impact of going through a distressed sale or a foreclosure on their credit scores and on their savings, many of these borrowers likely will not be able to obtain credit to repurchase a home for a number of years (Brevoort and Cooper, 2013). As shown in Goodman, Pendall, and Zhu (2015), these forced transitions essentially moved rates more quickly to the lower levels that prevail as of today, with declines forecast to continue. In addition, household formation rates declined during the crisis, resulting in an estimated 2.4 million households not forming by 2013 (Kolko, 2013).
148 Point of Contention: Declining Homeownership A Renter or Homeowner Nation?
Despite these changes in the overall homeownership rate during the past two decades, two types of variations have remained relatively stable and have implications for the future of the U.S. homeownership rate: wide regional differences (exhibit 3) and large homeownership gaps between minority and majority households (exhibit 4), with homeownership rates for White households at 72 percent compared with 45 percent for Hispanic and 43 percent for Black households as of 2015.
Exhibit 3 Homeownership Rate, United States and by Region, 1965–Q2 2015 Homeownership rate (percent)
Exhibit 4 Homeownership Rate, by Race and Ethnicity, 1994–Q2 2015 Homeownership rate (percent)
The Midwest and South have persistently higher levels of homeownership than the Northeast and West, with the homeownership rate in the Midwest exceeding that of the West by more than 10 percentage points. Across states, homeownership rates range from lows of mid-50 percent in New York and California to highs of mid-70 percent in states of the Midwest and South.
These differences point to the role of housing market conditions and also to demographics in homeownership outcomes. If the U.S. housing market is to become more similar to the West rather than to the South in terms of housing costs and demographics, the homeownership rate would be expected to decrease further.6 The homeownership gap between White and minority households is another feature of the U.S.