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November 2014

Homeownership Rates Slump as Incomes Shrink

but desire to own remains strong

November 2014 - NWREporter

State of the Nation's HousingNWREporter - November 2014. Continuing an eight year trend, the national homeownership rate declined in 2013 and now stands at its lowest point since 1995. Nevertheless, research indicates the majority of young adults want to own a home some day.

While a broad range of demographic groups are affected by the decline, the latest State of the Nation's Housing report states it has been most severe among the cohort that encompasses those in their late 20s through their early 40s. In fact, the share of households ages 25-44 that owns a home is at its lowest point since the early '70s when annual data became available.

"This substantial decline in owning has been an important reason for the continued weakness in the housing market," suggested Chris Herbert, acting managing director and research director at the Joint Center for Housing Studies (JCHS) of Harvard University, publishers of the State of the Nation's Housing.

Researchers at JCHS say predicting when homeownership rates will stabilize - and possibly turn back up - starts with an understanding of what has been driving the downtown. Among culprits they cite are:

  • The dramatic fall in home values, which has made people wary of the financial risks associated with home buying.
  • The "incredible increase in the use of student loans." Between 2001 and 2010 the share of 25-to-34 year olds with student loans jumped from 26 to 39 percent. Since 2010 the total amount of student debt outstanding surged by about 40 percent. Despite some staggering numbers, researchers say the median loan payment to income ratio has not exceeded historical levels, prompting them to conclude that "while mounting student loan debt and increasing delinquency among these borrowers is not the main reason young Americans are deferring homeownership, it is certainly a factor."
  • More restrictive mortgage underwriting standards. The average credit score for new borrowers is now "well into the 700s," but roughly half of all consumers have credit scores under 700, making it hard for many to qualify for mortgages.

Herbert and his colleagues pinpoint household incomes as a key factor in explaining fluctuations in homeownership.

Median household income for 25-34 year olds and 35-44 year olds grew sharply from 1994 through 2000, a time when homeownership rates showed steady gains. As incomes softened during the mid-2000s, growth in homeownership slowed.

Since 2006, median household incomes have fallen substantially for those 25-44, with corresponding declines in the homeownership rate.

"While young households are facing a number of headwinds to buying a home, until we see resumption in income growth, we are unlikely to see an upturn in homeownership rates," the authors of the newest report wrote.

In earlier research on attitudes about homeownership, JCHS found large majorities of respondents (more than 85 percent) continue to feel that owning is a better financial choice than renting. Similarly, their analysis of Fannie Mae's National Housing Survey from mid-2010 through fall of 2011 found that almost 90 percent of respondents expect to own at some point in the future, with those most expecting to own being under the age of 45.

Of note, since 19 out of 20 of the younger adults expect to own a home at some point in the future, researchers believe their findings "certainly do not suggest that positive attitudes toward homeownership have diminished."

Herbert pointed out that even though Americans overall continue to view ownership favorably from a financial perspective, buying a home is not purely a financial decision.

"Non-financial factors are often overlooked in the discussion about homeownership's continued appeal," Herbert wrote, adding, "While buying a home is the most significant financial decision that many people make in their lifetime, the choice of whether to own and which house to buy is ultimately a choice about the type of housing that best meets a family's needs across a variety of dimensions: for daily living space, for a place to gather with family and friends, for the ability to change your home to suit your tastes, for the right to stay there as long as you like, for security and privacy, access to quality schools, and for a community where you can put down roots."

The Joint Center for Housing Studies is a collaborative unit affiliated with the Harvard Graduate School of Design and the Harvard Kennedy School. In 1988, the Center launched its signature report The State of the Nation's Housing. The widely referenced publication contains an annual assessment of housing markets, homeownership, and affordability challenges.