Stopping Declining Homeownership Requires More than Affordability

According to recent research, the availability of starter and “trade-up” homes is in the midst of a four-year decline, which, at least in most markets, shows little evidence of abating. […]

According to recent research, the availability of starter and “trade-up” homes is in the midst of a four-year decline, which, at least in most markets, shows little evidence of abating. (Trulia defines starter homes as those priced in the bottom third of the market and trade-up homes as the middle third.)

Homeownership rates continue to tumble from their 2005 perch of about 69 to less than 63 percent. The rates for African Americans and Latinos have settled in the mid-40 percent range.

This problem may get worse. A forthcoming paper by Arthur Acolin, Laurie Goodman, and Susan Wachter suggests that as California goes, so goes the nation. California, for many reasons—not the least of which is housing costs—has had in recent memory a homeownership rate considerably lower than that of the rest of the nation. According to the most recent data, California’s rate continues to decline. At 53.4 percent, the state now has the second-lowest rate of homeownership in the country (after New York). Acolin and his colleagues suggest that the factors that influence California’s low homeownership rate may drag the rest of the nation to the low 50s by 2050. One major reason, these authors argue, is the shortfall of production—300,000 fewer units than household formation in 2014.

A shortage of all homes impacts the likelihood of new homeowners. Fewer for-sale and rental homes, of course, raises prices, excluding families from the homeownership market. Meanwhile, the tight rental market eats up the cash that could otherwise be set aside for downpayments. And of course, not all markets are the same. The great variation among metropolitan areas is significant, and while prices in some markets have vaulted well past their previous highs, other have still not recovered. Dallas and Denver, for example, are up at least 30 percent above their July 2006 highs, yet much of Florida’s homeownership market remains stagnant.

Each of these market dynamics impacts the availability of homes for new buyers.

If prices are too high, the market is simply out of reach. Consider the Wells Fargo/National Association of Home Builders Housing Opportunity Index (HOI), which calculates what percentage of an area’s housing stock is affordable to a family with the region’s median income (based on “standard” underwriting of 10 percent down and 28 percent of income spent on housing). San Francisco, often the poster child for out-of-control housing markets, has really been out of reach since the crisis. In early 1994, nearly 22 percent of the its for-sale homes were affordable to the median-income family. Today, the same can be said of just 8.5 percent of homes for sale in the Bay Area.

The reverse also hurts potential buyers. In Miami, the HOI is now about 40 percent, up from a nadir of 10 percent in 2007. Much of this is because the home values in the region are about 30 percent below their peak, according to the Wall Street Journal’s analysis. Miami now has one of the lowest homeownership rates of any major city in the nation, despite the measure of affordability.

One reason for this trend—a trend we see in markets across the country—is that despite good affordability ratios, there just isn’t enough housing stock on the market. When owners are underwater due to the crash, they stay in their homes, which prevents starter homes from entering the market, reducing incentives for construction and generally keeping a local market soft. Across many markets, there is a dearth of both starter and trade-up homes, essentially freezing out new buyers.

The fall of the homeownership rate in the U.S. isn’t only due to our failure to create new homes. Also to blame are mortgage policies, both before and after the bubble burst. Far too many families faced crises from predatory loans, such as refinancing, and from the subsequent downturn in the economy. Yet when faced with such a market crisis, many lenders and guarantors failed to work in the best interest of the borrower or even comply with the law. A recent article about Philadelphia’s experience with HUD’s Distressed Asset Stabilization Program underscores how better policy and practice could have kept families in homes and shielded their neighbors from some of the fallout from the crisis.

We also know how to better prepare families for homeownership and lower the barriers to entry. A comprehensive study of NeighborWorks America’s housing counseling efforts supports this claim. Buyers who participated in counseling were about one-third less likely to become delinquent on their mortgages. This has huge implications for advocates and new entrants to the market. Couple this with what we already know about the potential of low-downpayment loans, such as Self Help’s Community Advantage Program, and we have an effective pathway to addressing the homeownership crisis. A number of major lenders are offering such low-downpayment loans by accessing Freddie Mac or Fannie Mae products, but the uptake has been slow. We need to rethink how we approach these opportunities.

Access to credit is still a huge challenge. The White House recently highlighted many of the artificial and antiquated ways that local jurisdictions limit affordability and affordable housing development. The Housing Development Toolkit is a solid starting point for all of us to approach this work. Parking requirements, lack of density, permitting delays and idle land all raise costs for future residents and potential developers while limiting new stock.

Since before the housing crisis, and certainly in the years since, we have known what tools work: good preparation, good underwriting, good servicing and good local laws. Loans should be designed to be sustainable. Local laws must support these tools.

(Photo credit: Todd Lappin, via flickr, CC BY-NC 2.0)

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