Size and Face of Homeownership, Changed and Changing

Part 4 of the recent edition of the Harvard Joint Center on Housing Studies' report on the State of the Nation's Housing looks at the declining rate of homeownership in the U.S. which has now fallen for the seventh straight year.  The rate edged down 0.3 percentage points in the 2012-13 time period to 65.1 percent while the number of homeowner households also fell for the seventh straight year, declining by 76,000.  However these were the smallest declines since 2008 so the Center suggests that the bottom may be in sight.

Homeownership has seen the greatest decline among the age groups which usually generate the most activity in both the first-time and move-up markets.  Between 2004 and 2013 homeownership among 25 to 34 year olds slipped by nearly 8 points and 9 points for the next older group, 35 to 44 year olds.  Older groups have not been immune.  The Current Population Survey found that rates for all age groups between 25 and 54 are at their lowest point in the 39 years records have been kept.  Homeownership among those over age 75 however is near the record high.

Rates for minority households have also dropped sharply with black households down 6 percentage points from previous peaks and Hispanic and Asian/other households down 4 points while white households are down only 3.  Some minority homeownership rates may now be stabilizing; Hispanic and Asian/other rates did not change in 2013, but the gap in black/white homeownership has expanded from 25.9 points in 2001 to 29.5 points and the Hispanic/white gap grew 1.7 points from 2007 to 2013 to 27.3 points. 

These persistent gaps will put downward pressure on the national homeownership rate, particularly among younger age groups where the minority share of the population is growing while homeownership is dropping.  Of the 5.5 point 1993-2013 drop in the rate for 35-44 year olds, about 4.0 points reflect the groups shifting racial/ethnic composition.  As minority populations grow, opportunities for homeownership must grow as well in order to maintain demand for owner-occupied housing.  

This is much truer in the first-time homebuyer market where minorities make up an even larger and growing share, an estimated 32 percent.  Fourteen percent of the market is Hispanic and 49 percent of those buyers are immigrants. The minority presence is also shifting the age distribution of first-time buyers.  The median for white buyers is 29 but for black buyers it is 37; other minorities fall somewhere in-between.

Despite these demographic changes the report points out that most characteristics of first-time homebuyers are what they have always been.  They are younger and more likely to be married than are renters, especially in the 25-34 year old group.  Higher incomes are also a major determinant of first-time homebuying.  The share of first-timers with annual incomes over $75,000 is 34 percent compared to 13 percent among renter households.

But with both marriage and high incomes less prevalent than a decade ago fewer first-time buyers fit the traditional profile. What growth there has been among younger households is, in fact, concentrated in those least likely to buy a home.  The center cites the example of younger married couples where homeownership dropped by more than 914,000 households in the ten years ending in 2013 while younger single-person and non-family households increased homeownership by 1 million.

The cost of homeownership, while still relatively affordable by historical standards, is rising; the price of an existing home increased by 10 percent and interest rates by 1 point in 2013 which pushed up the monthly payment on a median priced home by 23 percent.  While the median $780 monthly payment would still have been a record low in real terms at any time prior to 2010, payment-to-income ratios rose in every metro area analyzed as incomes stagnated or fell behind the growth in housing payments.  Based on the National Association of Realtors affordability cut-off of 25 percent of income for housing payments residents earning the median income could afford to buy a median priced home in all but six of the largest metros last year.

But median incomes far exceed the income for many renters who would like to transition to homeownership.  The Center looked at the income of renters in each market and used the new qualified mortgage rule of a 43 percent debt-to-income ratio to determine who might be able to buy.  They concluded that 36 percent of renters in the top 85 metros could qualify by income for a mortgage to buy a median-priced unit in their market.  This assumes 5 percent down, 8 percent non-housing debt, and average taxes and insurance rates.

Again however, real estate is local.  In the metro areas along the coasts buying a home would still be a big financial stretch for renters.  In the 12 most expensive markets the 36 percent becomes 30 percent and in Honolulu and San Francisco only around 13 percent could afford a median priced home.  In the 15 least expensive metros, many of which are just coming out of the foreclosure crisis, a home would be affordable for more than half of renters.

Most homebuyers need mortgages to purchase and this is an era of tight credit.  There was an increase in lending in 2011 and 2012 but not all groups benefitted equally.  The increases in lending were much smaller for minorities (especially blacks) and there were also disparities across income groups - a gain of 16 percent among high income borrowers but only 9 percent among the low income.

Denials for conventional purchase mortgages were much higher among minorities - 25 percent of Hispanics and 40 percent for blacks; two to three times higher than the denial of white applications and the disparities are increasing.  Meanwhile those earning less than 50 percent of an area median income were rejected at a rate 14 percentage points higher than those with moderate incomes and three times more frequently than high income applicants.  The lowest income were also the only group to see their rejection rates increase in 2012.

Tight underwriting criteria as regards credit scores has also played a role in the sluggish recovery of the purchase mortgage market.  Data from CoreLogic shows that lending to individuals with scores below 620 effectively ended after 2009 and access to credit by those with scores in the 620 to 659 range has become increasing constrained.  While lending to that group fell by 6 points, the share of purchase mortgages to those with scores above 740 rose 8 points.

These conditions appear to have moderated in the last year. Average GSE credit scores dipped slightly and the share of mortgages acquired by Fannie Mae to borrowers with sores below 700 increased 4.3 percentage points.  Average scores for FHA loans declined from nearly 700 to about 690 and the agency reports a downward shift in the distribution of loans to the 620-719 range.  Urban Institute research indicates that much of the changes to both FHA and GSE metrics merely reflect the migration of borrowers with moderate scores from FHA to the GSEs.  Thus while the credit box may have widened, the easing of credit is more modest that the drop in scores might suggest.

For borrowers who are able to access credit, loan costs have increased steadily.  Interest rates rose to 4.46 percent at the end of 2013 and both the Federal Housing Administration (FHA) and the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac raised their loan guarantee fees (g-fees).  The average g-fee jumped from 22 basis points in 2009 to 38 in 2012.  The GSEs also introduced loan level price adjustments (LLPAs), upfront fees paid by lenders based on borrower risk.  LLPAs can total as much as 3.25 percent for the riskiest loans and are passed through to borrowers in the form of higher rates.

In 2010 FHA restructured its fees, raising its annual premiums to 85 to 90 basis points depending on loan-to-value ratios while lowering its upfront premium by 100 basis points.  Since then the FHA has tweaked these fees upward, adding substantially to first time buyer costs.

The Center says the outlook for homeownership depends on a strengthening economy which will eventually lift household incomes.  Despite recent increases, house prices and interest rates still favor the homebuyer although many younger adults will continue to find themselves in income, family, and household circumstances that do not promote homeownership.  Further, minorities will account for an increasing share of first-time homebuyers and mortgage markets must figure out how to accommodate the limited financial resources of this new generation of households.