Diversity Not Destined to Dampen Homeownership

The final installment of a series of working papers produced by the University of Southern California (USC), in partnership with Fannie Mae, looks at the decade-spanning 10-point plunge in the homeownership rate of young Americans.  Homeownership has declined, starting even before the housing crisis, across nearly all age groups, but has been most notable for those aged 25 to 44.

Prior papers in the series have looked at the role two factors play in increasing young-adult homebuying; parental financial support, and receipt of a bachelor's degree.  A third paper found that the correlates of homeownership varied under different credit and economic conditions.

The study attempted to simulate how future changes in the characteristics of young adults might affect changes in their homeownership rate over the next 20 years, with particular emphasis on the effects of increases in racial and ethnic diversity and alternative scenarios for college education. The study also simulates a policy scenario in which racial disparities in education are eliminated and a second one in which income and wealth gaps are closed and looks at both under both the more "normal" conditions of housing supply and credit access between 1999 and 2001, and the more homeownership-constrained "post-crisis" conditions of 2009 to 2013.

Demographic changes have been substantial and are expected to continue from 2015 to 2035. Households are becoming more diverse, particularly among the young adults who are the subject of this study.  The non-Hispanic white (white) share of the total 25 to 44 age group is expected to decline from 57.2 percent in 2015 to 48.4 percent in 2035, and this decline will be matched by the white share of all householders in this age group, from 59.2 percent to 51.5 percent.

As racial and ethnic minorities have historically lagged whites in homeownership rates, it is assumed the growing diversity will bring down those rates overall.  In 2015 white homeownership was 58.4 percent against 35.3 percent for Hispanics and 28.1 percent among African-Americans.  Asian homeownership is also lower, at 45.1 percent. If the homeownership rate for each racial subgroup is held constant at the 2015 level, the growing diversity would produce an overall homeownership rate for the age group of 48.2 percent, down 0.6 from the current level.

Homeownership rates have always been higher among the older cohorts, largely because older people have had more time to become homeowners, but the gaps between generations have widened recently, and the current group of young adults are tracking 10 percent below the homeownership rates of those groups a decade ago.  Granted the 2005 rates were buoyed by easy credit and an adequate housing supply while those in 2015 were weighed down by opposite conditions so some degree of catch-up may happen.

The Millennials, are the largest generation in history with 4.39 million members per single year of age, compared to 4.11 million for Gen Xers and 3.96 million for Baby Boomers. Size interacts with the different homeownership rates to generate very large differences in the actual numbers of homeowners in the different generations. This makes the success of Millennials in attaining homeownership is of growing importance because the Baby Boomers, and the smaller generation that precedes them, have either reached or are nearing an age when they will become net home sellers instead of buyers. Assuming Boomers follow the same homeownership patterns of past generations, there will be large numbers of homes released to the market over the next two decades.  Will there be a commensurately large increase in the number of younger buyers to absorb those homes?

Earlier USC/Fannie Mae papers found education had a large positive association with homeownership and a stronger impact on African-American populations than on white ones.  (Sample sizes limited conclusions regarding other ethnic groups.) While educational attainment has been rising steadily among younger householders the gap between Hispanics and other groups has persisted and even widened in the last decade, even as the Hispanic share of the population has been growing.

Previous papers looked at the impact of the Great Recession on young adults homebuying and in this current one looked at the pre- and post-availability of credit.  Suffice it to say they conclude that, adjusting for house price differences, households with identical characteristics were more credit-constrained and were substantially less likely to purchase homes after the financial crisis compared with pre-crisis period and educational attainment became more important. "Given that homeownership rates fell substantially in the latter period, the positive effects of higher education are interpreted as having prevented even greater declines in homeownership attainment."

To determine the outlook for homeownership rates among young adults even as future credit availability and housing market conditions remain highly uncertain as well as that population's employment and income prospects, the study simulated alternative scenarios for key conditions that shape homeownership outcomes. Those simulations are focused on the effects of college educational attainment and project forward to 2035.

Possible changes are represented two ways; one continues the baseline trends in attainment for each race/ethnic group between 1995 and 2015.  The second assumes that policy intervention causes the attainment of blacks and Hispanics to converge with the projected attainment of whites.

There We estimate four alternative scenarios, each of which is tested under market contexts duplicating demand, supply, and credit access of 1999 to 2001 (normal period) and from 2009 to 2013 (post crisis).

1.      Education, income, and wealth are held at current levels within each race/ethnic group.

2.      Recent educations trends within each group are assumed to continue and income and wealth moves in historic pattern with that education.

3.      Education gaps between whites and other groups close entirely, while income/wealth changes follow as in Scenario 3.

4.      All education, income, and wealth gaps close.

As expected, Scenario 1 suggests that homeownership rates for young adults will fall over the next ten years as racial/ethnic diversity increases.  However, the decline is only 0.7 to 0.9 percentage point for the "normal" and "post-crisis" market contexts respectively.

Under Scenario 2, where education continues to trend at current rates and bring with it increases in wealth and income, the research found that diversity would not decrease homeownership.  Instead, for the normal and post-crisis contexts there were increases of 1.3 percent and 1.7 percent respectively.  Homeownership rates are predicted to increase slightly more using post-crisis estimates because they were more sensitive to changes in education levels during the 2009-2013 period than in the earlier, normal market period.

Scenario 3 presumes a policy of new investments in education. The resulting elevated attainment would bring minority's attainment to the level of white households, and bring income and wealth along in keeping with their historic relationship.  Under the two market contexts, homeownership rates would increase by 2.4 to 2.9 percentage points, approximately double the increase projected without changes in educational policy.  

Finally, Scenario 4, bringing all groups equal in education, wealth, and income, increased the homeownership rate of young households increases by 6.2 to 6.7 percentage points.  There is an intergenerational aspect to wealth building, so this scenario is unlikely to happen, still it is instructive to note how much homeownership rates might increase.  The researchers say the results from Scenario 4 may illustrate the upper bound of the changes in homeownership and that it is worth noting that, under Scenarios 2, 3, and 4, rising levels of education, income, and wealth are more important under the tighter market context. 

Scenario 1 did indicate that the homeownership rate of young adults would decline slightly over the next 20 years because of increasing diversity, but the researchers argue this is the wrong scenario to consider. Because education levels of racial and ethnic minorities have been rising steadily, and because income and wealth tend to increase with higher education levels, they expect homeownership to rise for these groups.  In summary, completely closing the educational gaps would result in a future increase in homeownership of roughly 2.5 percentage points and if all differences in education, income, and wealth are erased, the increase would be between 6.0 and 7.0 percentage points.

These simulations reinforce the series' earlier conclusions that showed the key role of a college education in achieving homeownership and that rising educational attainment among minorities outweighs the assumed negative effect of growing diversity.

Even the most optimistic scenario, number 4, would not completely reverse the more than 10-point decline in young-adult homeownership since the onset of the housing bust - and this is true even in a more "normal" housing context such as existed before the housing bubble.  The authors speculate that, were the post-crisis market conditions to return to the "normal" conditions, especially those dealing with credit access, it would raise homeownership levels more than if it were possible to raise educational, income, and wealth levels.

The authors of the study conclude that, whether intervention is in the form of closing interracial gaps or changing policies more directly related to housing, i.e. down payment assistance, increased supply, or expanding credit access, "The looming sell-off of millions of Baby Boomer homes provides ample motivation for investigating alternative policies to bolster the homeownership demand of today's young adults. The fates of the generations are tied together, and so far, the young are lagging behind."