Homeownership rates

When I posted about whether young people are "falling behind" their parents, almost all of the commenters agreed that a big part of the reason that even relatively affluent young adults *feel* poor is that homeownership seems so out of reach (even with the declining market).  This made a lot of intuitive sense to me.

But my dad then sent me a ton of Census data on homeownership rates by age, going back to 1982.* (Yes, I come by my geekery honestly.)  And his point is that households under age 35 were just about as likely to own homes in 2008 (41.7 percent) as in 1982 (41.2 percent).   Homeownership rates for this group hit a low of 37.3 percent in 1993-1994, and then rose to 43.1 percent in 2004, before falling off slightly.

So how is it possible that homeownership can feel so out of reach to almost everyone I know, even as the homeownership rate didn't decline at all?  Well, part of the answer is that I live in an expensive housing market, so the "everyone" I know is a biased sample.  (The readers of this blog are more diverse, but I think are still disproportionately living in large urban areas, compared to the country as a whole.)   Also, a whole lot of condos were built in the 1990s, so if by "homeownership" you mean "owning a single family detached home," the homeownership rate probably did decline somewhat.

But it's also true that a lot of people -- at all age groups -- bought homes only by extending themselves to their limits.  There was this credit bubble that you might have heard about... (Supposedly in 2005, half of all loans made in DC were interest-only.)  And there was this dreadful fear that if you didn't jump in right away, even if you couldn't really afford it, you'd be priced out forever.  So, the people who didn't buy houses felt like they were falling behind because they couldn't afford a home, and the people who did felt like they were falling behind because they couldn't afford anything else.

*The Census table is only online as a text file -- if you want my Dad's Excel spreadsheet, I'm happy to send it on.

Comments

[jen]

I do think you're on to something with the condo-vs-single family thing. Many people in my circle really chafe at the condo lifestyle, especially once they have kids. The noise issues are the most common thing I hear.

Also I think people really feel their risk levels; they seem very aware of them. There's a lot of fear out there. If I go part time while the baby is small, do I increase my chances of layoff? Because if I got laid off we'd lose the house. When you look at it that way, everyone who *does* have a house can be interpreted as simply being lucky (so far). And this does not translate into a feeling of widespread and healthy homeownership.

[trishka]

well, my thought is, let's see what the homeownership rate is after the current wave of foreclosures works its way through the country. that probably sounds callous, and i don't mean it to. i just think that the relatively high rate of homeownership right now is buouyed up by the credit bubble, and isn't stable.

[dave.s.]

Jeez, you want us to deal with actual facts? Data? I have opinions!

There is a truly great line from Warren Buffet: 'When the tide goes out, you can see who's been swimming naked' I think you and Jen and Trishka are dead on, that the uncertainty and stretched budgets for homebuyers have a lot of folks worried that they'll be exposed when the tide goes out. When I bought my first house in 1979 I dealt with the requirements of 20% down, income verification etc. And having met those requirements gave me a lot of confidence that, if the tide went out, I'd be, well, covered... I didn't feel all that exposed because I hadn't been allowed to get that exposed.

[Kai Jones]

I was looking to buy a house in 1982, but interest rates were impressively high (15% if I remember correctly). I think if ownership rates are similar to then in spite of the incredibly lower rates of the 1990s and early 2000s (5 to 6% not uncommon), there is a conclusion in there somewhere to the effect that fewer people can afford to buy, or it takes more income, or something.

[Amy P]

dave s.,

That's a favorite quote over at thehousingbubbleblog.com.

There is a percentage of income that you shouldn't go beyond for housing expenses. After moving to DC, we had two years spending about 50% of take-home on rent, and it was a disaster.

I've been running over the numbers a bit, and it occurs to me that under the old downpayment protocol, new homebuyers would actually be a lot more flush than when they were saving for a house. Example: we rent for $1,000 a month and as soon as our last debt is paid off around Christmas, I hope to start saving $900 a month towards a downpayment of $10,000, plus an emergency fund of about the same size. If we buy a house and our our monthly mortgage payments are $1,000 a month, there is no way that our taxes and maintenance and so forth will add up to $900. Hence, we will be at least several hundred dollars ahead once we buy. Meanwhile, under the no-money-down protocol, buyers are tempted to go for the same size mortgage as their rent, or maybe a bit higher, and then get whiplash from the unexpectedly high size of taxes, insurance, HOAs, and maintenance. Even if both the down-payment buyer and the no-money-down buyer are spending the exact same amount of money, the down-payment buyer is going to feel more flush.

[Amy P]

Kai,

I believe owner-finance became popular then, because of those rates. I've seen a number of owner-finance offers around town lately, too.

[jen]

Let me ask a question: do people believe anyone would have a house today if we were all required to put down 10%? Is there anyone out there who bought a house in the last 10 years who put down 10%? Certainly not me. And I think we're in good shape in terms of housing expense; we bought a fixer-upper in 1999 and currently pay less than 20% of our net income on housing.

I'm not sure the 10% rule is realistic in today's world, where people emerge from college with student loan payments that run over $1000 a month. Wouldn't that delay homeownership for so long that people would not have the house when they need it -- when they start having kids?

[Elizabeth]

Kai's point is interesting. I just fiddled with the numbers a bit, and came up with an estimate that the monthly cost of a $500,000 loan at 5% is about the same as the monthly cost of $200,000 loan at 15%. Does it make a difference to the well-being of the borrower which situation you're in? I don't know. I think it's a lot easier to wind up $100k in the hole today...

Jen, for what it's worth, we bought 11 years ago, and did put 10% down. We were able to do it because my husband had put every cent he could into the employee purchase program when he worked at Oracle. So, that's a combination of luck -- riding the tech boom and turning a chunk of it into real estate before the housing boom hit this area -- and good planning -- because a lot of his colleagues were buying fancy cars while he was driving an Escort (which I nicknamed Ethelred because it stalled out on me at every light).

[Amy P]

jen,

Requiring a downpayment will push down house prices, just as "creative financing" pushed them up. At least, that's the gospel according to thehousingbubbleblog.com. The housing bubble blog folks also think that downpayments will ultimately go much higher than 10%. Our rental house is going to be bulldozed in about two years, so we've got a sort of natural deadline. We've got to either have a downpayment by then or face the expense of renting and moving again. It's going to be a cliff-hanger, especially if the downpayments go to 20 or 30 percent. With regard to those student loans, I wonder whether that kind of pricing is sustainable, particularly in an economic downturn.

"Wouldn't that delay homeownership for so long that people would not have the house when they need it -- when they start having kids?" I don't think homeownership is a "need" even if you have kids. We lived in an apartment until our kids were 5 and 2 and now rent a house. My parents had three kids and were in their mid-thirties before they started building their first house. It would have been nice to buy a house and then have our kids and not have to move anymore (moving with little kids is the pits), but honestly, if I had chosen a house before having kids, I wouldn't have had a clue what to look for, and we'd probably have had to buy a different house anyway. On the other hand, I really think that retired people should own their homes outright, as a hedge against inflation.

[Amy P]

I think the current college prices and housing prices may be the upscale equivalent of those rent-to-own furniture places that rip off the unsophisticated, charging them twice or three times as much as the item is worth by spreading the low-low payments over a long enough time frame.

[Mrs. Ewer]

My husband and I put 22% down on our first home, last year, in northern Virginia, at ages 24 and 30. We didn't blow money on beer, movies, cable, restaurants, travel, designer clothes or useless degrees. We drove a 20-year old station wagon. We skipped grad school and worked hard at jobs in the for-profit sector. We paid down our student loans as quickly as possible and then saved for a house, buying with parenthood in mind. Good planning, hard work and frugality can overcome even big student loans and a tough housing market.

[Christine]

I wish 10% down was the norm where I live. 20% is the minimum down and alot of people were demanding 40% when I was house hunting in 2001. Where I live housing prices are not the only factor in home ownership. Local taxes are so high that they have to be seriously factored into the sustainability issue. The fact that they can go up anywhere from 4% to 11% each year is as serious an issue as interest rates.

[jen]

Here's my thing about buying a house before you have kids: if you don't do it then, it will be VERY difficult to accomplish after the kids are around. In my particular family one parent quit work to stay home with said children, and that was the end of all disposable income. In other families the expenses focus more around child care and a larger or safer car, but the fact remains that having kids is incredibly expensive. If you don't get the house thing under control before the kids arrive you're adding a multi-year delay to the process, if not missing the boat totally.

I personally disagree that hard work and frugality are enough. Mrs. Ewer's point about "useless degrees", while phrased a bit harshly IMHO, is probably the most salient point here. Among my circle of friends, you can clearly see who went to grad school and who did not. Those with graduate degrees still rent.

But however you slice it, I just see absolutely no way that homeownership rates can stay at their supposed current level if everyone's required to be put down 10%. No way. If anything it seems like we're heading towards a more Japanese system, where kids need to get significant help from their parents to buy their first house. I personally dislike the "inherited class status" aspect of that sort of system.

[Amy P]

"If anything it seems like we're heading towards a more Japanese system, where kids need to get significant help from their parents to buy their first house. I personally dislike the "inherited class status" aspect of that sort of system."

Give it two, three years--you'll be able to buy anything you want. I wouldn't worry much about housing affordability--affordability is coming down the pike whether we want it or not. I would be much more concerned about people in their 50s and early 60s who were planning on retiring using the equity from a house, and have no other means other than their expectations of Social Security.

[jen]

But Amy, if we can judge from past experience, it just has not been the case that real estate prices magically adjust as they should if the world were perfectly rational. Look at Southern California during the early 90s -- everyone's house was under water, but yet housing prices did not fall all that much. People simply refused to sell, waiting years sometimes for their house to get back above the level of their loan.

[dave.s.]

AmyP lives in Texas, where there is a lot of land around most of the cities/towns. House prices have not gone up all that much - and won't if this continues.

The SoCal experience is, maybe, not going to repeat: that housing boom had taken place while people had to meet requirements to get loans, they had some skin in the game, 10% down. We have a lot of wannabe flippers now who 'own' five houses and have no equity in any of them. I think it will be very local, as this winds down.

[Amy P]

jen,

There are starting to be a lot of articles documenting underwater and distressed homeowners' willingness to just walk away.

dave s.,

When we left DC last year, our target town in Montgomery county was holding steady, with the area with worse schools starting around $400k. A year later, that so-so area has fallen about $100k. (One afternoon last year I went to an open house there and talked to the owner and by the time I got home, he had put up an ad on Craigslist offering the house for $10k less. It was a good day's work for me.) The good school side of the neighborhood is holding steady, but it will follow eventually.

You're generally correct about Texas. In our town, $100k is standard for 50 and 60 year old homes in OK neighborhoods. Looking at the listings for the area, the cheapest home is $7,900. There are only a handful of houses under $20k, but there seems to be a large selection of houses from $20k to around $30k. Meanwhile, out in the newer (and much whiter) suburbs, there seems to be a very large supply of new and newish houses around $200k, a quantity that seems unjustified given the local wage levels. Also, property taxes run 2-3%, which tends to suppress prices. I've got my eye on a faculty neighborhood that would allow my husband to walk to work and also on the really spectacular historic district near downtown, where beautifully maintained 80-year-old mansions are currently priced around $300k (around $100 a square foot). In the historic district, prices are slowly going down $20k at a time, and I've seen one property a bit too close to downtown drop about $75k. I believe sale prices are private in Texas, so it's a bit hard to follow the trend, but I can extrapolate based on asking prices and which houses have been sitting for a year. Property taxes run 2-3%, which tends to suppress prices. Given that and heating and cooling and maintenance and private school tuition, I want to keep our mortgage down to about $1000 a month. We have two years at our disposal and I think we'll do really well.

[Amy P]

Speaking of underwater folk, here's most of a post from today at housingpanic.blogspot.com:

------------------------------------
What's the best economic decision for a typical upside-down screwed homedebtor?

Door #1: Stay in their depreciating debt-trap, paying their bloated $3000 a month mortgage, their $300 per month homeowners association fee, their $300 a month tax bill, and their $200 upkeep and repair charges

Door #2: Walk away and rent a similar (or exact same) house for $1000 per month. Total.

Door #3: Hope for a Housing Gambler Bailout so that they can keep doing what's behind Door #1

[Jennifer]

My parents lived in an apartment (in the US) until my brother and I were 4 and 2 - and at that point they bought their first home (they were 38 and 31 at the time). I do think we expect a bigger house, younger, than our parents had.

Here in Australia, it is much harder to buy without a 20% deposit (it can be done, but the interest rates are much higher), and I don't think our house prices went up quite to the same extreme level. Which means that they didn't have as far to fall when they did fall.

[jen]

Thanks for the clarifications, everyone. I had not put together the differences between this bubble and the SoCal situation.

Am I hearing correctly that, if you're not having credit problems of your own -- if perhaps you already have your house, and quite a bit of savings -- that now is a good time to buy a rental property? I think of this often, particularly as my parents are getting old and fragile. Some time in the next 5 years I would bet they'll need to move near to us (or to the nursing home, or both). When I saw the two-flat across the street go up for sale I thought, I wonder how this compares to my 401K, etc., in terms of investment?

[Amy P]

jen,

From what I read over at thehousingbubbleblog.com, drops in home prices are very slow and sticky and this is just the beginning. Also (and I've forgot the name of the chart that shows this), there are still a bunch of adjustable rate mortgages that won't reset until 2012 or so. I don't know about your area specifically, but I've heard that there were vast numbers of condos projects in Chicago during the boom, so the rental market may be glutted for quite some time. Given those facts, the most prudent move might be to wait to buy a two-flat until you actually need it, bearing in mind that the coming recession may impact your family income and job security (unless you're a bankruptcy lawyer or something along those lines). The HBB folk caution against buying before 2010 at the earliest, and I think they prefer 2012. The traditional rule for landlords is to take monthly rent and multiply by about 100 or 110 to get a ballpark figure for how much you should pay. Good luck, it sounds like it would be a very sensible and convenient arrangement.

[dave.s.]

Jen, we bought the house next door to us in '01 when the woman for whom it had been built as a young bride got Alzheimer's, because my wife's parents were beginning to strain at keeping their house in Illinois going. It's been wonderful, wonderful to have them here - has enabled them (he died last year, now just her) to stay quasi-independent much longer, our kids had hot and cold running grandpa and grandma from the beginning.
Would it be a decent investment for you to buy this place across your street? Very hard to know, the effects of the national slowdown are going to be very different in different areas. But if you can keep your parents out of Geezerville by doing it, you have an enormous benefit, and if you factor in the cost of even a couple of years of custodial care in a home compared to being able to have them over for dinner, get a home health aide in 2-3 hours/day, and keep them going, it's going to look a lot more favorable to buy it.

[Amy P]

Here's a piece by Steve Almond subtitled: After two decades of renting, I finally bought a house. What the hell was I thinking?

http://www.salon.com/mwt/feature/2008/05/23/home_improvement/index.html