Big Idea 2014: The Sky Is Slowly Falling On Homeownership
John Burns
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This post is part of a series in which LinkedIn Influencers pick one big idea that will shape 2014. See all the ideas here.
The real homeownership rate is more than 2% lower than reported in the press, and I don’t think the homeownership rate will recover much from here.
My “big idea” is that homeownership is not going to fully recover or even return to levels seen in 2000 before the great housing boom, for a variety of reasons:
- Continued Foreclosures: The dotted line above is the percentage of households who own their home AND are paying their mortgage. The usual gap is less than 1%, but today’s gap is about 2.3%, meaning that homeownership could fall 1.3% purely due to the completion of the foreclosures currently in process. While more than usual will be saved by government mandates, the homeownership pressure will still be downward – probably to the tune of 1.0%.
- Worsening Affordability: The odds are good that home price appreciation and rising mortgage rates are the most likely scenario going forward, which will make homeownership less attainable for many. They should have bought earlier this year.
- Rising Lower Class: More and more families are falling out of the middle class and into lower income classifications, which will make it more difficult for them to achieve homeownership. The rising upper class won’t improve homeownership because these individuals were always going to be homeowners.
- Lowest Homeownership in the 30-34 Cohort: Today’s 30-34 year olds have the lowest homeownership rate of any generation since the GI bill was created in 1944. Five years ago, this exact same group (aged 25-29 at the time) had the highest homeownership rate of any generation before them! This is the Subprime Generation, many of whom got into homeownership too early and got kicked out of homeownership during the Great Recession. Their homeownership rate will continue to grow as they marry and have kids, but they are starting behind the 8 ball and are unlikely to catch up to historical averages by age cohort.
- Urban Living:I do not believe the pundits who claim that suburbia is dead, but I am a believer that a slightly higher percentage of people than usual are going to choose to live in an urban area, where they are going to be forced to rent due to affordability. This spans a variety of growing groups that include:
- lower income families who will depend on social services and public transportation that are more prevalent in urban areas,
- young college graduates who want to mix a vibrant work life with a vibrant personal life, and
- wealthy empty nesters looking for lower maintenance housing, a reduced commute and vibrant nightlife.
- Late Bloomers: Our demographer, Chris Porter, has done a great job documenting how young adults are leaving the nest later, getting married later, having kids later, and thus really needing a home later. We are coining this generation the “late bloomers.” Since they will achieve homeownership later in life, they are likely to be earning more, which will support a higher than usual percentage of more expensive entry-level homes, and possibly fewer entry-level homes in the distant suburbs.
- Debt: Adults are under 40 are strapped with debt. This trend has been going on for years, but lenders ignored it and kept lending. Auto lenders still ignore it. However, the Dodd-Frank rules put an end to aggressive mortgage underwriting by capping total debt at 43% of a family’s income. For those with multiple car payments and student loans, this will prevent homeownership. This is a huge group, as shown in the chart below of student debt. Pay particular attention to the blue, which is the huge student debt of those who are already in their 30’s.
Source: FRBNY Consumer Credit Panel / Equifax
There are many positive trends as well, and unforeseen events such as government intervention could certainly change things, but I think the negatives outweigh the positives when it comes to homeownership. Only time will tell if I am right.
In summary, the majority of households will continue to own their home, but we are transitioning to a society where a greater percentage of people will rent. They will rent primarily because they don’t have the income and credit track record to qualify for homeownership.
Photo: Nils Z / shutterstock
Senior Product Manager at Apple
11 年Good insights and well written but I think that a few points are not touched on enough or are misrepresented. Maybe home ownership is no longer the dream for young people like it was for older generations? I personally never plan on buying a home and would prefer to raise a family in an urban area. I like public transportation. It's not something that should be grouped with social services. It's more environmental and one does not need to worry about gas, parking, insurance, etc. I don't want to be tied down geographically. I want mobility and liquidity. The idea of investing a huge portion of your income into an illiquid asset and burdening yourself with the stress and maintenance costs, and the risk of a crash, is not appealing.
CEO. MartinV Solar Engineer
11 年John Burns....there seems to be an echo in your 'Homeownership' post. Consumerism seems to 'plug' many an ear!
I show you how to maximize returns and reduce taxes by using creative methods such as installment sales for notes and dividing land into smaller parcels to increase yield. Have a need then let's talk.
11 年Makes a lot of sense. Great opportunity for those investers that want to offer owner financing as long as it conforms to Dodd-Frank. Because of DF there are a lot of self employed who are going to have a harder time getting a mortgage. DF is 800 plus pages and has a lot of surprises in it. Give the legislation to be in effect 6-9 months and then listen for the howling to start. Well done piece.
Manager and Horticulturist at Reynolds Landscape LLC
11 年I appreciate your realistic writing of this article. The sky is not falling, but we all need to watch these trends carefully. I think that people are back to buying homes as a place to live, not so much for an investment. Those in their 20's and 30's have a sense that they can always buy later when they are ready.
There are other reasons to rent rather than own which are not captured here. Some choose to rent because they don't want the liability of the debt. Some choose to rent to keep their options open. It's much easier to relocate to where the jobs are if you're a renter rather than an owner. And last but not least...the notion that wealth is measured by ownership of land is changing. The younger generation measures their wealth in different ways.