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Should Housing Policy Focus on Shelter or Ownership?

That’s the Question as First Time Buyers Hit 30-Year Low

Faith Schwartz    |    Housing Policy

Is it time for the federal government to widen its view of housing policy beyond its traditional emphasis on homeownership and perhaps embrace a broader concept of “shelter”?

Several recent datapoints could provide support for that argument. Earlier this month, for example, the National Association of Realtors® (NAR) reported that first-time homeownership has now fallen to 32 percent, a nearly 30-year low.1 “Despite an uptick in home sales over the past year, the share of first-time home buyers in the housing market dropped for the third consecutive year,” said Lawrence Yun, the group’s chief economist, who added that a normal share of first-timers in the mortgage universe is close to 40 percent.

There has been an increase in home sales over the past year, NAR pointed out, but first-timers haven’t been the ones driving the trend. “The increase in home sales over the past year has instead been driven by more repeat buyers with dual incomes,” NAR’s report said. Potential first-timers have been deterred by high rents preventing them from accumulating enough money for a downpayment, and high levels of student debt.

Similarly, the national homeownership rate has declined steadily for the past decade to a 48 year low. During 2015 the homeownership rate has landed at 63.6 percent-- down from 69.2 percent nine years ago.2

Meanwhile rental demand continues to climb and rental vacancy rates continue to remain low (though they bounced up a bit in the third quarter). A key factor is that renters, particularly Millennials, have remained reluctant—or been unable—to make the jump to homebuyers.

So the signals are a little mixed right now, but it seems clear that Millennials have yet to embrace homeownership as fully as previous cohorts, mostly due to financial considerations rather than philosophical ones.

Rents have been rising, cutting into Millennials’ ability to afford mortgages. The median asking price of vacant rentals was $802 in the third quarter, according to the Census Bureau. It was below $700 as recently as 2011. Adding in occupied rentals changing hands, and the rise in rates is clear. Wells Fargo Economics Group has found that the rent portion of the Consumer Price Index (CPI) has increased over the past five years, and is up 4 percent from a year ago.

The Wells report also holds out hope for Millennial renters to become homeowners. Although they are affected by high rental costs, their share of spending on health care is less than their older counterparts, as rising medical costs have pressured older households, it pointed out.

“The slow wage growth among young Millennials has also contributed to their higher rent pressure but the upswing in wages for them over the past year has helped offset that,” the report noted. “This should allow more Millennials to save for a down payment and qualify for a home loan.”

What do these trends portend for the government’s housing policy? Today, much of the government’s focus has been on homeownership: supporting the GSEs, FHA, mortgage tax deductions, etc. But the data suggests that these efforts have become less effective in helping many younger Americans as they begin to form households. Do we need to do more for the millions of renters? We need to have a much stronger conversation around multifamily affordable housing stock that is available in the same geographies as available jobs are.

My colleague Sam Khater, deputy chief economist, has a good take on this: “Ownership is often perceived as always superior but there are many reasons it may not be. Moreover, it implicitly exposes the fact that subsidies are not just tilted to ownership but are demand side subsidies not supply side where the issue is most dire.”

[1] 2015 Profile of Home Buyers and Sellers, National Association of Realtors
[2]The 2015 rate is an average of the first three quarters of 2015. U.S. Census Bureau, news release CB15-170, Table 4.