Thursday, August 9, 2012

For young adults, does the American Dream still mean homeownership?

by Blake Warenik, National Housing Conference and Center for Housing Policy

It's become an article of faith in post-recession America: young adults aren't buying homes. Media outlets aren't the only ones reporting falling homeownership among young people, either—a Fannie Mae survey from October noted that the homeownership rate for 25-34 year-olds has declined by nearly 10 percentage points since 1980. Bottoming home prices, climbing rents, record-low mortgage interest rates flirting with three percent and a glut of affordable foreclosed homes on the markets. If there were ever a time to buy, it would seem that time is now. Yet more and more young people rent, move in with roommates, delay leaving home or move back in with parents.

When I was your age...

Boomers have a variety of explanations—some sounder than others—for why their children aren't starting careers, building assets and buying homes. The data, however, show that it is not aimlessness, Facebook addiction or commitment-phobia holding young adults back. They simply face a different economic reality than their parents.
  • Low real wages. For all but the wealthiest Americans, median wages are falling compared to inflation. The highest-earning fifth of Americans are seeing their fortunes improve; everyone else is staying roughly the same even as housing, energy and other expenses grow. "Everyone else," of course, includes most young people. While real wages fall for all but higher-income Americans, housing costs for working households continue to grow by comparison.
  • High unemployment. Young people are contending with rates of unemployment higher even than the stifling national average. In 2011, 9.5 percent of 25-34 year-olds and a whopping 14.6 percent of 20-24 year-olds were unemployed. A tough employment market is also eroding job security for young workers.
  • Access to credit. In a February Ellie Mae survey, the average FICO credit score for approved home loans was 764, an impeccable score in most other credit environments. Furthermore, the average accepted borrower put down 22% and average debt-to-income ratios of 21/34. (Even FHA loans required an average 701 credit score.) Many young people have short or blemished credit histories, high student loan and credit card debt and are unable to save enough for a down payment, making mortgages all but impossible to obtain. (See Ethan Handelman's May blog post on some of the factors still making mortgages so hard to get.)
  • Growing student loan debt. Many young college graduates would love the opportunity to start out with nothing. The Project on Student Debt reported that the average college senior who graduated with student loans in 2010 owed more than $25,000, up five percent from 2009. This is to say nothing of the growing numbers of student loan borrowers who drop out without finishing a degree. The Washington Post reported in May that nearly 30 percent of students who took out loans dropped out without a degree, up from 23 percent in 2001.
Of course, other factors contribute to falling rates of homeownership among young adults, such as delaying marriage. All told, though, the economic data makes it hard to argue that young adults have as easy a road to homeownership as their parents did.

A dollar spent, a dollar kept

Perhaps the best question is not whether most young adults can become homeowners; in general, the answer is at least "not yet." The more important question is whether young adults should become homeowners. The Center's own Jeffrey Lubell provided one answer in an interview with U.S. News in October: "I think if I were a youth in that age group, I'd be focused more on maintaining my ability to move and be mobile."

Lubell alludes to the reality that homeownership is a long-term financial and geographical commitment, all the more so in current market conditions where it's so hard to sell a home. For many young people, the ability to move where the jobs are and enjoy the flexibility to absorb early-career hiccups is well worth paying rent. At least for a while.

For homeowners, at least part of a monthly mortgage payment potentially builds personal wealth, a benefit renters cannot enjoy. A dollar spent paying down a mortgage stays in part with the homeowner as equity, which eventually grows into real wealth, if you stay in your home long enough and property values increase enough.

The real American Dream is about more than just homeownership in the abstract; it is about building the wealth to achieve financial independence. For decades, most Americans saw the shape of building wealth: it had four walls and a roof and it couldn't come soon enough. The next generation of first-time homebuyers has good reason to be skeptical of starting something they're not sure they're ready for.

Shifting plans, same goals

Boomers typically see homeownership as a rite of passage, along with marriage, children and other big steps. For their generation, these major life decisions served to separate adults from young people. But many experts, including Lubell, would like to put homeownership in the broader context of challenges and shifts affecting this cohort.

"What you are seeing is a delay in all the kinds of decisions that require a long-term financially stable future," Lubell said in an interview with Bloomberg published yesterday. "That's home purchases, that's marriage and that's having kids."

However, recent reports would suggest that delaying these steps is not a "seismic shift" in the long-term goals of so-called "Echo Boomers"—also called Millennials or Generation Y, roughly defined as Americans born between 1979 and 2000—but rather a push back in the timeframe in which these steps can and should be accomplished.

One such report came from the National Association of Home Builders in a survey of 1,500 likely voters released in January. Key among the findings were the responses of non-homeowners to the question of whether they have a goal of eventually buying a home. Perhaps counterintuitively, young adults polled as far more likely to have a long-term goal of homeownership than did the general population of non-homeowners. While 68 percent of all respondents answered "yes," the rate for respondents under 35 was even higher, with a vast majority of 85 percent responding that they would eventually like to buy a home. (A 2011 study from the Urban Land Institute put the number even higher, at 90 percent.)

Additionally, voters under 35 are just as likely to agree that "owning a home is the best long-term investment they can make and is worth the risks of ups and downs in the housing market"—with 74 percent of both groups agreeing. Incredibly, 82 percent of women under 35 agreed with the statement. Clearly the goals of members of this generation include homeownership and do not represent a revolutionary shift away from their parents' goals.

Despite delayed household formation, tight credit markets, housing market vicissitudes and employment woes, such overwhelming demand is a force to be reckoned with. Young adult homeownership may be falling for now, but it will not become a thing of the past. It is very unlikely that such huge demand will go untapped by mortgage lenders and home builders. Echo Boomers are now the single largest age cohort, with more than 80 million individuals making up a full quarter of the American population. A 2009 study by RCLCO, a real estate consulting and research firm, found that Generation Y's earning power then stood at about $200 billion annually, far outpacing Gen X, whose earning power stood at about $125 billion. That demand will be met; it's just a question of how quickly and how well.

From an Echo Boomer's point of view

For the sake of full disclosure and good narrative, may the reader note that I am a member of the generation in question. I, like many of my peers, have no regrets about not "buckling down," buying a house, getting married and having children as soon as possible. (The failure to accomplish these tasks by the age of 28 can be added to the litany of disappointments my parents have, by now, ceased to update regularly.) My long-term plans include all of these things—at least, I'm pretty sure they do. But I am absolutely sure that, before this point in my life, I was not ready for them and, like many of my peers, this was primarily for economic reasons.

Some, but certainly not most, of my peers have decided they are ready for these challenges. Their struggles have only recently become attractive enough to overcome the obvious foolhardiness of taking them on for myself. Yes, I am starting to explore the idea of buying a home someday soon, but not too soon. The biggest practical impediment to my doing so is, as it is for many, the tight credit markets. I could get a stellar loan with great terms—if I had 20 percent to put down. In most markets, saving that much while renting is nearly impossible for a first-time buyer. In a market like Washington, D.C., where I live, high home prices and higher rents make saving 20 percent for a downpayment the very definition of impossible, unless a wealthy parent simply cuts you a check in the high five-figures as a gift.

The housing market will correct eventually. While we won't, and honestly shouldn't, see the rates of homeownership we saw in the mid-2000s—nearing three-quarters of all households—there are a lot of young people with incomes high enough and credit risks low enough to merit a home loan who just aren't being served. Until the credit markets unclench and the job markets improve, a whole cohort of folks my age and a little older are renting when they might otherwise be buying. This trend is driving rents higher and hurting our ability to save for a downpayment (or for anything else). We are living in times of self-fulfilling prophecy.

Whether policymakers build the framework the future demands—a plan to encourage safe, broad access to mortgage credit and the development of high-quality, affordable housing with access to jobs, transit and amenities—is up to the housing community to ensure. My NHC colleague Sarah Jawaid's next blog project is to provide policy answers to the quandaries I've laid out.

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