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Opinion, commentary, and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
Lending

Do millions of Americans face impending housing peril?

Rising rents, lack of credit could displace potential borrowers

April 29, 2015

For those who thought the "improving" economy and a favorable interest-rate environment would provide a much-needed boost for homeownership, yesterday’s news from the U.S. Census Bureau was particularly disappointing.

According to Census, the national homeownership rate now stands at 63.7%, marking the sixth consecutive quarter in which the rate has declined. The rate has dropped by more than five percentage points since its high of 69.2% in 2004. That translates into some six million households transitioning from homeownership to rental housing.

To put matters in perspective, the last time the national homeownership rate was this low was during the first quarter of 1993 when Bill Clinton was beginning his first term as President, the World Wide Web was still in its infancy, and Jurassic Park – the top-grossing film that year – had yet to hit movie theaters.

Digging a little deeper, other numbers are similarly disappointing: The homeownership rate for African-American households now stands at 41.9%, a 20-year low, while the rate for Hispanics has fallen to 44.1%, well off its high of 50.1% in 2007. The homeownership rates for younger households, a traditional source of strength for the housing market, have also registered precipitous declines.   

What’s behind the plunge? 

It is clear we are still experiencing the aftershocks of the Great Recession. While the pace of home foreclosures has lessened, thousands of families continue to migrate from homeownership to the rental ranks.     

For first-time homebuyers, today’s tougher mortgage underwriting standards in the form of higher down payment and credit-score requirements have been well documented. Credit overlays are common, as lenders remain cautious about being held responsible for minor defects in underwriting despite the continuing efforts of the regulatory agencies to assuage these concerns.  

For younger households, student debt likely acts as a major obstacle to homeownership. According to the Consumer Financial Protection Bureau, this debt is approaching $1.2 trillion, an all-time high.  

Add to this mix the fact that median household incomes have hardly budged over the past decade, and it’s clear that fewer and fewer families have the resources for sustainable homeownership.   

An optimist would say we are now returning to the historically normal rate of homeownership and the current decline will soon level off. After all, between 1965 and 1995, the rate hovered between 63% and 65% with little variation outside these two boundaries. Today’s 63.7% rate falls well within this range. 

While such optimism may be warranted, it is hard to square with the broad demographic trends now unfolding in America. After staying on the housing sidelines during the Great Recession, millions of young Millennials are beginning to form households for the first time. Lacking the income and wealth for homeownership, most are choosing to rent, often in urban multifamily settings.

This new demand is putting upward pressure on rents in many cities and making renting less and less affordable. For those Millennials aspiring to homeownership, they find themselves caught in a vicious circle:  Rising rents are making it even more difficult to save for a mortgage down payment.

America is also becoming increasingly diverse. According to the Urban Institute, minorities are expected to account for 77% of new household growth this decade and a staggering 88% from 2020 to 2030.  The expansion of the Hispanic population will be a big part of this story.  

In the near term at least, renting will be the only housing option for many of these minority families, who typically have much lower incomes and wealth than their white counterparts. Highlighting the dramatic impact of these trends, the Urban Institute estimates that 62% of new housing demand will be rental during this decade, reversing the experience of past decades where most new housing demand was felt in the ownership market. 

In my view, the latest figures from the U.S. Census Bureau portend an even larger decline in the national homeownership rate. We are likely to arrive at a “new normal” where the rate falls well below 63%. The flip side of this lower homeownership rate will be an explosion in new rental demand that will send rents soaring even higher.

The result: Millions more families will find themselves stuck between a rental market they can no longer afford and a homeownership market for which they do not qualify. 

It’s time to wake up to this crisis and make responding to it a national priority.

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