Sometime in the past 86 years, the American Dream has evolved from James Truslow Adams’ patriotic summation about opportunity without constraints in "The Epic of America" to the simple notion of owning a home as a more tangible substitute. While not as eloquent as Adams’ prose, the idea of homeownership feels like a relevant symbol of what any American can achieve through hard work and perseverance. The current ability to achieve that symbol is in a perilous position due to a number of factors.
At its peak in the fourth quarter of 2004, the U.S. homeownership rate reached 69.2 percent. By the fourth quarter of 2016, the homeownership rate dropped to 63.7 percent, according to the U.S. Census Bureau. During that 12-year period, the U.S. added 13.8 million new households. If we do the math, there were 77.5 million homeowners at the end of 2004 and 80.1 million homeowners at the end of 2016 – even though the homeownership rate went down, there was still a net gain (2.6 million) in the total number of homeowners in the U.S. As it relates to the decline in the homeownership rate, the point of interest lies in the fact that the vast majority (80 percent) of new households are renters, not homeowners. So, what factors are contributing to such an aggressive decline in homeownership?
Tight credit markets. As demonstrated by historical mortgage data, the ability to obtain a mortgage has been difficult since the Great Recession and many housing market experts contend it is not likely to get easier any time soon. CoreLogic’s Housing Credit Index analyzes home loans according to six major indicators that assess the risk and quality of a mortgage. Loans originated in the third quarter of 2016 were among the highest quality loans originated since 2001. Two data points of interest from the report include:
- The average credit score on a new mortgage was 739. That's 39 points above the minimum for Tier 1 Credit.
- The lowest 1 percent of mortgages issued had credit scores in the 622 to 624 range, compared with 2001 when the score range was just 490 to 510.
This data suggests two key takeaways: 1) the credit quality of the borrowers has improved dramatically, and; 2) since the overall population has not experienced rapid improvement in their credit score, it means that many mortgage applicants are being denied. An increase in the homeownership rate is impossible if a large percentage of the population is not eligible for a mortgage.
Not enough money to go around. Simply put, most Americans do not have adequate savings to meet the requirements for a down payment on a home. The personal savings rate, which is the personal savings as a percentage of disposable personal income, currently sits at just 5.5 percent, down from the historical average of 8.3 percent, according to the Federal Reserve Bank. It’s easy to dismiss this as the average American just lacking financial discipline, but the actual problem relates to rapidly rising costs for essential spending items like health care, education and housing.
It’s no secret that health care in the U.S. is a complex subject with many different views, but what is undeniable to everyone has been the rapid ascent in the amount that the average American pays for health care – spiking 15.6 percent in the past five years, according to the Federal Reserve.
While child care and private K-12 schools have become more expensive over the last several years, it's colleges and universities that are now weighing down millions of households with debt. According to the Federal Reserve Bank, the total outstanding student debt in the nation rose to $1.31 trillion spread among 44 million Americans (that’s 18 percent of the population over 18 years old) with an average balance of nearly $30,000 per person.
As home prices and rents continue to escalate while wages remain relatively flat, most people are forced to use a higher percentage of their income for housing. Over the past five years, the median home price has increased 23.4 percent, per the U.S. Census Bureau, and the median rent has increased 13.6 percent, according to rent information provider RentRange – meanwhile, the median household income is estimated to have only grown by 3.6 percent. This disparity is pulling potential homeowners further away from the reality of homeownership and, when factoring in other major cost increases, there is simply just not enough to sock away in the piggy bank to make a meaningful difference for most Americans. Additionally, as the population of the U.S. continues to migrate to larger, more expensive metro areas, it’s creating even more of an issue since the majority of available housing may be priced out of reach for the majority of potential homebuyers.
Building for the wrong generation. Although residential building permit issuance is up considerably from the 2009 trough, it is still just 55 percent of the 2005 peak of 2.16 million new home permits, as reported by the U.S. Census Bureau.
The homes we are building aren’t generally priced proportionately to the incomes in their respective markets. If we take a look at new home sales across three major metro areas around the country, the issue becomes abundantly clear:
Median Household Income: $63,000
Median Home Affordability: $242,000
Percentage of New Homes Sold at/below Median Affordability: 25.8
Median Household Income: $72,000
Median Home Affordability: $373,000
Percentage of New Homes Sold at/below Median Affordability: 19.6
Market: San Francisco
Median Household Income: $93,000
Median Home Affordability: $481,000
Percentage of New Homes Sold at/below Median Affordability: 12.2
Sources: U.S. Census Bureau, Investability, Meyers Research.
By building homes that are generally unaffordable for the majority of potential homebuyers, homeownership is being organically suppressed. For a variety of reasons, the entry-level new home has essentially vanished from most major metro areas and, with it, the potential to realize the American Dream for millions of people.
While these trends are not encouraging for the next generation of potential homeowners, they indicate a paradigm shift in housing allocation going forward. Absent radical policy changes or the establishment of new, more flexible financing options, it appears clear that the homeownership rate in the nation may continue its downward spiral. This is good news for investors. As demand continues to outstrip supply, rents should continue to move upward while vacancies continue to decline. It seems like a different type of American Dream, that of a strong real estate investor market, appears to be in motion for the foreseeable future.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Investability Real Estate, Inc., Altisource or any other Altisource business entity. The foregoing content is not intended to constitute, and in fact does not constitute, financial, investment, tax or legal advice by the author, Investability, Altisource or any other business entity. All investment decisions carry inherent risk, and no Altisource entity shall have any liability with respect to any investment decision made based on the foregoing content.