Martha S. Peyton, Head of Global Real Estate Strategy & Research
Many homeowners have learned the hard way that home values do not always keep on growing and that a home may not be the ideal long-term investment it was touted to be. Moreover, some industry observers contend that the evaporation of household wealth resulting from the housing crisis and Great Recession has so severely damaged household psyches that the current aversion to homeownership may last indefinitely.
Now that investment returns on housing have been tarnished, these observers expect homeownership rates to continue their steady decline. Since reaching a peak of 69% of U.S. households in 2004, the homeownership rate has continued on a downward track, reaching 66% in 2011. Is it plausible to expect the homeownership rate in the U.S. to fall much further?
Tight credit drives decline in homeownership
Homeownership rates reached their peak in 2004 when interest rates were trending downward, and supportive government programs and mortgage credit were readily available. But that is no longer the case. While interest rates remain historically low, mortgage credit conditions are much tougher. The Federal Reserve’s Senior Loan Officer Survey shows that residential mortgage lending standards—including requirements for minimum down payments, maximum loan-to-value ratios and minimum borrower credit scores, among other items—were tightened steadily from early 2007 through the first half of 2010. Since then, standards have eased only marginally. Lenders tightened their standards in the face of the deep and prolonged employment recession that eliminated roughly 8.7 million jobs in 2008 and 2009. Less than half of that number had been replaced as of February 2012—32 months after the official end of the recession.
Tighter standards combined with still-high unemployment are in part responsible for the lingering 4.4% foreclosure rate on home mortgages as reported by the Mortgage Bankers Association for the fourth quarter of 2011. Were all these foreclosed homeowners to revert to renting, the homeownership rate would fall to a low not seen in over 40 years. There is also the prospect that the coming generation of households might have less access to homeownership than their elders.
Gen Y unlikely to reverse the decline in homeownership
Will preferences for homeownership shrink among the 18- to 32-year-olds who make up Gen Y? Survey data suggest the answer is “no.” In the summer of 2010, the Urban Land Institute conducted an online survey of 1,241 Gen Yers to shed some light on this question. Slightly more than half—53%—of the 18- to 24-year-olds surveyed expect to be homeowners in 2015, along with 75% of 25- to 32-year-olds. Of these prospective homeowners, 82% anticipate owning single-family homes. These results do not point to a sea change in preferences for homeownership, even after witnessing the housing crisis.
But will Gen Y have the same access to homeownership as previous generations? Here, the conclusion also appears to be an unequivocal “no.” The members of Gen Y are struggling to establish career paths and carrying substantial student debt. Consequently, many Gen Yers are living with their parents well into adulthood. In 2011, there were 6.3 million households with children between the ages of 18 and 25 living at home with their parents—a 7% increase over 5.9 million such households in 2008, which greatly exceeds the 1% increase in the number of households overall during that period.
Unemployment and lower wages problematic
Unemployment data clearly shows the tough job market facing Gen Y. In February 2012, young adults aged 20 to 24 had a 13.8% unemployment rate, compared to the overall rate of 8.3%. Older Gen Yers are somewhat better off than their younger peers, with an 8.7% unemployment rate in February, but still worse off than the national average. Together, these 5 million unemployed young people comprise almost 40% of the total number of unemployed. These difficulties in finding and keeping jobs will in turn make it extremely difficult for members of Gen Y to save sufficient funds for a down payment on a house or condo.
Facing heavy debt burdens
On top of their high unemployment rates and compromised earnings potential, Gen Y is also burdened by heavy student debt loads. A recent Federal Reserve study shows that 40% of those under 30 years of age have student loan balances averaging $23,300. Of that number, 10% have balances averaging $54,000. With unemployment rates disproportionately high among young adults, many Gen Yers are falling behind on paying their student loans. These heavy student debt burdens and high student loan delinquency rates will further inhibit homeownership prospects for Gen Y.
A tough time achieving homeownership
There are signs of healing in the U.S. housing market, with existing home sales up compared to 2010 and new housing construction much improved from the market bottom. Nevertheless, long-term market prospects will depend on the housing preferences and financial circumstances of the upcoming Gen Yers. Unfortunately, it appears at this point that although many Gen Yers aspire to the American dream of owning a home, their economic circumstances may prevent this dream from coming true.
This commentary is prepared by TIAA-CREF Asset Management and represents the views of TIAA-CREF’s Global Real Estate Group as of March 2012. These views may change in response to changing economic and market conditions. Past performance is not indicative of future results. The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
Real estate investing risks include fluctuations in property values, higher expenses or lower income than expected, higher interest rates which affect leveraged investments, and potential environmental problems and liability.
TIAA-CREF Global Real Estate personnel provide investment advice and portfolio management services through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, and Teachers Insurance and Annuity Association. Teachers Advisors, Inc. is a registered investment adviser and wholly owned subsidiary of Teachers Insurance and Annuity Association.
Past performance does not guarantee future results.