Tag Archives: Great Recession

JCHS: Why We Should Care About the Great Recession’s Most Unfortunate Victim: Homeownership

Why We Should Care About the Great Recession’s Most Unfortunate Victim: Homeownership

 by Rob Couch
Guest Blogger
From time to time, Housing Perspectives features posts by guest bloggers. This post was written by Rob Couch, a member of the Banking and Financial Services, Real Estate and Governmental Affairs practice groups at the law firm Bradley Arant Boult Cummings in Birmingham, Alabama.  Rob also serves on the Housing Commission of the Bipartisan Policy Center in Washington, DC..  Previously, he served as General Counsel of the U.S. Department of Housing and Urban Development and as President of the Government National Mortgage Association (Ginnie Mae). His post reflects thoughts he shared at a Brown Bag Lecture delivered at the Harvard Kennedy School on November 14, 2013.In my lunchtime talk at the Harvard Kennedy School, sponsored by the Joint Center for Housing Studies, I discussed why recent government efforts enacted in the wake of the financial meltdown have caused increasingly stringent underwriting standards. These efforts have resulted in fewer homeowners, particularly first time purchasers, and the widening of the homeownership gap between certain minorities and white Americans. One of the questions from the audience during my talk came from a young man who challenged the continuing validity of the “Dream of Homeownership.”

After the bubble of 2007, some might think homeownership isn’t as worthy a goal as it used to be. In particular, younger Americans who have recently witnessed homeowners suffer financial loss or foreclosure due to declining home values or job loss may be especially wary.  A sizable percentage of young people are not yet in a stable career and want the flexibility that renting offers, and many young Americans who do want to own a home cannot meet underwriting criteria or afford a down payment given the combination of student loan debt and high unemployment.

Nonetheless, as Eric Belsky explains in his paper, The Dream Lives On: The Future of Homeownership in America, most young adults surveyed say they intend to buy a home in the future.   Furthermore, the results of several surveys cited in Belsky’s paper reveal that a majority of both owners and renters believe that owning makes more sense than renting. And for good reason; numerous studies have confirmed the economic and societal benefits of owning a home.

As a homeowner makes payments against his mortgage, and as the value of the property appreciates, the borrower’s equity in the home increases. If necessary, this equity can be accessed though the sale of the home or through a “cash out” refinance or a revolving line of credit. Homeowners also enjoy tax benefits as, in most cases, the annual interest paid on a mortgage and property taxes are fully deductible. Due to the long-term fixed-rate feature of most mortgages and the lifetime cap placed on adjustable-rate mortgages, homeowners are insulated from some of the inflationary pressures on the cost of housing faced by renters.

For the past thirty years, the wealth gap between the most affluent citizens and moderate wealth families in the United States has steadily widened. Households that are able to convert their greatest monthly living expense – rent—into a tax protected asset through amortizing long-term debt have a powerful tool for accumulating wealth. The family that owned its own home in 2010 had a median net worth of $174,500, compared to families who rented and had a net worth of $5,100. Belsky’s paper provides a more detailed analysis of the financial benefits of homeownership.

The benefits of homeownership extend beyond the financial ones, though. Children who grow up in owned homes have higher academic achievement scores in both reading and math and have a25% higher high school graduation rate than children whose parents rent. Children of homeowners are twice as likely to acquire some post-secondary education, and they are 116% more likely to graduate college. As adults, they earn more and are 59% more likely to own their own home, extending the benefits of homeownership on to the next generation.

Society as a whole also benefits from homeownership. Research has shown that homeowners are more likely to be satisfied with their neighborhoods, and thus more likely to give back to their communities. People who own their homes more often participate in civic activities and work to improve the local community, and they are 15% more likely to vote. Lastly, they tend to have greater longevity in a residence, leading to a more stable neighborhood.

Considering the benefits homeownership offers to society as a whole, young Americans aren’t the only demographic group affected by recent policies. Recent reports estimate that the African-American community, with wealth more concentrated in homeownership than any other asset, lost more than 50% of its net worth during the housing crisis. The deterioration in homeownership has been disproportionately severe on African-Americans, Hispanics, and younger people, leading to a widening of the gap in minority/white homeownership rates.

Recent government efforts to protect borrowers who fail to pay their loans, particularly settlements that have been extracted from the industry and increased servicing standards, have had the effect of compounding the losses from bad loans, thereby encouraging even more conservative lending and hurting a much larger group of potential borrowers by depriving them of the opportunity to achieve homeownership. The overarching policy goal should be to facilitate homeownership, not to shift the burden of non-performance from defaulters to aspiring borrowers. Policies need to change if we wish to continue making homeownership a reality for the broadest group of eligible borrowers in the United States.  My recent paper, The Great Recession’s Most Unfortunate Victim: Homeownership, discusses how we can address this important issue.

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JCHS: 2012 Population Estimates for Metropolitan Areas

by George Masnick
Fellow
The Census Bureau recently released 2012 population estimates for cities and towns to complement the 2012 population estimates for metropolitan areas released in March.  With these two sets o f data it is possible to examine the split between primary city and suburban population growth trends.  My favorite blogger about census data, Bill Frey of the Brookings Institution, quickly released a commentary on these new data with the lead sentences: “Big cities could be making a growth comeback after a rocky decade. Their growth rates are rising and, for the second year in a row, they are growing faster than their surrounding suburbs.” 
 
He goes on to note that: “Among the 51 metropolitan areas with more than one million residents, 24 saw their cities grow faster than their suburbs from 2011 to 2012. That was true of just 8 metro areas from 2000 to 2010. Metropolitan areas exhibiting the largest city growth advantages included Atlanta, Charlotte, Denver, and Washington, D.C.”
 
Frey based his analysis entirely on growth rates, but it is the growth numbers that are more relevant for understanding city versus suburban housing demand.  When population growth numbers are examined, only 12 metros had greater numerical growth in the cities versus in their suburbs. Only seven metros on Frey’s list of 24 cities with higher growth rates than their suburbs also had higher numerical growth (Austin, Columbus, Louisville, Nashville, New Orleans, New York and San Diego).  Cumulatively, overall suburban population growth in the nation’s 51 largest metro areas outstripped overall primary city growth for 2011-2012 by a ratio of almost 2:1 (Table 1).  Atlanta, Charlotte, Denver, and Washington, DC, the four metro areas Frey singled out for their large city growth advantage, had suburban growth numbers that exceeded city growth numbers in 2011-2012.  (Click table to enlarge.)
 masnick_table1
 
 
** Abbreviated name.  Primary cities are defined as the metropolitan area’s largest city and up to two additional cities with populations exceeding 100,000.
Nor are the places where cities have a numerical growth advantage necessarily trending to increase that advantage. Of the 12 metros where cities had more absolute growth in 2010-11, six didn’t sustain that advantage in 2011-12, and four saw a decline in the advantage.  Only two metros had city growth advantages that increased in 2011-2012 (data not shown).
The key to explaining the differences between growth rates and growth numbers, of course, is the fact that for most large metro areas the suburbs have more people than the cities. Of the nation’s 51 largest metro areas, only five had greater primary city populations in 2012.  Three are sprawling metros located in the South and West (Austin, San Antonio and Jacksonville), and the remaining two in this category butt up against other metros and geological barriers to suburban growth (San Jose and Virginia Beach).  The vast majority of suburbs contain more population than primary cities, with Atlanta having more than 11 times as many people living in the suburbs; Hartford, Orlando, Providence, and St. Louis around eight times as many, and Washington, DC over 6 times.  Percentage rates of growth calculated on such disparate population bases are really not comparable.
Primary city population growth has been reinforced in recent years by the aging of the echo boom into the young adult population, because young adults often move to cities to go to college or to work.  Large gains since 2005 in the 18-34 age group have helped turn city growth rates positive in many cases.  There were 3.8 million more 18-34 year olds in 2011 than there were in 2005.   Young adults who move to primary cities of large metros have made the 18-34 age group the largest of the three age groups plotted in Figure 1.  In the suburbs of these metros, the 55+ age group is the largest.
 masnick_figure1
Source: 2010 Decennial Census.  For a list of metro areas see Table 1.
 
There are three main demographic drivers of population change in the suburbs of large metropolitan areas.  First, and most important, is the aging of the suburban population. An aging population creates two pressures for population growth to slow.  The children of these households are themselves becoming adults, fleeing the nest and often heading for the city or to places outside of the 51 largest metro areas.  As these suburban households age, deaths also increase and births decrease.
The second driver of suburban population growth is the housing turnover of aging baby boomers.  Household dissolution from death or divorce could create opportunities to boost population growth from younger and growing households who replace them. Life cycle migration out of the suburbs of large metro areas by smaller baby boomer households as they enter the empty-nest stage or retire from the labor force does the same.  However, the Great Recession and its slow recovery has dampened housing turnover in recent years through a variety of mechanisms.  Among the most salient of these are high unemployment and slow wage growth; owners who would like to sell but are underwater with their mortgages; tight mortgage lending by banks; more people working past age 65; loss of home equity wealth that was counted on to partly fund retirement plans; and lower immigration levels reducing housing demand.
The third driver of population growth in the suburbs has historically been new housing construction that attracts in-migrants.  Again, new construction during the Great Recession and its slow recovery has been at historic lows, and suburban growth has slowed as a consequence.
Looking forward, the aging of the baby boom will continue to dampen population growth in the suburbs.  Most baby boomer households will simply age in place and decline in size. Over the next two decades, some housing that is freed up by household dissolutions by cohorts born before 1945 and by the oldest boomers, or by housing released by these cohorts who do retire to other places, will help mitigate population loss in the suburbs because those buying their houses are likely to be younger than the sellers and have larger household sizes.  But the greatest opportunities for housing turnover in the suburbs will not take place until baby boomer households dissolve in significant numbers beginning in 2030.
During the next decade, some of the factors that have depressed housing turnover in the suburbs in recent years should run their course.  New housing construction will be needed to accommodate adult population growth from aging echo boomers, and possibly the next wave of immigrants. This should largely take place outside of primary cities – where land is more readily available.
While I do concur with Frey’s point that large city population growth is a welcome positive for their health and vitality, I also agree with his suggestion that a rebounding housing market could lure echo boomers, immigrants, and retirees out of large cities in the future.  While suburban growth rates will never approach the levels experienced in their earlier years, the suburbs should continue to grow in population now and well into the future.

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