Tag Archives: economic crisis

Lowest percentage of first-time homebuyers since 1987

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First-time homebuyers are having a difficult time participating in the real estate market:

Just 33% of primary residences sold this year were purchased by first-time buyers, down from 38% last year to the lowest level since 1987, the National Association of Realtors reported Monday.

The NAR says that the first-time-buyer share of home sales has typically hovered around 40% since 1981.

The headwinds facing young buyers are well known: higher student debt, rising rents and a weaker job market have made it harder for would-be buyers to save for a down payment and qualify for a mortgage, particularly in a lending environment where banks are much less willing to overlook credit blemishes or spotty incomes…

The NAR survey also found that people are staying in their homes longer than in the past. The median age of tenure–that is, the amount of time a typical homeowner stays in one house–rose to 10 years in the most recent survey, from six years in 2007.

This isn’t just about not having enough cheaper homes at the lower end of the market; this is also about getting people into the patterns of buying homes and then moving to bigger homes as their families and incomes grow. While there is still evidence that many young Americans want to purchase homes, being able to actually participate is a crucial first step.

Fortysomethings have more influence on sluggish housing than millennials

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While millennials currently have lower homeownership rates than in the early 2000s, Derek Thompson suggests fortysomethings are the bigger issue for the sluggish housing market:

The economy has a Gen-X problem. It’s a small cohort with a much-smaller-than-usual homeownership rate. And people wonder why the housing market is sluggish.

Update: Read Trulia’s Jed Kolko on why the middle-aged are the true lost generation of homeowners. In short: They bore the brunt of the foreclosure crisis:

In 2005, the year when the true homeownership rate peaked for most age groups, 25-to-29 year-olds were the age group for which homeownership was highest relative to the demographic baseline, followed by 30-to-34 year-olds. These were first-time home-buyers getting easy credit for overpriced homes; then, they bore the brunt of the foreclosure crisis, losing their homes and wrecking their credit history…

The millennial generation was still in their early 20s or younger in the mid-2000s–too young to have bought during the bubble and then to have suffered a foreclosure: Only the oldest among the 18-to-34 year-old group in 2013 would have been of home-buying age during the bubble.

Interesting data. Generation X had bought into the American Dream and the importance it places on owning a home but they were badly burned by the housing collapse. They were in the wrong place at the wrong time: eager to buy homes, able enough to overpay based on decent jobs, and particularly indebted when their housing values tanked.

There is another issue at play here: while millennials may not have been very involved in the economic crisis, they are the generation that could continue the homeownership ideal among Americans. If they choose otherwise – and perhaps they are watching those older than them – then there may not be much of an upward tick compared to Generation X.

Side note: a funny quote from earlier in the article.

It is a truth universally acknowledged that a journalist in possession of a negative statistic must find a way to blame Millennials for it.

Generational blame is alive and well even in our advanced rational and enlightened age. Talking about generations is an easy shorthand for analyzing social trends. Whether such talk holds water compared to other age breakdowns or other data may be another matter…

Argument: homeownership is not worth risky financial situations

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Megan McArdle argues that policies and leaders promoting homeownership for those with less resources are doing a disservice:

Because, I think, most of us still haven’t managed to shed the idea that buying a house is a good way to get some unearned bonus wealth. Too many people managed to do just that for too many years. We think of 2008 as an aberration, rather than reversion to the mean. And that’s a costly mental error.

The long, steep increase in American home prices from 1946 to 2008 was driven by a whole lot of trends that are hard to repeat: the invention of the 30-year, fixed-rate, self-amortizing mortgage, which allowed people to pay more for a house by lowering the monthly payments. The securitization revolution, which lowered mortgage risk by bundling the loans into large, diversified portfolios, thereby lowering rates. Rising inflation, which pushed up the price of houses. Falling inflation, which lowered interest rates and monthly payments still further and allowed people to pay even more for those houses. The credit-scoring revolution, which allowed banks to offer loans to more people, increasing demand for the existing housing stock. And in dense coastal areas, you also had the rise of NIMBY zoning laws, which made housing scarcer and therefore more expensive…

Which is not to say I am against buying homes. I am very much for buying a home — so much so that I went and bought one myself a few years ago. But buying a house is a good idea only if you meet the following conditions:

  1. You can afford a sizable down payment to cushion you from the effects of local economic downturns or you have a super-stable job, such as working for the government or your father-in-law, that makes you unlikely to ever miss any payments.
  2. You can afford the maintenance as well as the payments, insurance and property taxes.
  3. You have good disability and/or mortgage insurance to make sure that you do not miss any payments even if you break your back and can’t do your job anymore.
  4. You are pretty sure you do not want to leave your area or move to a larger, more expensive home anytime in the next five years.
  5. Your payment is a reasonable percentage of your take-home pay (I shoot for under 25 percent; anything over 35 percent is far too risky).
  6. You have a sizable emergency fund to deal with contingencies.
  7. You can afford other forms of savings, rather than counting on your house as a piggy bank for future needs. In general, if declining home prices would send you into a hysterical panic about your financial situation, you are buying too much house.

If you do not meet these conditions, then buying a house is gambling — not just on rising home prices, but also on the continued soundness of your roof, boiler and plumbing. If you wouldn’t borrow the money to go to Vegas, then don’t borrow it for a house, either.

It sounds like McArdle is concerned with two issues:

1. People have not learned the lesson of the housing crash: housing prices do not inevitably go up. They may go up – and generally have over time – but this is not a guarantee. If you don’t accept this premise, then you will treat real estate differently.

2. The general American desire for owning a home is not enough compared to economic realities. Americans generally like owning homes: they are part of the American Dream in symbolizing status, we assume homeowners are less transient and care more about their communities, and they allow for individual freedom. But, if people can’t properly afford them, McArdle says it is not worth stretching financial bounds to make it possible. Instead, we need sound principles like saving up your money over time to make a good down payment on a house.

Both are valid concerns. Generally, Americans like seeing homes as an investment as well as an essential part of a successful life. Telling them otherwise may not be popular for politicians…

American manufacturing jobs “stepped off a cliff” in the 2000s

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The loss of manufacturing jobs was particularly significant in the 2000s:

Manufacturing job loss has been a fact of American life since the 1970s, but in the 2000s manufacturing stepped off a cliff, shedding 5.8 million jobs, or about one of every three—most of them before the Great Recession began at the end of 2007. Illinois alone lost 320,900 manufacturing jobs, or 36.6 percent of its total, in the 2000s. Good jobs for those without a college diploma disappeared in the 2000s and generally did not come back. In December of 2000, the ratio of unemployed job seekers to job openings had been 1.1 to 1. At the end of the decade, it spiked to 6.1 to 1. The 2000s was the first recorded decade of zero job growth…

There are still more than 12 million manufacturing jobs in the U.S. and output is as high as ever, and just behind China’s. In an overlooked story, the United States added manufacturing jobs for 12 months in a row in the past year. The gains are modest, but such a winning streak has only happened four times in the last 30 years. Some business elites have shifted their thinking. General Electric’s CEO Jeffrey Immelt wrote in 2012, “Outsourcing that is based only on labor costs is yesterday’s model.”

As the article suggests, the 1970s get a lot of attention for a downward slide in manufacturing jobs but this pattern has held up in other recent decades – until this past year or so. The initial downward slide was certainly important; it led to the work of sociologists like William Julius Wilson who noticed the negative effects on poor urban neighborhoods. But, the loss of manufacturing jobs also has long-term consequences that may still be hard to imagine.

Better economy = more teardowns

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One side effect of an economic recovery may just be more teardowns:

For some historic preservationists on the North Shore, the economic downturn in 2008 had a silver lining, bringing a lull in tear-downs and new-home construction that gave scores of vintage properties a reprieve from the wrecking ball.

But six years later, officials in north suburban Winnetka tasked with preserving historic homes say that reprieve has clearly ended. They report that demolition permits have nearly doubled, with 36 issued in 2013, up from 19 in 2009…

In addition, [Highland Park] nearly tripled the number of demolition permits issued in recent years — 27 in 2013, up from 10 in 2009, officials said.

Granted, these are pretty wealthy and desirable suburbs, places that still have teardowns when the overall economy is bad. But, this article does highlight the dilemma for preservationists: more money in the real estate market means more people can purchase teardowns in desirable neighborhoods. Does that mean preservationists should wish for a less heated housing market?

Changes in foreclosures, single-family rental market

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One housing expert discusses the state of the housing market in regards to foreclosures and single-family rentals. First, foreclosures:

Yes, the pig has finally made it almost through the python. At the peak of the crisis, we were looking at about 14.5 percent of all loans being either delinquent or in the process of foreclosure. In a “normal market” that number is between 4 and 5 percent.

Right now, we’re roughly at 7.5 percent of all loans, so we’re down by half from the peak but almost twice as high as normal. In the next two to three years, that number should work its way down to the norm…

We’re seeing pretty much historically unprecedented loan performance — historically speaking, about 1percent of loans will be in foreclosure in a given year, and now we’re looking at about half of that…

And this suggests that we probably have over-tightened credit. Not that we want more people in default, but we know that people are having a hard time getting loans. Loan standards are just too tight.

Second, changes to the rental market:

Before the Blackstones of the world, 95 percent of single-family rentals were owned by people who owned five or fewer properties. It was a cottage industry, literally.

What I’ve seen happening is, these little guys are becoming the property scouts for the big investors…

They’ll buy the houses, do the repair work and flip them to the Blackstones. They’ve moved from being landlords to being flippers.

Some interesting changes with continued fallout from the bursting of the housing bubble. And it is still hard to know whether these changes are “the new normal” or the market could overheat again as we are eight years or so from the peak of the bubble.

Fewer Americans see homeownership as path to financial success

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As more Americans are discouraged about the American Dream, fewer see homeownership as a means for reaching financial stability:

Nearly two-thirds of Americans, or 64%, believe they are less likely to build wealth by buying a home today than they were 20 or 30 years ago, according to a survey sponsored by non-profit MacArthur Foundation. And nearly 43% said buying a home is no longer a good long-term investment…

A majority of respondents said they believe renting is more appealing than buying — and that renters are just as likely to be successful financially as someone who owns a home…

Historically, owning a home has been considered an essential part of achieving the American Dream.

However, the housing bust, with its explosion of foreclosures, changed all that.

The key may just be in the second paragraph cited above. It is one thing to have economic hiccups where homeownership is a less viable option for many because of financial troubles. In this sort of scenario, the economy would improve and people would just right back into owning a home. It is another thing to fundamentally rethink perceptions of renters. For decades, many suburbanites and others have suggested that renters – often in apartments but also in houses – are not as committed to their communities and tend to be lower class. Renters couldn’t be trusted as much, didn’t care much about property values, and were generally less desirable than owners who would invest more in their homes and neighborhoods. But, if more people across a broader range of classes and places become renters, perhaps this will all change.

More Americans again view owning a home as a good investment

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The burst housing bubble reduced the value of many homes yet more Americans are again seeing a home as one of their best investments:

According to a recent Gallup poll, real estate beats out stocks, bonds, savings accounts and even the Great Recession’s investment darling, gold, as the favored form of long-term investment. A full 30 percent of Americans see real estate as the best investment—up from just 19 percent in 2011.

A new survey by the Pulte Group echoes such sentiments: 35 percent of Americans reported that they would like to buy a home soon in part because they see it as a smart financial investment, said Valerie Dolenga, spokesperson of Michigan-based home builder, Pulte Homes.

This kind of growing confidence should make us all wonder, though: Haven’t we learned anything from the housing crash? One of the big takeaways from the crash was to avoid this exact line of thinking…

Now that the market is recovering, and home prices are growing again—in fact home prices are at an all-time high in nearly 1,000 cities across the country, according to Zillow—the siren song of seeing your home as an investment is becoming tempting once again.

Then four tips are offered to help ensure your home can be a decent investment: location matters, buy a home that needs some work so you can increase its value, “don’t buy the best house on the block,” and expect to stay in the home a while to allow the value to increase. In other words, a house is not automatically a good investment yet good planning can go a long ways.

At the same time, sentiment about seeing homes as good investments is not necessarily related to making bad choices about buying houses. In other words, we need to see how these beliefs become translated into actions. For example, more Americans may want to buy homes but if other pieces are not in place, such as good inventory or readily available mortgage credit, then this may not lead to another housing bubble. The bigger issue may come when everyone involved from buyers to lenders to the media gets caught up in a housing rush and it takes on an inertia of action that goes far beyond consumer sentiment.

Finally, views on homeowership as a good investment are tied to other factors:

Upper-income Americans are much more likely to say real estate and stocks are the best investment, possibly because of their experience with these types of investments. Upper-income Americans are most likely to say they own their home, at 87%, followed by middle (66%) and lower-income Americans (36%). Gallup found that homeowners (33%) are slightly more likely than renters (24%) to say real estate is the best choice for long-term investments.

Social class and wealth matter when determining what are viewed as good investments.

Link between more foreclosures and higher suicide rates

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A new study suggests a rise in foreclosures is connected to higher suicide rates amidst the economic crisis:

The study, publishing in the June issue of the American Journal of Public Health and available online now, is the first to ever show a correlation between foreclosure and suicide rates.

The authors analyzed state-level foreclosure and suicide rates from 2005 to 2010. During that period, the U.S. suicide rate increased nearly 13 percent, and annual home foreclosures hit a record 2.9 million (in 2010).

“It seems that foreclosures affect suicide rates in two ways,” said co-author Jason Houle, assistant professor of sociology at Dartmouth College. “The loss of a home clearly impacts individuals and families, and can arouse feelings of loss, shame, or regret. At the same time, rising foreclosure rates affect entire communities because they’re associated with a number of community level resources and stresses, including an increase in crime, abandoned homes, and a sense of insecurity.”

The effects of foreclosures on suicides were strongest among adults 46 to 64 years old, who also experienced the highest increase in suicide rates during the recessionary period.

Given the (1) relative importance of owning a home as a means of providing for one’s family as well as signaling one’s status and (2) the relative financial burden of having a mortgage (usually far beyond credit card or student loan debt), this makes some sense. At the same time, this study tackles the issue from a broad perspective without being able to link individual neighborhoods or cases to certain outcomes.

Don’t let your McMansion turn into a financial McPrison

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A real estate firm argues buyers shouldn’t buy a home that could turn into a McPrison:

McMANSION OR McPRISON?
WHICH ONE WOULD YOU RATHER HAVE?

The sprawling McMansion that someone said you can afford may quickly turn into a McPrison when all of your money is locked up in it. There are lots of home affordability guidelines out there. Start with this one:

  • Don’t spend more than 300% of your gross household income.
  • Another is to pay no more than 150 to 200 times the monthly rent of a comparable property.
  • All of that said, don’t buy a home unless you plan to spend at least seven years in that area.

Some conservative guidelines for buying a home, particularly from those whose livelihoods depend on moving houses. Yet, the contrast between a McMansion and a McPrison is interesting. According to this advice, the main negative of a McMansion is that it can cost too much. The McMansion can appear to be a good thing that ends up trapping the homeowner. This has been a common argument after the economic crisis: too many people and lenders overextended themselves in purchasing and enabling McMansions. Part of the definition of McMansion from Investopedia reinforces this idea:

Many McMansion homeowners live beyond their means as mortgages on these monstrous properties may be 100% mortgages, interest-only mortgages and/or amortized over 40 or more years. The cost of utilities and maintenance in a larger home are also more significant, as is the cost of commuting from the distant suburban settings in which these homes are often located.

Two quick responses:

1. Of course, non-McMansions can be pricey as well depending on their size, location, and design.

2. Ultimately, this ignores the numerous other critiques leveled against McMansions (i.e., you could be trapped by a lack of community in McMansion neighborhoods) and focuses on the financial implications. If the homebuyer wanted a McMansion and could financially make it happen, there is nothing on this page to suggest the realtors would disapprove.