Tag Archives: homeownership

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…

Different areas to address to help millennials purchase homes

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Survey data suggests Millennials want to buy homes but have a hard time finding the resources. Here is a quick look at different hurdles:

So why aren’t all young would-be homebuyers just taking advantage of the low down-payment options offered by these plans to get into the market before prices rise further? Not everyone has access to the programs that can shrink a down payment, and even for those who do, such help may not be enough. “Typically the down payment is the biggest hurdle for a homebuyer” says Ken Fears, director of regional economics and housing finance at the National Association of Realtors. “Programs that have a lower down payment are going to provide a bigger boost for the consumer.” Some programs, like Fannie Mae’s Community Home Buyer’s, require a 5 percent down payment, a sum that still makes saving a difficult proposition for many young people, particularly those in areas with quickly climbing home prices, such as San Francisco and San Diego. States like North Carolina and New Hampshire, have particularly well-regarded programs that allow for down payments of about 3 percent. Some private lenders also offer assistance to new homebuyers, but fees and additional factors, such as debt-to-income ratios, can prove more restrictive.

But programs aimed at reducing down payments for first-time homebuyers can feel like a double-edged sword. In competitive areas, where homes are scarce and multiple bids are common, an affordably low down payment can be limiting. “You’re not very competitive. If you’re going into a house with multiple offers and they see 3 percent down versus 10 or 20 percent down, they’re not going to go with your offer,” says Anne Simpson, a 27-year-old teacher and prospective homebuyer in Washington D.C…

Tight inventory is also a major hurdle for first time buyers. “In a majority of large metro areas nationwide, the inventory of lower-priced homes for sale is much lower than inventory of mid and high-priced homes for sale,” says Humphries. That can make for a stressful and competitive shopping experience where prospective buyers feel like there’s a race to save up for their down payment before rates go up and favorite neighborhoods sell out…

And for more Millennials, issues of poor or nonexistent credit and lack of consistent wages push dreams of homeownership just out of reach. High student-debt payments combined with escalating rent leaves little extra income for savings and even those with steady jobs have learned that significant raises are hard to come by. According to Humphries, there’s no quick fix. Instead, patience, education, and advocacy programs for newer buyers will be the key to boosting first time home purchases among younger buyers, progress that could take another three to five years.

As the article notes, even with higher renting costs, it is not easy to buy a home. While this article provides just a brief overview, it seems like there is an opportunity for private lenders to really help or develop this market. Imagine college graduates with some student loan debt that want to own, have decent jobs, and yet don’t have the credit or big down payment yet. Isn’t there a way to craft something based on their education (tied to lower unemployment rates, higher earnings down the road)?

Ending a long-term relationship can lead to downward mobility in housing

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The end of a long-term relationship can negative influence one’s housing options:

Many (though declining numbers of) marriages end in separation today. Besides the emotional turmoil that the marital separation causes, this event has profound effects on the chances to remain in homeownership for both ex-partners. Generally, at least one, if not both partners, will leave the previously shared dwelling. As separation often involves a loss of financial resources, people may have a hard time re-entering homeownership. After falling out of love and separating, a fall down the housing ladder may follow, as we show in a study recently published in European Sociological Review.

How drastic this fall will be depends very much on the housing market environment (see Figures 1 and 2). In the past in Britain, easy access to housing finance and high supply facilitated (re-)entry into homeownership for ex-partners even under house price inflation in the 1990s and early 2000s. In tight housing markets ex-partners will face more difficulties, and once access to mortgages becomes restricted, as happened in Britain after the recent crash in the housing market, problems may arise. So in the past British ex-partners could return to homeownership at some point in their lives because access to mortgages was easy – and they needed to return because alternatives in the private and social rental sector were and are unattractive. This may no longer work in future. Ex-partners may increasingly face similar problems that new market entrants currently encounter, for which the term generation rent has already been coined.

To better understand what may happen to British ex-partners, we can consider the example of Germany. The German housing market is in many ways different from the British, not the least because private rental accommodation is an attractive alternative to homeownership. Access to mortgages is also more restricted than in Britain, even after the recent tightening of regulations in Britain. High down payments are the rule in Germany. In this market environment, homeownership is a once-in-a-lifetime opportunity for many, while a considerable share of people will never enter homeownership. After separation, very few Germans will be able to return to homeownership (see Figure 2). Ex-partners will be less likely to be in homeownership through their lives post-separation. This scenario may foreshadow the British situation in the near future.

Being excluded from homeownership in the German context is not as consequential as it may turn out to be in Britain, however. First, more Germans will accept to rent after separation compared to the British, because attractive, and most of all, secure accommodation is available for – internationally seen – reasonable costs. Second, the German public pension system is relatively generous for those who continuously worked throughout their lives. To build up private wealth as a cushion for old age is not as necessary as in Britain. In Britain, where individuals are expected to privately invest in financial products and property to build an individual safety net – an idea called asset-based welfare – people that experience a separation may lose this safety net. This may result in stark disparities between the separated and those remaining married in old life.

Many (though declining numbers of) marriages end in separation today. Besides the emotional turmoil that the marital separation causes, this event has profound effects on the chances to remain in homeownership for both ex-partners. Generally, at least one, if not both partners, will leave the previously shared dwelling. As separation often involves a loss of financial resources, people may have a hard time re-entering homeownership. After falling out of love and separating, a fall down the housing ladder may follow, as we show in a study recently published in European Sociological Review. – See more at: http://blog.oup.com/2014/10/home-ownership-marriage-separation/#sthash.bcXULRwJ.dpuf
Many (though declining numbers of) marriages end in separation today. Besides the emotional turmoil that the marital separation causes, this event has profound effects on the chances to remain in homeownership for both ex-partners. Generally, at least one, if not both partners, will leave the previously shared dwelling. As separation often involves a loss of financial resources, people may have a hard time re-entering homeownership. After falling out of love and separating, a fall down the housing ladder may follow, as we show in a study recently published in European Sociological Review. – See more at: http://blog.oup.com/2014/10/home-ownership-marriage-separation/#sthash.bcXULRwJ.dpuf

The authors conclude that changes in family structures over the past few decades mean that housing policy primarily built around families and stable relationships just won’t work. In other words, we need more housing options for smaller, changing families and people who live alone.

I wonder if the same findings would hold in the United States. Perhaps it might be particularly problematic in higher-priced markets where buying homes and renting can be difficult even for stable, middle-class families.

Spain’s global lead in elevators tied to housing policies

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Spain leads the world in elevators per 1,000 people and this is the result of certain housing policies:

Compared to other countries, Spain’s elevator supply looks remarkably, well, elevated.
Spain Has Risen to the Top of Global Elevator Rankings
Quartz

At face value, there’s a pretty simple reason why. Spaniards are some of the world’s pre-eminent apartment-dwellers. In 2012, roughly 65 percent of the population lived in apartment buildings, much higher than the euro-area average of 46 percent. (The only other European countries that compare to Spain in terms of apartment-living are Latvia and Estonia, which are both also around 65 percent.)…

Top-down planning gave rise to relatively high-density urban building, often by politically connected construction companies in a building boom that stretched from the 1960s into the late 1970s.

“The dominant form of this housing was estates (apartment complexes) with over 1,000 dwellings,” wrote then Harvard academic Eric Belsky and colleague Nicolas Retsinas, in a paper on the Spanish housing market back in 2004. “These estates replaced many of the shantytowns that developed near cities like Barcelona and Madrid in the late 1940s and early 1950s.”

Thus was the modern Spanish city born.

With the emphasis on agricultural land in the Franco regime, dense cities and elevators were the result.

Given all this, what are the implications?

1. Do all those elevators detract from or enhance walking (taking the stairs versus having denser communities where walking is the norm)?

2. Are there any unique features of Spanish elevator culture?

3. Do the Spanish any sort of edge in elevator technology or maintenance?

USA Today says American Dream costs $130k per year

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Living the American Dream isn’t cheap, according to calculations from USA Today. Here is what went into the cost:

•Home ownership is central to the American dream. So, we took the median price of a new home ($275,000), subtracted a 10% down payment, then projected the annual cost of a 30-year mortgage at 4% interest. We also added annual maintenance costs of 1% of the purchase price. Total: $17,062 a year.

•We used the U.S. Department of Agriculture’s April 2014 figure of $12,659 for a moderate-cost grocery plan for a family of four.

•In May, AAA estimated it would cost $11,039 a year to own one four-wheel-drive sport-utility vehicle.

•The Milliman Medical Index pegged annual health insurance premiums and out-of-pocket medical expenses at $9,144.

•We used various estimates for the costs of restaurants and entertainment; one family summer vacation; clothing; utilities; cable or satellite; Internet and cellphone; and miscellaneous expenses (see table).

•Total federal, state, and local taxes were pegged at 30% for households at this income level, based on a model developed for Citizens for Tax Justice.

•USA TODAY calculated current educational expenses for two children at $4,000 a year and college savings (all of it pretax, we assumed) at $2,500 per year per child, based on various rules of thumb.

•Finally, the maximum annual pretax contribution to a retirement plan for people under 50 is $17,500. That’s slightly less than 15% of this American dream household’s annual earnings, in line with financial planners’ recommendations.

Total: $130,357.

It sounds like a lot — and it is in a country where the median household income is about $51,000. Add one more child and another vehicle and you could easily reach $150,000.

I can see some places where costs could be trimmed, particularly with the car and a more minimalistic approach to retirement savings. I wonder if the emphasis here should be on the overall cost – which is high and the article notes it can vary quite a bit from region to region – or the assumptions about what the middle class is about. I was recently looking at a classic sociological study Working-Class Suburb written by Bennett Berger in 1960. There is a point in the book where Berger juxtaposes the suburban critic frowning at the ills of suburban life and the suburbanite who is happy with his relative comfort of a car, refrigerator, house, and little patch of lawn. In the decades since, expectations about the good life have increased, as Juliet Schor showed in The Overspent American. If Americans need $130,000 a year to have the basics, many of which are good things, then is being middle-class something completely different today?

Want a home with extra amenities? Just buy a condo with hotel services

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Developers are building more condos with hotel amenities:

Developers across the U.S. are reviving a concept that collapsed with the real estate crash in 2008: combining condominiums and hotels. In cities including Miami, New York and Los Angeles, a rebounding hospitality market is joining with rising demand for luxury homes, spurring developers to construct new full-service hotels and ask premium prices for residential units associated with a high-end brand…

“I love the amenities the building will have — a restaurant that can provide room service, a concierge, maintenance, a person that can clean your place, valet parking,” said Viete, 25, who works for his family’s real estate company in Caracas. The $250 million project, scheduled to break ground in August, is already 85 percent sold…

Condo developments with a hotel can be structured in several ways. In some cases, residences may be connected to the lodging segment only so that owners can take advantage of the hotel’s amenities and benefit from the brand’s prestige. That tends to put a premium on unit prices.

In other developments, known as condo-hotels, a portion of the condos are made available to the hotel when owners aren’t using them, producing revenue for residents.

Sounds nice if you have some extra money lying around. On one hand, the story doesn’t say how much extra such units would cost over and above condos available elsewhere but on the other hand, if you have to ask, this isn’t the market for you…

Thinking about these units, they are an interesting contrast to a common American narrative about homeownership that goes something like this: you work hard to put together enough to purchase a home, you work hard to maintain it, you are more likely to participate in local community life, and it is a long-term investment and place for sentimental moments. Yet, the housing options available to those with more money goes against these principles. Instead of putting sweat equity into maintaining the home, you can pay someone else. Instead of getting deeply involved with neighbors and local issues, the wealthy can travel from house to house in exciting locations. Instead of holding onto a home because of family life and memories, housing becomes just another commodity to be bought and sold. In other words, condos with hotel features are far beyond normal American conceptions of homeownership.

Bill Gates could buy every home in Boston and still have $1 billion left

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Redfin suggests Bill Gates could purchase all the homes in Boston but not Seattle :

If Bill Gates took every dollar of his net worth (most of which comes from Cascade Investment, his investment firm, as well as Microsoft), he could afford to buy every home in Boston — and still be worth more than a billion dollars, according to a new report from the online real estate site Redfin.

For the report, Redfin calculated the combined cost of every single-family home, condo and townhouse in a city by looking at home sales between April 1, 2013, and April 1, 2014. These sales were used as a representative sample of all homes in a city. The combined costs were then lined up next to the net worth of billionaires on this Forbes list. (You can find more about the methodology here.)

So for Seattle, Redfin calculated that 241,450 homes in the city are worth a combined $111.5 billion dollars. Bill Gates could afford each of the 114,212 homes they included in the Boston calculation (total cost: $76.6 billion), but he couldn’t buy every home in Seattle. The Walton family that founded Wal-Mart could afford every home in Seattle, but only if they teamed up. They could also afford every home in a lot of other cities, including Miami, Dallas and Washington.

Using the combined home prices on this list, some billionaires could settle for purchasing a few smaller cities rather than picking up one of the pricier options. Mark Zuckerberg, who reportedly spend more than $30 million last year buying up homes near his Palo Alto house, could take his Facebook money ($28.2 billion) and buy every home in nearby Berkeley ($25.9 billion, according to Redfin). Or he could decide to buy up a few Zucker-bergs (sorry) across the country, purchasing Corvallis, Ore. ($9 billion), Punta Gorda, Fla. ($10.1 billion) and Oak Park, Ill. ($7.6 billion) with $1.5 billion left over.

See the full list of billionaires and cities they could buy here. The primary purpose Redfin gives for putting this together?

Given that the average American struggles to afford a home, we wanted to illustrate just how many homes the wealthiest among us could buy.

Certainly a stark comparison between the buying power of the typical American versus the wealthiest. So is Redfin pushing hard here to criticize the .01%? It doesn’t appear that way. There is no indication how the differences between Gates, the Waltons, and others might be evened out to provide homeownership opportunities for more Americans. Or, is this more about page-clicks and driving traffic to their website? This is a relatively easy way to leverage their data capabilities and capitalize on recent talk about inequality.

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.

Buying or renting smaller spaces related to less consumer spending

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If Americans turn away from McMansions and toward smaller homes or renting, they may also spend less on other items:

The apartment/renting moves have two implication for consumer spending. First, less space means less stuff. Second, rental units typically aren’t fitted with high-end appliances and finishes.

Looking at real spending for certain home goods, the data show annual increases in spending on items like appliances, furniture and window treatments are averaging less than they did during the boom years. That means that, like home construction, demand for home goods isn’t supplying the boost to economic growth that it did before the recession.

The Demand Institute, a joint initiative of The Conference Board and Nielsen, looked into the shift’s impact on consumer spending in a 2012 study. The DI analysis expected demand for home goods to pick up as housing recovers, but “value-oriented brands are likely to see the greatest growth,” the report said, a short-run trend “driven by landlords and renters who want to spend less on fixtures and furnishings than homeowners [do].”

Renting households also tend to own fewer vehicles, said the DI report, in part because their finances are worse than homeowners but also because parkingspots are limited. That shift will limit future car sales

All together, this links spending in one large area – housing – to spending in other sectors. Take owning a large suburban house. Such a home tends to support a more robust housing industry including construction and real estate. Such homes are often built in more sprawling suburban neighborhoods, leading to more cars and more road construction. Bigger homes require more furnishings, landscaping, and opportunities for improvements and repairs, supporting more suburban big box stores and other retailers.

I do wonder how much this is a case of spurious correlation versus indicating broader shifts: is this all linked to people having less disposable income? If they feel they have less money, they might make different choices about housing as well as consumer goods. Or, due to the economic crisis and relatively stagnant income for many Americans, consumers might be shifting their preferences in a number of ways that could upset traditionally important economic sectors. It could be a move away from expensive and more durable goods (houses, cars) toward electronics (like smartphones) and entertainment (the creative class).