The Local Perspective: Explaining Low Homeownership Level
NAR recently released a new white paper titled “Hurdles to Homeownership: Understanding the Barriers.” This white paper covered the results of a nationwide homeownership study commissioned by NAR. While all of the five reasons for depressed homeownership levels apply on Cape Cod, we wanted to localize the results of the study to give you actionable information you can use in your daily business.
The primary barrier to increased homeownership on Cape Cod, Martha’s Vineyard and Nantucket is the continuing low level of inventory, which, combined with high buyer demand, is leading to skyrocketing median sales prices. Our most recent market statistics from May 2017 bear this out in dramatic fashion. Limited housing options and an extremely low rate of new construction – on average, less than 500 per year across the Cape and Islands – are preventing any significant progress from being made on the inventory and affordability front. Clearly, new construction alone isn’t going to meet this need. In order to help combat this alarming trend, there are several initiatives and bills are under consideration at the local and state level to help ease the inventory crunch which CCIAOR is actively monitoring the progress of. The bottom line is that we need more housing inventory. More inventory is good for homeowners, good for home buyers and good for the economy.
Mobility amongst existing Cape Cod & islands homeowners has also been limited by the lack of inventory. For example, homeowners looking to downsize are finding limited options, and that the price of those options often exceeds their budget. Rising mortgage rates are also a disincentive to move, as homeowners on 30 year fixed rate loans with rates under 4% are not likely to move given the current financial market.
Taken together, these elements create a situation in the housing market where there is very limited availability of housing stock for first time homebuyers and limited opportunities for existing homeowners.
“The decline and stagnation in the homeownership rate is a trend that’s pointing in the wrong direction, and must be reversed given the many benefits of homeownership to individuals, communities and the nation’s economy,” said 2017 NAR President Bill Brown, a Realtor® from Alamo, California. “Those who are financially capable and willing to assume the responsibilities of owning a home should have the opportunity to pursue that dream.” One of Brown’s main objectives as president of NAR is identifying ways to boost the homeownership rate in a safe and responsible way.
Nationwide NAR Study: 5 Reasons for Depressed Homeownership Levels
The research, which was commissioned by NAR, prepared by Rosen Consulting Group, or RCG, and jointly released by the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley Haas School of Business, identifies five main barriers that have prevented a significant number of households from purchasing a home. They are:
Post-foreclosure stress disorder: There are long-lasting psychological changes in financial decision-making, including housing tenure choice, for the 9 million homeowners who experienced foreclosure, the 8.7 million people who lost their jobs, and some young adults who witnessed the hardships of their family and friends. While most Americans still have positive feelings about homeownership, targeted programs and workshops about financial literacy and mortgage debt could help return-buyers and those who may have negative biases about owning.
Mortgage availability: Credit standards have not normalized following the Great Recession. Borrowers with good-to-excellent credit scores are not getting approved at the rate they were in 2003, prior to the period of excessively lax lending standards. Safely restoring lending requirements to accessible standards is key to helping creditworthy households purchase homes.
The growing burden of student loan debt: Young households are repaying an increasing level of student loan debt that makes it extremely difficult to save for a down payment, qualify for a mortgage and afford a mortgage payment, especially in areas with high rents and home prices. As NAR found in a survey released last year, student loan debt is delaying purchases from millennials and over half expect to be delayed by at least five years. Policy changes need to be enacted that address soaring tuition costs and make repayment less burdensome.
Single-family housing affordability: Lack of inventory, higher rents and home prices, difficulty saving for a down payment and investors weighing on supply levels by scooping up single-family homes have all lead to many markets experiencing decaying affordability conditions. Unless these challenges subside, RCG forecasts that affordability will fall by an average of nearly 9 percentage points across all 75 major markets between 2016 and 2019, with approximately 5 million fewer households able to afford the local median-priced home by 2019. Declining affordability needs to be addressed with policies enacted that ensure creditworthy young households and minority groups have the opportunity to own a home.
Single-family housing supply shortages: “Single-family home construction plummeted after the recession and is still failing to keep up with demand as cities see increased migration and population as the result of faster job growth,” said Berkeley Hass Real Estate Group Chair Ken Rosen. “The insufficient level of homebuilding has created a cumulative deficit of nearly 3.7 million new homes over the last eight years.”
Fewer property lots at higher prices, difficulty finding skilled labor and higher construction costs are among the reasons cited by RCG for why housing starts are not ramping up to meet the growing demand for new supply. A concentrated effort to combat these obstacles is needed to increase building, alleviate supply shortages and preserve affordability for prospective buyers.
FOR FURTHER READING:
“Hurdles to Homeownership: Understanding the Barriers” is the second of three papers scheduled for release in 2017 by RCG. Among the findings of the first white paper, “Homeownership in Crisis: Where Are We Now?,” released earlier this year, RCG estimated that more than $300 billion would have been added to the economy in 2016, representing a 1.8 percent bump to GDP, if homebuilding returned to a more normalized level consistent with the historical trend. The third paper – published later this year – will highlight a series of creative policy ideas to promote safe, affordable and sustainable homeownership opportunities.