Tag Archives: homeownership

Who Will Live in the Suburbs if Millennials Favor Cities?

Longtime readers know I follow the work of urbanist Richard Florida, whose recent book was the topic of Are Cities the Incubators of Decentralized Solutions? (March 14, 2017).

Florida’s thesis–that urban zones are the primary incubators of technological and economic growth–is well-supported by data that shows that the large urban regions (NYC, L.A., S.F. Bay Area, Seattle, Minneapolis,etc.) generate the majority of GDP and wage gains.

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https://i0.wp.com/www.oftwominds.com/photos2016/gdp-metro2.jpg

Cities have always attracted capital, talent and people rich and poor alike. Indeed, “city” is the root of our word “civilization.” So in this sense, Florida is simply confirming the central role cities have played for millennia.

More recently, Florida has addressed the rising wealth/income inequality that is making desirable urban areas un-affordable to all but the top 10% or even 5% wage earners. This is a critical concern, because vitality is a function of diversity: a city of wealthy elites paying low wages to masses of service workers is not an economic powerhouse.

What happens as buying a home in a desirable city becomes out of reach of all but the most highly paid tranche of workers?

The larger question is: what happens to home ownership as housing prices continue higher while the next generation’s wages remain significantly lower than previous generations’ incomes?

Millennials are typically earning less than Baby Boomers and Gen-X did in their 20s and 30s, and if this continues–and history suggests it will–then how many Millennials will be able to buy a pricey house?

One consequence of stagnating wages and rising home valuations is a “nation of homeowners” morphs into a “nation of renters.”

The other big question is: if Millennials aren’t earning enough to buy pricey homes, who is going to buy the tens of millions of houses Baby Boomers will be selling as they downsize/move to assisted living? As for inheriting Mom and Dad’s house–that’s not likely if Mom or Dad need the cash to fund their retirement/assisted living.

This question is especially relevant to suburban homes, especially those far from employment centers. Though data on this trend is sketchy, it seems Millennials strongly favor city living over exurban/suburban living.

Anecdotally, I can’t think of a single individual in their 20s or 30s that I know personally who has bought a house in a distant suburb. Everyone in this age group has bought a house in an urban zone. Not a highrise condo in the city center, but a house in a ring city near public transport.

Though data on this is hard to find (if it exists at all), Millennials seem more willing to make the sacrifices necessary to live in the urban core, either by renting rather than buying a cheaper suburban home, or by purchasing a modest bungalow on a small lot rather than an expansive suburban home on a big lot.

(This could change if Millennials start having lots of children, but to date small bungalows in urban regions appear big enough for families with two children.)

In a turn-around from the postwar era, which saw a mass exodus of the middle class from city centers to suburbia, the upper middle class is moving back to urban centers and the lower-income populace–once the urban poor–are being pushed out to the suburbs. We can now speak of the suburban poor.

To some degree, the suburbs have become victims of their own success. Long commutes in heavy traffic are the inevitable result of the vast expansion of suburban subdivisions, shopping malls and business parks. These killer commutes detract from the desirability of suburbs, especially to auto-agnostics of the Millennial generation, who exhibit low enthusiasm for auto ownership.

Rather than symbolizing freedom, auto ownership is viewed as a burdensome necessity at best.

If we overlay these trends (assuming they continue into the future), we discern the possibility that marginal suburban housing could crash in price and morph into suburban ghettos of isolated low-income residents.

The Pareto Distribution may play a role in this transformation. Should 20% of the suburban housing stock fall into disrepair, that could trigger the collapse of valuation in the remaining 80%.

Not all suburbs are equal. Those with diverse job growth may well act as magnets much like small cities. Those with few jobs and long commutes are less desirable and have smaller tax bases to support services.

The asymmetry between modest/stagnant Millennial wages and the soaring cost of housing cannot be bridged. If these trends continue, only the top tranche of highly paid young workers will be able to afford housing in desirable areas. Given a choice between affordable ownership in a small city or in a distant suburb, Millennials may well choose the affordable small city rather than the distant exurb or low-services suburb.

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Note that most incomes have gone nowhere since about 1998. Even the top 5% has made modest gains in real (inflation-adjusted) income.

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Meanwhile, home prices are back in bubble territory. “Hot” urban areas such as Seattle, Portland, the San Francisco Bay Area, Los Angeles, Brooklyn NYC, etc. have logged double-digit gains in recent years.

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So who’s going to pay bubble-valuation prices for the millions of suburban homes Baby Boomers will be off-loading in the coming decade as they retire/ downsize? We know one part of the answer: it won’t be Millennials, as they don’t have the income or savings to afford homes at these prices.

These trends promise to remake the financial geography of cities (large and small) and suburbia–and in the process, radically shift the financial assets of households, renters and owners alike.

By Max Keiser | Financial War Reports

Is The Home Ownership Rate In America The Lowest In History Today?

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No,

As you probably assumed anyway, due to Betteridge’s Law, we aren’t currently in a homeownership trough. The recent homeownership rate posting of 62.9% for the second quarter of 2016 is not the lowest in history, nor is it even the lowest in recorded US history. However, it is the lowest post in 51 years(!) – not since the third quarter of 1965 have we seen homeownership rates this low.

And why are we at DQYDJ bothering to look now?

Donald Trump, the Republican nominee for President sent this Tweet a couple days back:

The History of the Home Ownership Rate

A while back, we did a two-part deep dive into the history of the 30 year mortgage and the history of the (recorded) home ownership rate in America. That research dug up some very interesting information.

First, long-dated mortgages of 15, 20 and longer years started in the mid 1930s. Second, private mortgage insurance (which was mostly done in by the Great Depression) started up in 1957 with the Mortgage Guaranty Insurance Company.

Those innovations brought homeownership to the masses – no longer did you have to be able to afford a huge, short-term loan with a massive down payment. Extending Mr. Trump’s graph back to 1890 you can see the effect of the innovations (and of the Great Depression and Recession) on homeownership rates:

(Note that until the 60s there wasn’t as much resolution in the series – see our historical research for details).

 

The longer dated series lets us state a few interesting facts:

  • The lowest homeownership rate since 1957’s PMI innovation was a 61.9% rate in 1960.
  • The lowest homeownership recorded since 1890 was 43.6% in 1940 – in the midst of the Great Depression.

Why Is the Home Ownership Rate Dipping?

Oh, you won’t accept ‘people are renting more’ as an answer?

Yes, the run up in real estate prices in many areas of the country (so soon after the Great Recession!) is a huge factor. But, so too are the massive demographic changes underway in our country.

As we have pointed out many times, the millennials (of which I count myself as an older member) now makeup roughly 25% of the workforce. Millennials have different living arrangements than past generations – a greater propensity to live at home, a seeming desire to be free to change jobs (and areas!) more often, and, yes, more expensive housing options. That last point, of course, prices many millennials out of the market – renting makes much more sense when you look at the home prices in many metros in the United States.

Can It Change? Will We See the Rate Rise Again?

Yes – as of right now, I don’t see the drive towards renting (and living at home) to be a sort of permanent desire. Already there are countering trends – the so-called “Tiny House” movement one of them (and, yes, I have been searching for a place to name-drop it!). It’s safest, at this point in time, to assume millennials will tend to be similar to their parents – eventually leaving the city to marry, have kids and buy homes. You know, like yours truly.

However, we’re looking into the future here. Marriage is trending towards being an institution for older and older couples, along with kids. If these trends keep up, we might start to get into uncharted territory here – I’d love your input on whether you think homeownership rates will recover, or high-60s was an anachronism.

Will we see an increase in homeownership led by the millennials?

by Don’t Quit Your Day Job | Seeking Alpha