First American: 6 Trends That Will Reshape Homeownership Demand

July 18, 2017

When analyzing the homeownership rate, First American discovered six key trends that will transform homeownership demand and the understanding of achieving the American Dream.

As U.S. homeownership rates hit half-century lows, many are afraid that this dream is fading. However, the dream of homeownership is far from dead. Nearly 77 percent of people who responded to a recent Chase survey agreed that homeownership was a part of achieving the American Dream. After owning a home, half of respondents selected going to college, getting married and having children as other elements that are vital to the fulfillment of that dream. Another survey confirms this sentiment as it found that 94 percent of Millennials between the ages of 20-29 are planning to buy a home.

“While it may not be a surprise that homeownership remains a priority, it may come as a surprise that Millennials have not been discouraged from this goal,” said Mark Fleming, First American’s chief economist. “Millennials are often referred to as a ‘renter generation,’ because they have prioritized their education and tend to concentrate in metropolitan areas. They have, for now, chosen to share cramped apartment space with roommates over the making the commitment to buy a home. But the American Dream is not the mere act of owning a home, but rather an ethos or set of ideals that allows citizens the opportunity to pursue prosperity and upward mobility through hard work. In this context, homeownership is not just about shelter, but a primary vehicle for wealth creation for middle­class Americans. 

Here’s a look at the six trends that will affect homeownership, according to First American:

    1. The Most Educated Generation in the U.S.: Despite the popular narrative surrounding Millennials as "over-educated and under­employed," a Millennial with a college degree earns approximately $17,500 a year more than a Millennial with only a high school diploma, according to the report. As First American’s Homeownership Progress Index (HPRI) shows, markets and states with growing educational attainment rates often experience significant improvements in homeownership. The importance of education to homeownership has only increased over time. The good news is educational attainment is growing. So, it is reasonable to expect homeownership rates to grow as well. As more people achieve greater levels of education, they are able to generate higher income and then use that higher income to buy homes.
    2. Homes and Marriage Go Together Like a Horse and Carriage: Most would say that they plan to buy a home when they "settle down," but what does that mean for a Millennial nowadays? This is a serious question because marriage and homeownership, perhaps the two most enduring institutions of our society, have shaped the economic fortunes of many Americans. Over the past half century, there has been an overall decline in the rate of marriage. According to government data, the share of married households has fallen from a high of 72 percent in 1960 to approximately 50 percent today. Have Americans lost that loving feeling? Many reasons are cited for the decline in the rate of marriage, including the increase in the participation of women in the labor force and the increased level of educational attainment. Most recently, Millennials are largely prioritizing higher educational attainment over marriage. The share of young adults (aged 24 to 34) that are married has dropped from 70 percent in 1995 to 54 percent in 2014.

      According to analysis in First American’s Homeownership Progress Index, the homeownership rate is 30 percent higher among married couples than other households. If married households are more likely to be homeowners, and marital rates are falling, how much of the decline in homeownership is due to the changing attitudes toward marriage? Because the marriage rate was increasing between 1995 and 2005 as Generation X got hitched, marriage was a net contributor to the growing overall homeownership rate, but from 2005 to 2014 the declining marriage rate alone has reduced the homeownership rate by 3.5 percentage points. This trend turned around in 2015, with marriage being a contributor to homeownership in 2015 and 2016.
    3. Home is a Family Formation Station: A recent study by the Urban Institute found that between 2007 and 2012 birth rates among women in their 20 declined by more than 15 percent. The drop was, in part, caused by the decline in the rate of marriage. This doesn't necessarily suggest that either the marriage rate or birth rates won't increase as Millennials choose to have children at a later age, but it does delay the decision to buy a home. First American finds that just as the decision to marry influences the decision to own, so does the decision to have children. As one might suspect, the more children in a household, the more likely the decision to own versus rent. The homeownership rate is 1.7 percent higher for households with one or two children compared to households with no children, and it is 5.4 percent higher for households with three or more children.
    4. Finally, Income Growth: It's not just the decisions to marry or have children that increase the likelihood of being a homeowner. Economic conditions also play an important role. If the economy is in recession and it's hard to find a job, or one's income is flat or declining, it would make sense that there would be less demand for homeownership. But, could the converse also be true too? According to First American’s index, households with an average income of $110,000 or more in 2016 had a homeownership rate of approximately 87 percent. At the lowest annual income bracket of $28,000, the homeownership rate is 45 percent. As one might expect, homeownership increases as household real incomes increase. For a household earning $50,000, an extra $10,000 a year would increase the likelihood of homeownership by 2.1 percent. Going from an income of $50,000 to $100,000 increases the likelihood of homeownership by approximately 10 percent. The good news for the real estate industry is that there are some positive trends in income growth. After a period of stagnant wage growth, median household income in the United States increased from $53,718 in 2014 to $56,516 in 2016. This upward trend in income translates, all other factors held equal, to an almost 1 percent rise in the likelihood of homeownership.
    5. Is It All About the Economy? Household income is only one measure of overall economic conditions. Equally important is whether one can get a job, change a job or keep a job. Changes in economic conditions and consumer access to mortgage financing are also important influences on homeownership. Our decision and ability to buy a home is closely tied to all of these economic factors. Between 1992 and 2005, the strong economy of the 1990s and the housing boom of the early aughts increased homeownership, all else held equal, by 5.6 percent. The recession that followed the housing boom peak forced the homeownership rate to decline 5.1 percentage points. More recently, improving economic conditions have helped fuel resurgence in the homeownership rate.
    6. Closing the Gaps: Homeownership is a goal shared among all people, regardless of race or ethnicity, and remains the main driver of wealth creation for the majority of households in the United States. Since homeownership is one of the key components of achieving the American Dream, understanding the observable differences in homeownership rates by ethnicity may help identify ways to advance the prospects for homeownership across all ethnicities. Differences in homeownership rates can be attributed to many household characteristics, making it difficult to make broad conclusions. For example, a lower homeownership rate in a particular ethnic group may be the result of economic, demographic and educational factors that are causally related to homeownership, but only correlated with ethnicity. A 2015 Census16 study showed that 15 percent of Hispanics had a bachelor's degree compared to 22 percent of African-Americans - a difference of 7 percentage points. The education gap between Whites and African-Americans remained stable, between 11 and 14 percentage points from 1988 to 2015. Since greater educational attainment typically leads to greater income, these ethnic differences in educational attainment levels also influence income disparities across ethnicities. So, one reason a homeownership gap between different ethnicities exists is because disparities in educational attainment levels and, subsequently, income levels, also exist. It's important to identify the relationship between ethnicity and homeownership after controlling for the directly attributable economic, demographic and educational relationships that are also correlated with ethnicity.

      Controlling for other homeownership-related characteristics reduces the homeownership gap for all ethnicities, but it does not remove the gaps all together. Even after accounting for all of the other important factors influencing homeownership rates, substantial unexplained gaps in homeownership rates between ethnicities remain. The real challenge is to better understand why this gap persists. After accounting for all the other factors, are the differences in the homeownership rate by ethnicity due to the challenges of raising a down payment, access to credit, or the impact of more or less financial obligations to extended family members? Fleming says that this research can't answer that question, but it does help to inform the policy discussion about where one might look to further understand why homeownership gaps by ethnicity exist.

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