5 reasons for a declining homeownership rate

by Chelsea Niaz

Young businessman talking with couple. Male financial planner explaining investment plans to clients. They are in office.

Rosen Consulting Group (RCG) partnered with the National Association of Realtors and found five reasons for the United States’ declining homeownership rate, according to research released recently.

RCG found post-foreclosure stress disorder, mortgage availability, student loan debt, single-family housing supply shortages and single-family housing affordability as the distinctive reasons for the current deflated market. In spite of “historically low interest rates,” the study found that there are 1 million fewer total homeowners in 2016 than in 2006.

“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,” NAR President William E. Brown said“Those who are financially capable and willing to assume the responsibilities of owning a home should have the opportunity to pursue that dream.”

Post-Foreclosure Stress Disorder

RCG introduced the concept of “post-foreclosure stress disorder” as shifts in the perception of risks associated with buying a home. Specifically, the lasting psychological impacts upon prospective homeowners since they or someone they knew lost their homes to foreclosures. The Great Recession and its impact produced a community of prospective buyers whose past experiences halt them from pursuing their current home-buying goals.

“Economic scarring,” a phrase coined by Economic Policy Institute (EPI) has similar implications. EPI identified trends like reduced educational achievement, reduced lifetime earnings, higher rates of poverty, reduced investment activity and stunted entrepreneurial activity as examples of economic scarring, which also result in long-lasting impacts on economic decision-making.

The report found that the stricter environment of credit availability and the low level of new housing supply also contribute to an environment in which 93 percent of those who lost their homes to foreclosure have not repurchased a home as of 2014.

Mortgage Availability

After the Great Recession, mortgage lending decreased substantially as banks withheld loan approvals from many households no matter how good or even excellent their credit scores were.

In 2003, those with credit scores between 720 and 759 represented the largest portion of mortgage originations at 34 percent, according to the report. However by year-end 2016, households with the same credit scores dropped to less than 17 percent. Whereas those with credit scores of 760 or greater represented 58 percent of total mortgage originations. These inaccessible lending standards made it daunting to pursue mortgages and forced more people to rent rather than own.

Student Loan Debt

In the first quarter of 2017, the total U.S. household debt surpassed the previous peak in 2008 by 0.4 percent, reaching $12.73 trillion. Student loan debt, as a share of total household debt, rose by more than five percentage points since 2008 to 10.6 percent, according to the report.

NAR’s 2016 study found that 71 percent of non-homeowners believed their student loan debt delayed them from buying a home. Being in debt makes it hard to save for a down payment, qualify for a mortgage and afford a mortgage payment. These realities make becoming a homeowner seem all the more dispiriting.

Single-Family Housing Supply Shortages

You can’t buy what you don’t have, an issue that persists among the single-family housing market. Less availability of capital for homebuilders and the rising cost of construction hamper the development of new single-family homes to replace those lost to investors and unaffordability.

“The insufficient level of homebuilding has created a cumulative deficit of nearly 3.7 million new homes over the last eight years,” Berkeley Hass Real Estate Group Chair Ken Rosen said.

This deficit will remain until there is active involvement, something many are unwilling to commit to since the recession. Investment in single-family homebuilding remained low after the recession while construction costs rose. Construction costs along with a shortage in skilled labor, rising land prices and local government regulations all combine to create the depressed market conditions today.

Single-Family Housing Affordability

Home prices increased faster than household income growth creating more expensive houses available to fewer people. There are also fewer homes in general as seen by the lack of new construction which itself results in a lack of moderately priced homes. These paired with investors taking single-family homes results in the study predicting a fall in affordability by nine percentage points across all 75 major markets between 2016 and 2019. RCG estimates five million fewer households will be able to afford the local median-priced home by 2019.