Thursday, January 14, 2016

Homeownership Postscript: An Even Grimmer Appraisal

In a recent post, I pointed out how, when adjusted for age and life expectancy, homeownership in the United States is lower than is has been for many decades.  In the comments, it was further pointed out that not only is homeownership itself lower, but that free and clear ownership has been on the decline as well.

There is some data available here, enough to put together a chart over time first using the non-adjusted homeownership rates (blue is homeownership, red is the percentage of all homes that are owned without a mortgage):

As can be seen, there has been a dramatic change over time, with over a majority of owned homes being owned free and clear in the 1920s and 1940s, and thereafter steadily declining to the present figure of just under 30 percent.  The increase in the 1940s may be related to the effects of wartime rent control and the shift in cash investing to real estate during those years.

Today, the majority of these non-mortgage encumbered homes appear to be owned by senior citizens who have paid off their 30-year mortgages.  In light of this, and the growth of the over-65 demographic since the 1940s, it should be somewhat surprising that this statistic has declined.

Here is the same analysis using my age-adjusted homeownership figures (1920 is omitted):

In addition to the above, of the majority of homes that are encumbered with mortgages of all types, the percent of equity in those homes has been steadily falling as well, as shown on the below chart:

The chart speaks for itself, with a decline in the 1950s and 1960s likely related to a growing use of the 30-year mortgage with its lower down payment requirements, a stabilization through the early 1980s, and a precipitous decline during the cresting and burst of the housing bubble in the late 2000s.

The implied conclusion here, that a dramatic expansion of debt has been necessary just to maintain the illusion of a stable homeownership rate (setting aside the explosion of debt in the 2000s necessary to support an increase in homeownership), puts an even more negative spin on the figures from the preceding post.  In short, a decline in homeownership has until the past few years been masked by shifting demographics and an increase in household debt.

One last point here is that although homeownership fell back to its earlier baseline (in non-adjusted figures) following the real estate bubble, equity has not risen back to to the prior 60-70% range, even in spite of the many institutional cash buyers on the market.  The debt legacy of the bubble appears as though it will be around for many years to come.

Related posts:

Sunday, January 3, 2016

Are Millennial Families Really Seeking a Car-Based Suburban Lifestyle?

A recent article by Lyman Stone makes the argument that the return to cities observed during the late 2000s, rather than being primarily a reflection of increasing preferences for urban living, was a temporary phenomenon caused by a bubble in suburban real estate which for a brief time made city renting significantly less expensive than suburban buying.  Under this theory, there was no great change of preferences among the so-called millenial generation or others, but only a temporary price inversion caused by fleeting and unsustainable cost factors.

The general idea that land rents are higher toward city cores, and lessen in a concentric pattern outwards from the center, is not new.  As the "bid rent theory," it was developed by William Alonso in the 1960s, and has applicability to cities from the distant past all the way down to the present.  Modifying but not necessarily contradicting this theory is the concept of the "favored quarter," in which bid rents are determined by cardinal direction from the core rather than by distance alone.  In contemporary cities, both the bid rent and favored quarter can be easily found and mapped.
Income distribution map of Dallas/Fort Worth by Bill Rankin.
In general terms, the bid rent theory holds that commercial uses will compete more intensively for space in central areas, resulting in higher density (and higher cost) housing forms as residential uses are forced to bid against non-residential uses for scarce land.  By contrast, the favored quarter may represent a wealthy neighborhood using the zoning power or self-rule to insulate itself from non-residential or high-density residential competition, thereby securing what is in effect a subsidy for a valued central location.  This sort of abuse of the zoning power, at city-wide scale, has been the subject of a tremendous debate in recent years.

None of this is new or particularly controversial.  The bid rent theory does not presume anything about residential preferences, so far as I am aware, though we might imagine that the same proximity and centrality that is attractive to commercial uses is also appealing to residents who could enjoy that same immediate proximity and centrality as a major amenity.  At the same time, the hustle and bustle of commercial uses are repellent to those who, for their residential spaces, crave some degree of quiet enjoyment.  Central areas are also likely to be disfavored by those, such as young families, who value large living spaces and high quality public schools above even immediate conveniences where both preferences cannot be met simultaneously.

In a post a while back, I also doubted as to whether these underlying preferences had changed, and that inflated costs in suburban areas and/or foreclosures, had driven higher demand to rent in urban areas.  This is not really contradicted by the National Community Preference survey, which continues to show that people highly value the single-family home and immediate, walkable convenience:

The most undersupplied areas, relative to demand, are the "suburban neighborhood with a mix of houses, shops and businesses," the "small town," and the "rural area."  These patterns seem to be amplified for the millenial generation, with a particular emphasis on walkable neighborhoods.  Oversupplied, relative to preference, are the mostly residential suburb and city (although I suspect many of the "city" residential areas are largely "suburban" in character).  I do not know exactly how "small town" differs in form from the mixed suburban area, but one imagines the category to be inspired by the fictional New England village of Stars Hollow from the Gilmore Girls show, with its vaguely New Urbanist mix of houses and shops with quirky and eccentric independent proprietors immune from the long arm of Walmart:

Stars Hollow set, and also, I believe, for Hill Valley from Back to the Future.
The allegedly unrealistic image of the town in the show has been critiqued here, but I still think the popularity of the series has something to tell us about the environments and lifestyle people idealize, even if the particular example in the show may not be economically plausible.

Lest we imagine that these choices are in fact economically or spatially incompatible, or that what is being sought is the unobtainable single-family house in Central Park, this is the essence of Japanese market urbanism: an extremely compact assemblage of small single-family homes (and some apartments) that is pedestrian and bike friendly.  This must be the case, since lower densities will result, for the majority, in the perception of a "residential-only" neighborhood.  Naturally, Japanese-style development (as described by Nathan Lewis here) is one thing which the American cities have almost entirely failed to provide, although a few neighborhoods here and there, generally developed before 1930, provide a reasonable facsimile.

Tokyo neighborhood.
Quite a bit has also been written as to whether the millennial generation will, in time, leave urban areas, as though there was some question as to whether this particular age bracket would buck the trend of all groups before it.  As Joel Kotkin wrote two years ago:
"The millennial “flight” from suburbia has not only been vastly overexaggerated, it fails to deal with what may best be seen as differences in preferences correlated with life stages. We can tell this because we can follow the first group of millennials who are now entering their 30s, and it turns out that they are beginning, like preceding generations, to move to the suburbs.
These trends can be seen on a nationwide basis. Among the cohort of children under 10 in 2007, the number who lived in core cities as of 2012, when they were 5 to 14 years of age, was down by 550,000. Families are the group most likely to move either to the suburbs or smaller towns. This movement, plus the high degree of childlessness in large urban cores, suggests that many of those who are leaving the core cities in their early 30s are parents with young children."
Now, for families with young children approaching kindergarten age who lack the resources for expensive private tuition, school quality emerges quickly as an important preference, subordinating almost all other concerns.  But this does not mean that these families do not desire an urban lifestyle, or, by their housing choices, are rejecting such a lifestyle.  The survey data seems to broadly refute that idea.  Rather, the cruel spatial economics of exclusion favor low-density, restrictively-zoned places for "good schools," and American cities offer few other intermediate options.  Abandoning an urban life, with its high costs, is a sacrifice for one's children rather than, necessarily, a pursuit of an ideal.  The choice is reinforced by the panoply of incentives the US tax code offers to those who would buy rather than rent.  Many other families with financially limited choice, shut out of suburban options by restrictive zoning and other exclusionary policies, must remain in urban areas regardless of their preferences.

Seen in this context, I do think the New Urbanism has tapped in to something important in the American psyche.  Only, as Nathan Lewis has written about, it has generally (but certainly not always!) done so too literally, using lackluster American examples as inspiration rather than successful ones from abroad.  I do not think the American imagination is so literal, though.  Stars Hollow passed as a New England town even though it bears no resemblance to the typical Connecticut small town with its large central green and sprawling layout.  What was important was not the specific form, but rather the walking lifestyle, the spontaneous interaction and the community as a whole.  The set simply provided the urban form necessary to sustain the belief that this lifestyle was possible for the characters.

If a real-world development does not offer a sufficient density, or sufficient flexibility in terms of mixing of uses, these things will not occur, and you will have little more than a film stage set.  Imitate a Japanese neighborhood, on the other hand, and you may have more success.  Perhaps clad the buildings in Georgian and Colonial facades for the tastes of American buyers, but leave the form alone.  Do not obsess over mixing of uses or "apartments over the shop" -- these things take time and happen gradually, not all at once and from the beginning.  A suburb built to this form, odd as it may seem, will meet the stated preferences of American buyers, families included.  The demand is certainly there.

The New Urbanism, whatever its failings, has at least recognized the situation, changed the conversation and opened new possibilities not only in terms of building, but regulatory reform and making possible traditional forms of urbanism under contemporary city codes.  This blog is intended as a sort of continuation of this new conversation using a slightly different vocabulary.   

As to what such a new neighborhood might look like, Nathan Lewis has already written at length, but in another post, I'll reiterate some of his findings along with an example that could be done today.

Friday, January 1, 2016

Is the Decline in the Homeownership Rate Even Greater Than Thought?

One of the most heavily reported stories of the post-housing bubble economy has been the decline in the American homeownership rate, which has supposedly fallen to levels not seen since the days of the Lyndon Johnson administration.  Although ownership data is often broken down every which way, including regionally, across ethnic and income groups, over time, by immigration status and by age bracket, one analytical quirk I've noticed is that the non-age comparisons are rarely themselves controlled for by age.

This is highly significant, since homeownership is, obviously, heavily correlated with stage in life.  While only around 33% of 29-year-olds own homes, by age 39, this number leaps to around 49% (according to age bracket data from the 1990s to present).  This fact has major consequences for comparisons among nearly every demographic group, but even more so for comparisons over time.  How so?   Consider that a major age-related change since the 1940 Census has been an increase in the median age of around 10 years due to a decline in the birth rate and a substantial increase in life expectancy.

What is the significance of these changes for the homeownership rate?  The chart I prepared below uses averages of ownership by age bracket for 1994 and 2014 to estimate interval changes and make a complete graph showing that, in general, the rate increases until around age 66 (one would think related to post-retirement home sales) and then gradually tapers off thereafter, while still remaining well above the overall average.

As a result, the older a population grows, the higher its homeownership level should be, all else being equal.  Intuitively, it should be shocking that today's homeownership rate is comparable to that at the height of the baby boom era, when the national median age was only 28.  The Census Bureau has apparently made some adjustments to more recent ownership data to reflect changes in age structure, but I was interested in doing the same for the decennial data going back many decades.

The data has been adjusted to account for 1) changes in the median age, normalized to 2014, to reflect that an older population is centered around a much higher ownership level, and 2) changes in the life expectancy independent of median age, to reflect that the older people live, the higher the homeownership level is likely to be.  First is a plot of the non-adjusted decennial Census data (plus 2014), showing the familiar pattern of a large jump in the 1940s due in part to wartime rent controls, a slowdown in the 1960s, and a general stagnation since that time.

Once we account for the demographic changes, however, it becomes obvious how the aging of the population has masked a major decline since 1970.  The chart below shows the data adjusted for change in median ages only.  Note also how the slowdown in the 1960s has disappeared and been replaced by a substantial increase, as the population was growing younger during that time.  This is more consistent, I think, with the conventional wisdom that the 1960s were a boom time for new buyers as much as the 1950s were.

Finally, if we account for life expectancy as well, the trends are further amplified, showing that, in age-adjusted terms, today's homeownership rate is lower than that of 1940, which was itself a low point only a little above where it had been in the depths of the Depression.  A peak is reached around 1970, after which there was and continues to be a decline (the upward blip in the mid-2000s is not represented here).

My attempt at analysis here is definitely not the last word in examining this data, and no doubt there are flaws, but it at least leaves open the possibility that today's homeownership rate, in the context of age adjustments, is lower than it has been for a very long time, at least as long as 80 years and perhaps as far back as 120 years or more.  With more data on earlier Censuses and a more rigorous approach more refined and complete results could be calculated, but I would doubt whether the overall picture would be greatly different.

The question as to why homeownership peaked around 1970, in these charts, and declined thereafter, is one which has been discussed in many other and related contexts.  Nathan Lewis has written extensively about the abandonment of the gold standard.  Ben Ross has discussed the changes in land use policy in the 1970s, including the rise of environmentalism, which threw up new barriers to development and reduced the supply of new housing coming to market.  Seeking a full explanation would be far beyond the scope of this post, but I think it is noteworthy that the results are broadly consistent with other economic markers, including inflation-adjusted income.

Finally, it it may be interesting to compare these trends with those of Europe, as shown on this graph which I grabbed from Twitter (via Antony Slumbers):

Although the US continues to have a lower homeownership rate than the Eurozone, and far lower than many individual countries, I suspect this difference may disappear or even reverse once median ages are taken into account (the median age of the Eurozone being over 41).

Spreadsheet with data and charts here.

Related posts: