New homeownership numbers and the value of homeownership both personally and locally

Homeownership, as a federally supported and insured, leveraged investment is the most common way everyday households build wealth, gain economic stability, and offer social mobility to their kids and community. In establishing the rights to change the space, it also offers the next generation the opportunity to shape the quintessential American asset. With this kind of importance, the most recent homeownership rate data, while showing some gains, was disappointing given the surge in sales this season.

• U.S. homeownership rate grew slowly — a bit over half a percentage point in two years to 65.4% in Q3–2021, a smaller rate than we would have hit had the homeownership rate continued the pace of growth seen from 2016 to 2019.
• U.S. homeownership rate fell 0.2 percentage points over the half, remaining at 65.4% over Q3.
• This comes despite sales over the last 12 months booming across the nation (862K more annually to 6.38M, 15.4% up from 2019).
• Intense competition and increasingly unaffordable down payments lead many to worry about the eroding prospects of homeownership for younger generations, a potentially large societal loss.

Rolling out the archetype of the white picket fence and detached suburban house to describe the American dream really misses the point. It’s not the aesthetics of boomer built neighborhoods that younger generations want access to. It’s the full suite of what they offer: more reliable wealth building and the opportunity to shape homes and communities to the needs of our futures that upcoming homeowners want.

So one might think that a period of historically low mortgage rates just as millions of U.S. households are newly offered remote working options to access more affordable yet distant homes would be a boon to homeownership rates. And they might be, but so far competition has been so fierce, and the incentives for second, third, and nth home purchases strong enough that much of the activity in home sales this past year wasn’t really due to young adults finally making it.

Sales boomed across the nation this season, a whopping 862K more (+15.4%) arm’s length sales in the 12 months ending in September than in 2019. But despite this undeniable surge in purchase activity, U.S. homeownership rates increased only 0.6 percentage points over the past two years.

The homeownership rate finally began growing again after the housing bubble bust of the aughts by mid-2016. Sales volumes by then had finally grown past 5 million annually, a rate we are currently dwarfing. Over the next three years, including a hiccup in early 2019, the national rate grew 1.3 percentage points, a pace that would have overshot the current value had we kept it up.

The competition over housing reached a fevered pitch this season while mortgage rates dropped to historically low levels. Joining a massive generation of potential first-time buyers, second and investor buyers also descended on the market. The fastest moving and least price sensitive buyers included the institutional variety (like REITs incentivized by newly invented mortgage- and rental income-backed securities) and other affluent buyers that could use the low rate environment to expand their real estate holdings, often without having to liquidate stock portfolios.

The ability of wealthier and bigger buyers to harvest more U.S. housing during house price booms presents a real challenge for more moderate and first-time buyers who approach the same market with limited affordable options. It’s also challenge for policy makers given the task to close the homeownership rate gaps and foster social mobility in their communities. So let’s take a moment to consider what we lose, both as individuals, and as communities when everyday Americans lose access to homeownership.

A hugely tax advantaged, relatively “safe” way for everyday folks to make a leveraged investment

Every household should (though not everyone can) account for future income and cost of living changes whether the near future brings rampant inflation or not. The resiliency of your lifestyle is dependent on your ability to offset or avoid the rising cost of housing, higher education, elder-care and, lately, prices in general. Debt itself is a hedge against inflation (you repay the money when it has less value after prices rise), but you also need to save into something that appreciates. And you have options.

U.S. government policy has consistently supported the financial benefit of homeownership in all kinds of ways, perhaps most obviously with huge tax breaks (not paying capital gains on up to $250K in profit, $500k if married, is very meaningful) and federal insurance enabling a 30 year loan term. More recently, think of the incredible interest rate support from the Federal Reserve offering a chance to refinance and reduce your bills in a time of trouble or the critical foreclosure moratoriums and forbearance extension programs through the pandemic. The rental market by contrast is the wild west.

This massive support keeps mortgage rates low and long loan terms (and so low monthly payments) possible. It also enables a relatively safe way for the average person to make a leveraged investment. The leverage part goes like this: after contributing just the down payment, you earn the appreciation on the full value of the house and the fee for being about to super charge your down payment like that is the cost of your loan. The leveraged investment is actually a big part of the homeowners advantage. It’s possible to make leveraged investments in the stock market too, but way riskier.

These features in turn make homeownership a more predictable and often faster path to wealth and financial stability than renting and investing in less protected assets — a pattern that held true for most buyers (those that avoided foreclosure) even during the most traumatic housing cycles of our parents’ lifetimes.

Opportunity for sweat equity and a hedge against personal inflation

The ability to invest in your land and property enables a homeowner to earn a larger return by putting in some of their own time and labor (sweat equity) and tune the knobs on the quality and costs of their lives more personally (personal inflation hedge).

If renovation spending and my instagram feed is any indicator, homeowners used this past year to invest in the spaces they own by creating personal gyms, remote office spaces, daycare facilities to share with pod families, gardens to renew the soul, outdoor living and eating spaces to safely enjoy friends, and basement apartments to support the next more financially challenged generation.

In the coming years these renovations and investments can offset the price of gym memberships, commutes, dining out, and, if rising trends to aging-in-place is as indication, has the potential to lower the cost of future long-term care in one’s own home.

Behaviorally friendly (automatic and familiar) investment

People don’t participate in stock markets enough. That’s the conclusion of what economists call the equity premium puzzle. The evidence? The rate of return on stocks is above and beyond what would compensate for the risk.

Some behavioral economists explain our under participation like this: we’re irrational and ill-informed and we know it. Financial markets are so complicated that financial literacy is now a lifelong endeavor. Advice for investing in the stock market is generally to diversify and hold over the long-run, yet

Even the financially well-versed might panic and withdraw during a market downturn or feel unreasonably worried they had been taken advantage of or made the wrong decision and switch horses at the wrong time. These anxieties inspire more middle income folks to stay away from stock markets than probably should.

Putting up a down payment and locking into a mortgage — for which a share of your payment acts as a type of forced savings plan and your wealth grows with the value of the home — is probably the most familiar form of investment to the typical American. While buying a home is not risk free or easy, for better or worse, the long history of government incentives and support has provided a salience around home equity as an investment across the full income spectrum.

Still a highly complex transaction, government regulation requires that the buyer is supported and informed at various times along the way. The large upfront cost of the transaction incentivizes careful consideration and a long holding period, and keeps you from changing this investment strategy too often.

That said, those same transaction costs are too high. Too prohibitive and they keep homeowners in place when moving to chase a better employment opportunity would be a better strategy for social mobility. That might be less of an issue in the future, though.

The intense competition among prop and fin-Tech players, increasing in fervor during the pandemic, will lower transaction costs in home buying and selling. This will certainly lower the downside of having to move before you had planned. More remote work opportunities should do the same. By giving the local homeowner access to a national or even international job market without moving, growing deep roots will have fewer downsides and more benefits.

An incentive to stick around for a while, invest in the neighborhood and build community

While the nature of home buying incentives owners to stick around for longer, ownership and the added mechanism through which owners benefit financially from the appeal of the greater community may also incentivize more neighborliness.

It’s pretty tricky for researchers to disentangle the benefits of actually becoming a homeowner from what made that person a homeowner in the first place. A future homeowner likely has a greater financial capacity than someone who stays a renter. They also probably started with life goals that involved committing to a community. The best studies that try to account for this to measure the benefits of subsidizing homeownership come up with mixed results.

Here’s the intuitive economics behind it. Renters, the argument goes, invest their time and money in different areas of the community than owners. Because renters are more geographically mobile, they have less incentive to make decisions to benefit the hyper-local neighborhood in the long-run. They might bear the costs but not experience the benefit since they’ll move too early and without home equity to make it worth it.

On the other hand, homeowners’ interest in their investments also encourages higher levels of property and landscape maintenance and voting for long-run capital improvements. Some evidence even suggests homeownership increases neighborhood social involvement and local charitable giving.

Middle-class Americans’ slice of the pie

Widening inequality puts more and more assets into fewer hands. That includes real estate — assets that reflect the vast diversity in how we work and live, assets bolstered with the sweat and creativity of generations, assets for better or worse enshrined with federally policies and insurance to provide financial security.

As more single-family homes move into a single-family rental market increasingly owned by non-local investors big and small and down payment affordability erodes rapidly, experts are beginning to worry about the ability of future generations to access homeownership and the household wealth building and community enrichment it offers.

As a housing economist, I hope we find ways to keep the option alive for middle class America.