In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi discuss the history of homeownership in the U.S., the impact of homeownership on wealth creation, and current demographic-driven trends influencing homeownership and the housing market.
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Listen to the REconomy Podcast™ Episode 67:
“So Millennials are delaying homeownership, not deferring it. That investment in education will continue to pay off. We know higher educational attainment increases earning potential, which in turn boosts house-buying power, and increases the likelihood of purchasing a home. Indeed, Millennials pursuit of higher education may have delayed their transition to homeownership, but it gives them a boost now that many are finally making that transition. In 2022, a third of primary home purchases, were by people aged 25 to 34, which includes mostly Millennials, along with older Gen Zers.” – Mark Fleming, chief economist at First American
Transcript:
Odeta Kushi - Hello and welcome to episode 67 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing and affordability. I am Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hey, Mark, Happy National Homeownership Month.
Mark Fleming - National Homeownership Month. Hi, Odeta. I guess it is still technically June, so Happy National Homeownership Month, indeed, to you as well. I'm curious, though, when was June declared National Homeownership Month?
Odeta Kushi - It was actually in 1995 that President Bill Clinton started National Homeownership Week. I remember it like it was yesterday.
Mark Fleming - Weren't you four years old in 1995?
Odeta Kushi - Okay, yeah, good point. I don't remember it at all. But I do know that it was President George W. Bush that then expanded the observance to the entire month of June in 2002. But why all the focus on homeownership? I mean, for as long as I can remember, I've been told that homeownership is a primary tenet of the American Dream, not to mention that homeownership is highly regarded as a measure of how well the country's socio-economic system is doing for the typical family. So, in today's episode, we'll talk a little bit about the history of homeownership in the U.S. and how we actually measure the homeownership rate in this country, why homeownership matters from a financial perspective, and how today's largest generation, my generation, is faring when it comes to attaining the ever-important American Dream of homeownership.
Mark Fleming - That is quite a list. So we better get started, because otherwise, it'll be a very long podcast, and what better place to start then at the beginning, so we're gonna go way back. And I mean, long before my favorite decade. A typical mortgage in the early 1900s, might have had a term of five years and require a 50% down payment.
Odeta Kushi - Ooooh.
Mark Fleming - Exactly. Plus, they were usually structured with interest-only monthly payments and a balloon payment at the end for the entire principle. This is, of course, highly encouraging of homeownership, of course, exactly. This was okay until the Great Depression hit, then banks stopped lending and borrowers were left without any cash. I just keep thinking about 'It's A Wonderful Life' when this comes up. To stabilize the housing market, the U.S. government created the Homeowners Loan Corporation in 1933, the Federal Housing Administration in 1934, and the Federal National Mortgage Association, now Fannie Mae, in 1938. Then came the GI Bill of 1944, which provided low-cost mortgages, low-interest loans and financial support for World War II veterans. The GI Bill, this is really important, led to a surge of demand for housing, and essentially was the reason, along with the development of highways and mass-produced cars, for the development of suburbs around most of the major cities at the time. One-fifth of all single-family homes built in the 20 years following World War II were financed with the help from the GI Bill loan guarantee program. And,by 1950, for the first-time in American history, more than half of all Americans owned their homes.
Odeta Kushi - It's like the golden era for the expansion of homeownership.
Mark Fleming - It was indeed. Homeownership through our favorite decade, the 1980s, until the 1990s remained consistently within the 63 to 65% range. It wasn't until the late '90s that the homeownership rate increased further and eventually exceeded 66% in 1998. Then, of course, we had the housing boom when homeownership peaked at 69%. And, of course, the subsequent decline. Today, the homeownership rate is exactly 66%.
Odeta Kushi - I just want to highlight that you said our favorite decade. That is your favorite decade. I'm a '90s person. Okay, my favorite decade, I need that on the record. Alright, so the homeownership rate today is lower than the peak of nearly 70% in the mid-2000s, but higher than the recent trough of about 63% in 2016. So, what's driving these swings in the homeownership rate?
Mark Fleming - Big swings, funny that three percentage points is a big swing. Good point. Good point. But it's because the homeownership rate prior to the housing boom was so stable, it is a big deal that it moves 3%, given the historical lack of movement really at all. And one big factor is demographics. And to explain that we have to explain how the homeownership rate is calculated. Care to do the honors, Odeta?
Odeta Kushi - I sure will. So the homeownership rate is just the number of owned households divided by the total number of rented and owned households. So very simple mathematics there. Now, prior to the Great Financial Crisis, there was lots of owned household formation, adding to the numerator and denominator of the homeownership rate. Now, what we've seen in the aftermath of the Great Financial Crisis is growth in rental household formation. That's your Millennials aging out of their parents home or their college dorms. So, in those instances, you go from a group setting in college or in your parents home, but in either case, you're not considered a household or you're considered part of your parents household. So, that's one reason why the homeownership rate declined from 2005 to 2016. We increased that denominator, which caused the homeownership rate to decline.
Mark Fleming - And I think it's important to say here that the homeownership rate went down, because there were more renters, not fewer homeowners.
Odeta Kushi - Exactly. But starting in 2016, we saw the homeownership rate increase once more, that's your older millennials aging into homeownership. Recall that millennials are not only the largest living generation, but they're between the ages of 27 and 42 as of this year, so they're continuing to age into their late 20s and early 30s, which are the prime home-buying years.
Mark Fleming - And the renting millennial household moves from being a renter to a homeowner adding to the numerator, and voila, homeownership goes up. In the latest Q1 2023 data, the number of owned households increased on a quarterly basis by 16,000, while the number of renter households declined by 178,000, and the homeownership rate was essentially flat on a quarterly basis.
Odeta Kushi - Interesting, but, but wait a minute, are we saying that millennials are actually out there buying homes?
Mark Fleming - Well, it took them long enough, but yes, that's right. Homeownership data from again, Q1 of 2023 revealed that on a quarterly basis, the homeownership rate increased the most for households under 35 years old, followed by households between 35 and 44 years old.
Odeta Kushi - But we're the forever renter, avocado toast generation.
Mark Fleming - Hey, you know, Gen Xers like avocado toast, too, so maybe we should form a Breakfast Club. Get it? See what I did I did there, get it?
Odeta Kushi - I really thought we could get through a whole episode without one of these. We digress.
Mark Fleming - Never!
Odeta Kushi - You know, with student loan debt burdens and the scars of the Great Recession and tight housing inventory, it's not difficult to see why people would assume that Millennials would turn out to be a generation of renters.
Mark Fleming - Yes, despite this past popular opinion, Millennials are not only interested in homeownership but, as of 2022, the majority of millennials, 51%, are homeowners according to Census Bureau data. Many demographic and lifestyle factors point to a generation that is aging into their prime home-buying years. The bulk of Millennials are over the age of 33. Nearly half are married, and approximately 40% have a bachelor's degree or higher, making Millennials the most educated generation in American history.
Odeta Kushi - You can't see this listener, but I am very prideful right now.
Mark Fleming - You really are. You're beaming for ear to ear.
Odeta Kushi - I am. I am very excited. Tell me more about how great my generation is. Well, in prioritizing their education, Millennials have delayed marriage and family formation relative to previous generations and the delay of these key lifestyle decisions, which are correlated with the transition to homeownership, has translated into a delay in the homeownership rate for Millennials compared with their generational predecessors. Probably another reason why people assumed Millennials would remain forever renters. At the same age of 30, 42% of Millennials owned homes, compared with 48% of Gen Xers at the same age. Over the past decade, however, Millennials have significantly narrowed this gap. At the age of 41, the millennial homeownership rate is 62%, while Gen X stood at 64%.
Mark Fleming - So Millennials are delaying homeownership, not deferring it. That investment in education will continue to pay off. We know higher educational attainment increases earning potential, which in turn boosts house-buying power, and increases the likelihood of purchasing a home. Indeed, Millennials pursuit of higher education may have delayed their transition to homeownership, but it gives them a boost now that many are finally making that transition. In 2022, a third of primary home purchases, were by people aged 25 to 34, which includes mostly Millennials, along with older Gen Zers.
Odeta Kushi - So Millennial home buying is here to stay, even though this is a very challenging market, particularly for first-time home buyers. By the way, our colleague Ksenia has written all about this in a recent blog post entitled 'Millennials, Walking Around Like They Own the Place,' which you can find at firstam.com/economics.
Mark Fleming - Oooh, that is a clever title. I have to say. I thought so, yeah.
Odeta Kushi - So this brings me to my next question. What's the financial benefit of homeownership anyway, what's all the fuss about?
Mark Fleming - It so simple. Homeownership is the primary driver of wealth creation in the United States.
Odeta Kushi - But what does that even mean? How does homeownership drive wealth creation?
Mark Fleming - Home ownership requires buyers to first save for a down payment, so there's wealth right there. And, as a homeowner, you also build equity every month, the equity being the amount of money that a homeowner can get if they sell their home minus the debt the homeowner owes on it. Sort of how much of it you own after paying off your debt. Each month the mortgage payment acts like a forced savings plan by reducing the amount owed on the home with each little bit of principle you pay a benefit that renters do not have. Renters can only build similar wealth if they invest an amount equal to the initial down payment, and then invest an amount each and every month equal to the principle that that homeowner is paying off each and every month.
Odeta Kushi - Not to mention the value of the home changes over time, usually increasing over the long run. Homeowners build equity wealth over time simply by being the asset owner. As homeowners move for a new job or for a larger home or for access to better schools for their children, the equity they have accumulated goes with them.
Mark Fleming - And, of course, in recent years, that's been a big benefit, as house prices have increased so much. Renters as non-homeowners gain no wealth benefit as home prices rise. That wealth actually accrues to the landlord. Homeownership, even for the lowest quintile of income earners, helps to facilitate additional non-housing savings. Over time, assuming your wages don't rise, or assuming, sorry, that your wages do rise, the fixed payment for shelter becomes a lower burden. And, therefore, homeowners are able to save in other ways that renters cannot.
Odeta Kushi - In that sense, it's also an inflation hedge, right? You've got your fixed housing cost, your wages and the cost of living is going up, but your housing costs are not. But let's put some numbers to this that you may have heard from us in previous episodes as well. According to the 2019 Survey of Consumer Finances, a survey that collects detailed accounts of household finances. The median homeowner has 40 times the household wealth of a renter, $255,000 for the former compared to about $6,000 for the latter.
Mark Fleming - 40 times.
Odeta Kushi - That's huge, right?
Mark Fleming - Yep.
Odeta Kushi - And, you know, homeowners are wealthier than renters at every income level. And the majority of homeowner wealth comes from housing for every income category, except for the very top earners. For example, for the lowest income group, the median net worth of a homeowner household is about $102,000, but for the renter household it is only $1,500. So, at the lowest income category, 92% of total homeowner net worth is tied to the value of residential property.
Mark Fleming - And, if you can't tell, listeners, that we are big fans of homeownership wealth creation. Between 2016 and 2019, housing wealth was the single biggest contributor to the increase in net worth across all income groups, accounting for 32% of the overall increase. This was especially true for lower income households. For households at the bottom of the income distribution, the value of housing wealth increased by $21,000. More than all other asset types combined.
Odeta Kushi - Alright, so are we just saying everyone should hope to become a homeowner?
Mark Fleming - Well, not necessarily. Everyone should have access to shelter, but the decision to rent or own that's ultimately a more personal decision.
Odeta Kushi - Right. We talk all about what drives a decision to become a homeowner in Episode 10 of the podcast.
Mark Fleming - That's going way back again.
Odeta Kushi - That's right, an oldie but a goodie.
Mark Fleming - If I recall correctly from that episode, Odeta, your answer to how someone should decide whether to rent or own was...
Odeta Kushi - By calculating the net-present value with after-tax cash flow is being discounted by the home buyer's required rate of return, obviously.
Mark Fleming - Obviously, or it is determined, first and foremost, by a lifestyle choice. Many people just prefer to rent.
Odeta Kushi - I mean, I know I sure did when I first moved to Washington, D.C.
Mark Fleming - I think most of us do at some point in our lives. So, the decision to own is, first and foremost, driven by that lifestyle decision. And then, secondly, you determine if and how much you can afford to buy.
Odeta Kushi - So that's when you calculate the net-present value with after-tax cash flow is being discounted by the home buyers required rate of return.
Mark Fleming - Yeah, that's such a long statement. Um, if you say so. Spoken like a true economist.
Odeta Kushi - All right, well, I saw that eye roll, so maybe that's a good place to stop. Happy Homeownership Month to all and thank you, as always, for joining us on this episode of The REconomy Podcast. If you have an economics-related question, you'd like us to feature in the future, you can email us at economics@firstam.com. We love to hear from our listeners. And, as always, if you can't wait for the next episode, you can follow us on Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.
Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2023 by First American Financial Corporation. All rights reserved.
This transcript has been edited for clarity.
