Another stunning measure of affordability is the number of buyers who are living on a single income. Of those who earned $30,000 to $40,000 last year, nearly 40 percent qualified for a mortgage on just one paycheck, reports Chicago Title and Trust-a dramatic jump from 24 percent in 1991. Nearly half of last year’s buyers were achieving first homes-including the highest percentage of nevermarried singles Chicago Title has ever seen. Maybe-just maybe-this signals an end to the long and troubling decline of homeownership among young adults.
For the past 20 years, each new wave of young people found houses ever harder to buy. A typical example are households in the age range of 25 to 29 (formerly, a prime home-buying time). Back in 1973, around 44 percent owned where they lived. By last year that number had plunged to 34 percent. What especially gravels the young is that, over the same period, older people found it easier to buy. Homeownership rose among people 55 and up.
As any group ages from 25 to 65, the portion owning homes will rise. But in all years so far, baby boomers bought at lower rates than their elders did. Post-boomers are faring worse. Even if the slide has indeed been arrested, high levels of ownership won’t return until there’s a change in politics of the market, as well as in its economics.
The upcoming political battles will engage the restrictions on land use, water and population density, which push up the price of developed land. For builders, the challenge is cutting costs-by developing less expensive lots, finding lower-cost suppliers and drawing simpler floor plans. In California, some starter houses do without family rooms or second bathrooms, says Ira Norris, chief of Inco Homes in Upland, Calif. Both the size of new California houses and their price per square foot declined last year, for the first time since the 1973-74 recession. Average house size will probably rise again when the market improves. But smaller homes, more efficiently built, have emerged as an underexploited niche.
Still, they have to compete with older homes, which cost less than new ones and hold their value better than condominiums. To make decent money, plan on owning your property for five years. That’s a shameless generalization, I know. But it does take time for rising prices to cover your costs and build enough equity for a trade-up.
The average house (if such a thing exists) might appreciate 3 percent to 4 percent annually over the ’90s-at least, that’s the range most analysts use. But all markets are local; some will do better, others worse, depending on supply and demand. The South and Midwest are good candidates for a 4 percent gain, says economist Anthony Downs, of the Brookings Institution in Washington, but prospects are poorer in California and New England.
Boston’s experience shows the downside of real-estate booms. As demonstrated by Karl Case, economics professor at Wellesley College, booms exaggerate the highs in a business cycle by creating jobs solely to feed the feverish housing market. When the cycle tips over, the loss of those jobs aggravates the inevitable decline. The Middle West, which originally watched the booms with envy, now exemplifies the virtues of markets that quietly chug ahead. As the National Association of Realtors sees it, when house prices rise above the general inflation rate by much more than a couple of points, you’re borrowing appreciation from the future. That’s an invitation for home values to stall.
A 3 percent return, by the way, isn’t as modest as it sounds. Your true yield is computed on your down payment, not on the property’s total price. If you put down $10,000 on a $100,000 house, and the value rises by $3,000, your gross increase is 30 percent (before all costs and taxes). Furthermore, your investment keeps the rain off, which is more than can be said for stocks. Your psychic returns include the chance to retire in a paid-up house.
For those wondering whether to rent or buy, put away your Ouija board. You cannot predict whether your $10,000 would net more in real estate or in stocks. To my mind, the decision turns on circumstances. Do you think you might move away or marry? Then rent. Have your toes grown roots into the community? Then buy.
Today’s heavy sales aren’t likely to send prices spiraling up. Too many owners intend to unload as soon as the market feels a bit firmer. Too many builders already have their hammers out. Except when mass hysteria reigns (in California, permanently), supply and demand for property tend to stay in rough balance over time.
This year and next should be characterized by big catchup sales to buyers formerly locked out by recession and high interest rates. But the next potential wave of demand doesn’t look so strong. Large numbers of young renters still can’t afford homes (adjusted for inflation, their earnings declined in 1990 and 1991). Down payments are tough to accumulate. Current owners may decide not to trade up, to avoid being house poor in middle age. And behind the boomers comes that small generation, the baby bust. With fewer young households, growth will slow.
The market solution to demographic decline-not only for builders but also for mortgage bankers-is to find ways of serving those whom the housing boom forgot. For lenders, this means reconsidering classes of customers once dismissed-for example, minorities (who may suffer from illegal discrimination) and lower-income workers who never missed a rent payment. Both Fannie Mae and Freddie Mac-two federally backed companies that buy mortgages from lenders-are promoting nontraditional loans. The lenders in Fannie Mae’s Community Home Buyer’s Program, for example, accept borrowers with modest incomes (generally, under $40,000), higher debts than normal and little cash. Major lenders like Prudential Home Mortgage are targeting ethnic and low-income customers. Progress will be slow, but the direction finally looks right.
