Faltering homeownership rates have become a widespread concern in the aftermath of the housing bust and financial crisis. Young adults have experienced particularly large declines in homeownership, with the homeownership rate of 25 to 44-years old plummeting by 10% over the past decade. While the foreclosure crisis was one obvious cause of the young-adult homeownership retreat, other contributing factors include a slow labor market recovery from the Great Recession, tighter post-crisis mortgage credit, a limited supply of entry-level homes, and long-term social changes such as delayed marriage and childbearing. Given these multiple contributing factors, some of which are more subject to intervention than others, policy makers and housing professionals have struggled to define the role of policy in shaping future homeownership rates.
In an effort to illuminate alternative paths, University of Southern California researchers Dowell Myers, Gary Painter, Julie Zissimopoulos, Hyojung Lee, and Johanna Thunell have produced a series of working papers that disentangle the many factors influencing young-adult homeownership, thereby producing valuable insights into the potential efficacy of various policy levers. The first working paper demonstrated the importance of parental financial transfers in increasing young-adult home buying, suggesting a potentially significant role for down payment assistance in expanding homeownership. The second paper found that receiving a bachelor’s degree increased the likelihood of homeownership, hinting at the potential impact of education policy. A third paper found that the correlates of homeownership varied under different credit and economic conditions, suggesting that policy interventions need to be sensitive to the market context in which they are implemented.
In the latest and final installment of the working paper series, the authors simulate how future changes in the characteristics of young adults might affect changes in their homeownership rate. The analysis estimates prospective changes between 2015 and 2035 in the prevalence of homeownership among young adults aged 25 to 44, prime ages for first-time home buying. The simulations place special emphasis on how increases in racial and ethnic diversity and alternative scenarios for future college educational attainment might alter the trajectory of young-adult homeownership. To take into account how alternative market conditions might modulate policy impacts, the authors run their simulations under both a credit- and housing-supply-constrained post-crisis market context and also under a more favorable normal market context, similar to conditions before the housing bubble.
The simulation results contradict a popular narrative that suggests increasing racial and ethnic diversity will invariably lead to a decline in the young-adult homeownership rate. The authors simulations do indicate that increasing minority shares could lead to a decline of between one-half and one percentage point in the young-adult homeownership rate over the next 20 years, but only under the unlikely assumption that education, income, and wealth remain constant within racial/ethnic groups. This assumption is unlikely to materialize because education levels of minorities have been rising steadily, and because income and wealth tend to increase with higher educational attainment. Taking the recent trend of rising education levels (and associated gains in incomes and wealth) into account yields an increase of about 1.5% in the young-adult homeownership rate over the next two decades, even with the increase in the minority population share.
Whether intervention comes in the form of raising education levels to close interracial gaps in educational attainment or of policies more directly related to housing, such as providing down payment assistance, encouraging increased housing supply, or expanding access to mortgage credit, increasing the homeownership demand of young adults will become very important as aging Baby Boomers begin to vacate the vast stock of owner-occupied homes that they currently inhabit. Their inevitable departure from owner-occupancy will create a much larger generational succession in the housing market than ever seen before, and an intergenerational hand-off that sustains home values will require much larger demand from younger adults. The fates of the generations are tied together, and so far the young are lagging behind.
*Excerpts from a Fannie Mae article Growing Diversity, Rising Educational Attainment, and the Future of Young-Adult Homeownership dated 04/20/2017
**Via Economic Focus