Top Posts – Homeownership Rates of Family Households

2024-12-31T09:14:37-06:00

With the end of 2024 approaching, NAHB’s Eye on Housing is reviewing the posts that attracted the most readers over the last year. In September, Catherine Koh dived into data on the homeownership rate of various household types including married couples with children, married couples with no children, single parents, and others. The homeownership rate for multigenerational households increased by 4.9 percentage points (pp) over the last decade, but there’s another household type that experienced an even larger increase in the homeownership rate over the same period—single parent households. In further analysis of the Census’s American Community Survey (ACS) data, NAHB dives deeper into the homeownership rate for other family household types: married couples with no children, married couples with children and single parent households. In 2022, most family households were married with no children (44%), followed by married with children (26%), single parents (12%), others (12%), and multigenerational families (6%). This composition has not changed much, with the exception of a gradual decrease in the share of married with children and single parent households, which is offset by an increase in the share of married with no children households. The homeownership rate for single parent households saw the largest gains in homeownership rate with an increase of 5.7 percentage points over the decade. However, the overall level of homeownership rate for single parent households remains the lowest among all other family household types at just 41%.    Another group that saw a large increase was the married couple with children households, with a 4.5% increase over the decade from 73% to 78%. Like multigenerational households, these increases were spurred on by historically low mortgage rates in 2021. The only household type to have plateaued was married without children. As a matter of fact, these households saw decreasing homeownership rates for a few years before creeping back up to be at roughly the same rate as they were ten years ago at 84%. Nonetheless, married without children households remain as the group with the highest homeownership rate with an average rate of 84% over the decade. We also examined the estimated home price-to-income ratio (HPI) for various household types. To calculate the home prices for recent homebuyers we used the median property value for owners who moved into their property within the past year. Here is where we see the effect of how multigenerational households were able to lower their HPI with pooled income and budgets. In contrast are single parent households with their estimated home prices approaching five times their income, indicating that these households are significantly burdened by housing costs.    Given that homeownership rates jumped in recent years for most household types despite increases in home prices suggests that the low mortgage rates in 2021 made steep home prices more palatable for homebuyers to enter the market. However, it is unlikely that we’ll see a continued increase in homeownership while mortgage rates remain elevated.  Discover more from Eye On Housing Subscribe to get the latest posts sent to your email.

Top Posts – Homeownership Rates of Family Households2024-12-31T09:14:37-06:00

Top Posts – How Quickly Do Prices Respond to Monetary Policy?

2024-12-31T09:14:46-06:00

With the end of 2024 approaching, NAHB’s Eye on Housing is reviewing the posts that attracted the most readers over the last year. In April, Eric Lynch examined various macroeconomic and housing finance components and their responsiveness to changes in the federal funds rate. As economist Milton Friedman once quipped, monetary policy has a history of operating with “long and variable lags.”[1] What Friedman was expressing is that it takes some time for the true effects of monetary policy, like the changing of the federal funds rate, to permeate completely through the larger economy. While some industries, like housing, are extremely rate-sensitive, there are others that are less so. Given the current inflation challenge, the question then becomes: how does monetary policy affect inflation across a diverse economy like the United States? This was the question that Leila Bengali and Zoe Arnaut, researchers at the Federal Reserve Board of San Francisco (FSBSF), asked in a recent FSBSF economic letter article, “How Quickly Do Prices Response to Monetary Policy” [2]. The economists examined which components that make up the Personal Consumption Expenditures (PCE) Index[3], an inflation measurement produced by the Bureau of Economic Analysis (BEA), are the most and least responsive to changes in the federal funds rate. While the Federal Reserve makes decisions “based on the totality of the incoming data”[4] including the more popular Consumer Price Index (CPI)[5] produced by the Bureau of Labor Statistics (BLS), their preferred inflation measure is PCE. This is the reason why the researchers focused on this specific index. Figure 1 represents how selected components would be affected over a four-year period if the federal funds rate increased by one percentage point.[6] The color of the bars is separated using the median cumulative percent price decline over this period: blue is the top 50% of all declines, while red is the bottom 50%. Both housing components (owner and renter) are classified in red or ‘least-responsive’, which might appear to be counterintuitive given how the latest tightening cycle starting in early 2022 has affected the residential industry. The NAHB/Wells Fargo Housing Market Index (HMI) declined every month in 2022, mortgage rates rose almost to 8%, and existing home sales fell to historically low levels. However, as the shelter component of CPI remains elevated, this less than expected responsive nature of housing could partially explain why the dramatic increase in the federal funds rate has yet to push this part of inflation down further compared to other categories. Figure 2 illustrates this point by showing both groups along with headline PCE inflation with their respective year-over-year changes since 2019. The blue shaded area is when the Federal Reserve lowered the federal funds rate, while the yellow vertical line is where the Fed started the most recent tightening cycle. The most responsive grouping (as defined by Figure 1 above) has experienced greater volatility than the least responsive grouping over this period. Especially as home prices have experienced minimal declines, this would provide further evidence for the housing components of inflation (i.e., prices) being somewhat less responsive to monetary policy. It is important to note that this does not suggest that the overall housing industry is not interest rate sensitive, but rather, that other sectors like the financial sectors responded faster. However, and NAHB has stated this repeatedly, this “less” than expected response for housing is a function of the microeconomic situation that housing is experiencing. Shelter inflation is elevated and slow to respond to tightening conditions because higher housing costs are due to more than simply macroeconomic and monetary policy conditions. In fact, the dominant and persistent characteristic of the housing market is a lack of supply. Also, higher interest rates hurt the ability of the home building sector to provide more supply and tame shelter inflation, by increasing the cost of financing of land development and residential construction. This may be the reason for the somewhat counterintuitive findings of the Fed researchers. The Federal Reserve has a dual mandate[7] given by Congress, which instructs them to achieve price stability (i.e., controlling inflation) and maximize sustainable employment (i.e., controlling unemployment). To accomplish the first part, the Federal Reserve has targeted an annual rate of inflation at 2%.  As Figure 2 showcases, while the headline PCE remains above this target, the most responsive grouping of PCE is, in fact, below 2% and has been for many months. This leads one to conclude that what is preventing the Federal Reserve from achieving its desired inflation target is due to the least responsive components of the index. Figure 3 details this case with the bars representing the contributions of the two groupings (most and least responsive) to headline PCE inflation and the yellow line is the federal funds rate. The researchers were able to draw two conclusions from this chart: “[The] rate cuts from 2019 to early 2020 could have contributed upward price pressures starting in mid- to late 2020 and thus could explain some of the rise in inflation over this period.” “The tightening cycle that began in March 2022 likely started putting downward pressure on prices in mid-2023 and will continue to do so in the near term.” Nevertheless, even though there are some who suggest that these monetary policy lags have shortened[8], the researchers do not believe that the drop in inflation after the first rate hike in early-2022 was a direct effect of this policy action. As evident by Figure 3, the fight to get inflation down to target is going to be much harder moving forward, especially given housing’s least responsive nature. As the researchers concluded, “[even] though inflation in the least responsive categories may come down because of other economic forces, less inflation is currently coming from categories that are most responsive to monetary policy, perhaps limiting policy impacts going forward.” The Federal Reserve will have to weigh this question as 2024 continues: what are the trade-offs for reaching their inflation rate target to the larger economy if the remaining contributors of inflation are the least responsive to their policy actions? More fundamentally, if housing (i.e., shelter inflation) is not responding as expected by the academic models, policymakers at the Fed (and more critically policymakers at the state and local level with direct control over issues like land development, zoning and home building) should define, communicate, and enact ways to permit additional housing supply to tackle the persistent sources of U.S. inflation – shelter. The opinions expressed in this article do not necessarily reflect the views of the Federal Reserve Bank of San Francisco or the Federal Reserve System. Notes: [1] https://www.marketplace.org/2023/07/24/milton-friedmans-long-and-variable-lag-explained/#:~:text=long%20and%20variable%20lag. [2] Bengali, L., & Arnaut, Z. (2024, April 8). How Quickly Do Prices Respond to Monetary Policy? Federal Reserve Bank of San Francisco. https://www.frbsf.org/research-and-insights/publications/economic-letter/2024/04/how-quickly-do-prices-respond-to-monetary-policy/ [3] https://www.bea.gov/data/personal-consumption-expenditures-price-index [4] https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230726.pdf [5] https://www.bls.gov/cpi/ [6] Specifically, the researchers used a statistical model called vector autoregression (VAR) which examines the relationship of multiple variables over time.  As a result, VAR models can produce what are known as impulse response functions (IRF) which can show how one variable (prices) responds to a shock from another (federal funds rate). Figure 1 is the cumulative effect (i.e., adding all four individual year effects together) of this process. [7] https://www.chicagofed.org/research/dual-mandate/dual-mandate [8] https://www.kansascityfed.org/research/economic-bulletin/have-lags-in-monetary-policy-transmission-shortened/ Discover more from Eye On Housing Subscribe to get the latest posts sent to your email.

Top Posts – How Quickly Do Prices Respond to Monetary Policy?2024-12-31T09:14:46-06:00

Top Posts – Top Compromises Buyers Will Make to Reach Homeownership

2024-12-30T09:20:58-06:00

With the end of 2024 approaching, NAHB’s Eye on Housing is reviewing the posts that attracted the most readers over the last year. In May, Rose Quint shared key takeaways of NAHB’s study of home buyers.  High mortgage rates and double-digit growth in home prices since COVID-19 have brought housing affordability to its lowest level in more than a decade.  Given this reality, a recent NAHB study on housing preferences* asked home buyers about which specific compromises they would be willing to make to achieve homeownership. For 39% of buyers, accepting a smaller lot is the path to affording a home.  This finding highlights the paramount importance of reforming zoning laws that mandate lot sizes, as nearly 4 out of 10 buyers would be willing to give up land in exchange for owning a home.  For 36% of buyers, accepting fewer exterior amenities is the way to homeownership—they will simply add that deck or patio at some point in the future.  Another 36% were willing to move farther from the urban core and 35% will accept a smaller house if that’s what it takes to buy it. But what areas of the home, specifically, should shrink to reduce the overall footprint of the home?  Most buyers who will take the smaller house compromise sent builders and architects a clear message: shrink the home office (53%) and the dining room (52%) to save on square footage.  Also, loud and clear in the message: leave the kitchen (only 21% would want that smaller) and closet space (22%) alone. *  What Home Buyers Really Want, 2024 Edition sheds light on the housing preferences of the typical home buyer and is based on a national survey of more than 3,000 recent and prospective home buyers.  Because of the inherent diversity in buyer backgrounds, the study provides granular specificity based on demographic factors such as generation, geographic location, race/ethnicity, income, and price point. Discover more from Eye On Housing Subscribe to get the latest posts sent to your email.

Top Posts – Top Compromises Buyers Will Make to Reach Homeownership2024-12-30T09:20:58-06:00

Top Posts – Examining Differences between Homeowner and Renter Wealth

2024-12-30T09:21:16-06:00

With the end of 2024 approaching, NAHB’s Eye on Housing is reviewing the posts that attracted the most readers over the last year. In March, Jing Fu compared homeowners and renters’ major assets, debt and net worth, as well as differences between age groups.  As examined in a previous post, homeownership plays an integral role in a household’s accumulation of wealth. This article further discusses the role of homeownership and examines the difference between homeowner and renter household balance sheets across assets, debt, and net worth. Households who own a primary residence (homeowners) build primary residence equity, while renters have zero residence equity. In the third quarter of 2023, CoreLogic’s homeowner report analysis detailed that U.S. homeowners with mortgages have seen their equity increase by a total of $1.1 trillion, a gain of 6.8% from the same period in 2022. In addition to primary residence equity, households who own a primary residence almost always own other assets as well. In contrast, households who do not own a primary residence (renters) neither accumulate wealth from home price appreciation, nor do they benefit from primary residence equity gains by paying down a home mortgage. Moreover, renters typically own a much smaller amount of other assets in aggregate than homeowners. Both home equity and non-residence equity account for the wealth gap between homeowners and renters. It is useful to keep in mind that almost all households will spend time as a renter and time as an owner. Prior NAHB analysis1 indicates about 9 out of 10 households will be homeowners during some period of their lifetime. As such, while homeownership is key pathway for wealth accumulation, the rental market plays a role in this process as well, as most households will rent before they own a home. ASSETS: In 2022, while almost every family owned some assets, homeowners own the vast majority of assets in aggregate. An analysis of the Survey of Consumer Finances (SCF) suggests that the households who owned a primary residence own most other assets in sum, such as other residential real estate2, vehicles, other non-financial assets3, business interests, stocks and bonds, retirement accounts, and other financial assets4. This is shown in Table 1 below. In contrast, renters who do not own a primary residence do not own as many other assets as homeowners. For example, in aggregate, homeowners owned 16 times more stocks and bonds than renters, 15 times more business interests and retirement accounts than renters. Table 2 presents median values of assets, debt, and net worth for all these homeowners and renters by age categories in 2022. Homeownership and housing wealth are strongly associated with age. The median value of the primary residence rose for homeowners aged between 35 and 44, reached the peak for homeowners aged 45 and 54, before declining for those aged 55 and above. Meanwhile, the median value of homeowners’ other financial assets continued to rise across these age categories. The median value of retirement accounts increased to $65,000 for homeowners aged between 45 and 54 and decreased as age increased. At the same time, the median value of business interests, other non-financial assets, and stocks and bonds among homeowners remained zero, indicating that fewer than half of homeowners own these assets at any age cohort. While Table 1 suggests that the owners of these assets are more likely to be homeowners, Table 2 indicates that a minority of homeowners own such assets. However, among households that owned these assets, the median value of business interests, other non-financial assets, and stocks and bonds grew over the entire age categories, as illustrated by Table 3 below. For renters, more than half of renters owned other financial assets, but they did not accumulate as they aged. Noticeably, fewer than half of renters owned retirement accounts, other residential real estate, other non-financial assets, and business interests at any age cohort. When renters were 65 or older, the median value of their financial assets and non-financial assets dropped by almost half from the median value when they were under 35. DEBT: On the debt side of homeowners’ balance sheets, the value of the primary home mortgage debt was the largest liability faced by homeowners. However, the median value of mortgage debt declined between the 35 to 64 age categories. More than half of homeowners above the age of 65 did not have mortgage debt (nor a balance on any of the other major debt categories). For renters, the value of credit card and installment debt was the largest liability in their debt category. The median value of credit card and installment debt declined between the 35 to 64 age categories and was zero for renters aged 65 or older. NET WORTH: Net worth, the measure of households’ wealth, is the difference between families’ assets and liabilities. An analysis of the 2022 SCF found that homeowners had a median net worth of $396,000, while renters had the median net worth of just $10,400. Thus, homeowners are wealthier than renters. Among homeowners, the primary residence equity was the largest category of their net worth. However, for renters, the non-primary residence equity was the larger portion of their net worth, reflecting the accumulation of other assets by renters in their life stages, as illustrated in Table 2. Across homeowners, the median amount of primary residence equity rose successively with age, largely reflecting a lower amount of mortgage debt as opposed to a higher home value. In 2022, the median net worth for homeowners was about 38 times the median net worth for renters. Excluding the primary residence equity from net worth, the median non-residence equity of homeowners was 15 times that of renters.   Note: 1 Ford, C. (2019). “Lifetime Homeownership and Homeownership Survival Rates Using the National Longitudinal Survey of Youth,” NAHB Special Studies, November 1, 2019. https://www.nahb.org/-/media/1057BA30B7A94167A26D3AC1F7A6B498.ashx 2 Other residential real estate includes land contracts/notes household has made, properties other than the principal residence that are coded as 1-4 family residences, time shares, and vacation homes. 3 Other non-financial assets defined as total value of miscellaneous assets minus other financial assets. 4 Other financial assets include loans from the household to someone else, future proceeds, royalties, futures, non-public stock, deferred compensation, oil/gas/mineral investments, and cash, not elsewhere classified. 5 According to the SCF, the term “families”, used in the SCF, is more comparable with the U.S. Census Bureau definition of “households” than with its use of “families”. More information can be found here: https://www.federalreserve.gov/publications/files/scf17.pdf. Discover more from Eye On Housing Subscribe to get the latest posts sent to your email.

Top Posts – Examining Differences between Homeowner and Renter Wealth2024-12-30T09:21:16-06:00
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