Why Homeownership Is Falling – Despite Lower Prices: Look to the Job Market


By Susanne Trimbath and Juan Montoya

There’s something about “Housing Affordability” that makes it very popular: Presidents past and present set goals around it. The popularity of this perennial policy goal rests on the feel-good idea that everyone would live in a home that they own if only they could afford it. Owning your own home is declared near and far to be the American Dream.

Recently, however, it seems that Americans’ aren’t all having the same dream. Despite improving conditions of affordability, home sales continue to decline. Affordability is balanced on a tripod of prices, incomes and interest rates. As incomes become unstable because of mounting job losses, housing falls further out of balance – no change in price or mortgage interest rates will be enough to rebalance the tripod within the next twelve to eighteen months,

In a new study on Homeownership Affordability we identify two anomalies in the data: home sales are falling as housing affordability is rising; and the rate of homeownership since 2004 has fallen despite the apparent “boom” in housing.

Rising Affordability with Falling Sales

In the last three years, the average mortgage interest rate was 6.14%. Such historically low rates should improve affordability compared to, say, the time of the 1990s credit crunch when mortgage rates averaged 9.3%. Leading up to 2007, median income in the US rose by 0.6% and median home prices fell by 3.1% – also a positive indicator for affordability. The mortgage payment to income ratio at the median has fallen to about 23%. Compared to 32% in 2002 and even 40% in 1988, just before the 1990s credit crunch, this should be a very positive indicator for homeowner affordability. Yet, new home sales have plummeted from a rate of about 1.4 million per year in the summer of 2005 to less than 500,000 by the end of 2008.

In 2007, for every 1% improvement in affordability, home prices fell by 2%. There clearly has been a breakdown in the fundamental relationship between supply and demand. Why? It appears potential buyers are concerned that homes are over-priced and, worse yet, that home price declines will increase in the future. There are indications that some households think that homes are over-priced regardless of affordability and, furthermore, not everyone who can afford a home is interested in buying one. Some communities, some jobs and some lifestyles are better suited to renting.

Ownership Policies with Falling Ownership

All this has occurred in the face of conscious federal policy. Expanding homeownership opportunities, especially for minorities, was a fundamental aim of the Bush Administration’s housing policy – one strongly supported by Democrats in Congress. In June 2002, HUD announced a new goal to increase minority homeownership by 5.5 million by the end 2010. Hispanics were the only minorities to have clear gains in homeownership through 2008: a 4.1 percentage point increase compared to the end of the last decade. The gains in homeownership for black Americans was about the same as for the nation as a whole. Yet the ownership rate for the nation as a whole declined by almost 1 percent during the more recent “housing bust” years.

Some regions saw bigger losses in homeownership than others, especially those outside the urban areas and particularly in the Midwest.

Where do we go from here?

We believe the analytical focus needs to shift to employment when analyzing housing for individual states, regions or cities. The accompanying table shows where, at the state level, the workforce is shrinking as unemployment is rising. These are the areas, much like Southern California at the end of the Cold War or Houston after the 1980s bust in oil prices, that will suffer potentially devastating drops in home prices as a result of forced sales by departing labor.

Supply, demand and pricing, the cost of financing, household income and home prices – all are critical factors in the equation of homeownership. But more than anything we believe that mounting job losses, in addition to a declining stock market, will now play the critical role. Over time, the current credit crisis will not only make funds more scarce – which must eventually drive up the price of credit – but also drive up the risk premium demanded by lenders. Growing job uncertainty will increase the price of credit even further.

These factors alone will negatively impact affordability in the future. Keeping mortgage rates artificially low (for example, as the Federal Reserve buys up mortgage-backed securities as proposed in Congress) will create upward pressure on prices, which in turn will hurt affordability. Additionally, we see continued imbalances in the supply-demand equation as foreclosures add inventory to the market.

In the coming 12 to 18 months, we believe that interest rates will rise and incomes will, at best, remain flat in the face of the global recession. More importantly, as job losses mount, “affordability” will be less important and “maintainability” – the ability of homeowners to keep their homes in the face of unemployment – will emerge as a major factor. In the meantime, housing affordability will hang precariously out of balance due to falling incomes and decreasing jobs as well as surging real interest rates.

State Change in Total Workforce and Unemployed
%change in number of workforce
%change in number of unemployed
Unemployment rate as of Dec. 2008
Michigan -1.9% 39.7% 10.6%
Rhode Island -1.8% 88.1% 10.0%
Alabama -1.8% 75.3% 6.7%
Illinois -1.5% 40.3% 7.6%
West Virginia -1.3% 4.6% 4.9%
Mississippi -1.1% 25.6% 8.0%
Missouri -0.8% 37.6% 7.3%
Tennessee -0.4% 59.4% 7.9%
Ohio -0.3% 33.8% 7.8%
Arkansas -0.1% 12.7% 6.2%
New Hampshire -0.1% 33.6% 4.6%
Utah -0.1% 51.8% 4.3%
Delaware 0.0% 75.3% 6.2%
Wisconsin 0.1% 27.8% 6.2%
Maryland 0.1% 63.4% 5.8%
Kentucky 0.3% 48.4% 7.8%
Iowa 0.3% 20.7% 4.6%
Massachusetts 0.4% 61.1% 6.9%
Idaho 0.4% 142.6% 6.4%
Colorado 0.4% 53.8% 6.1%
Georgia 0.5% 78.3% 8.1%
Montana 0.5% 68.9% 5.4%
Maine 0.6% 44.5% 7.0%
Minnesota 0.6% 47.6% 6.9%
South Dakota 0.6% 35.4% 3.9%
North Carolina 0.7% 87.4% 8.7%
Indiana 0.7% 86.0% 8.2%
Connecticut 0.7% 48.0% 7.1%
Florida 0.8% 80.9% 8.1%
New York 1.0% 51.9% 7.0%
North Dakota 1.0% 8.5% 3.5%
Vermont 1.1% 66.9% 6.4%
Nebraska 1.2% 46.0% 4.0%
Wyoming 1.3% 12.4% 3.4%
New York City 1.4% 47.2% 7.4%
Kansas 1.5% 27.4% 5.2%
South Carolina 1.6% 55.3% 9.5%
California 1.8% 60.4% 9.3%
Virginia 1.8% 69.2% 5.4%
New Jersey 1.9% 72.8% 7.1%
Hawaii 2.0% 82.9% 5.5%
Oklahoma 2.1% 21.7% 4.9%
Louisiana 2.2% 52.6% 5.9%
New Mexico 2.2% 56.2% 4.9%
Alaska 2.4% 22.4% 7.5%
Pennsylvania 2.4% 55.7% 6.7%
Washington 2.6% 60.0% 7.1%
Texas 2.6% 45.9% 6.0%
Oregon 2.8% 70.4% 9.0%
Arizona 3.4% 72.0% 6.9%
Nevada 4.9% 84.6% 9.1%
Average 0.8% 53.2% 6.7%
Median 0.7% 52.6% 6.9%

Dr. Trimbath is a former manager of depository trust and clearing corporations in San Francisco and New York. She is co-author of Beyond Junk Bonds: Expanding High Yield Markets (Oxford University Press, 2003), a review of the post-Drexel world of non-investment grade bond markets. Dr. Trimbath is also co-editor of and a contributor to The Savings and Loan Crisis: Lessons from a Regulatory Failure (Kluwer Academic Press, 2004)

Mr. Montoya obtained his MBA from Babson College (Wellesley, MA) and is a former research analyst at the Milken Institute (Santa Monica, CA) where he coauthored Housing Affordability in Three Dimensions with Dr. Trimbath. He currently works in the foodservice industry.

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Student Loans

I haven't seen any research on this, but its a gut reaction I'd like to have some feedback on: how are increasing student loans affecting the housing market? Since underwriters only allow a certain income-to-debt-ratio when approving a loan it would seem that recent graduates would have particularly hard times getting approved if the student loan was in their name.

Secondly, is there any research to show how average credit scores have changed during the past 10-15 years? Given the unemployment rates, there must be a significant number of frictional unemployed that were out of work slightly longer than they had planned and been more than 30 days late on their payments. This of course would affect their credit score and thus their opportunities to get a mortgage.

Lastly, lenders have been lowering the percentage of appraisal value of a home bought as an investment, rental or flip, from the 80% range closer to 65-70% according to a real estate investor friend. This of course would discourage interest from many investors to buy and repair foreclosed homes. Those homes then stay on the market for longer periods of time leading to price reductions, which could be translated as 'affordability' increases on average, which could bring down all existing and new home prices. If this is even partially responsible for drops in prices without increased interest in purchasing a home it will take some time for a correction because so many banks, and loan insurers like the VA, are holding back large numbers of foreclosed properties from the market. To the extent that neighbors of foreclosed houses are worried about squatters in my area.

I was speaking with the guys

I was speaking with the guys from Junk Removal Milwaukee and they said that most of the houses they went to didn't have owners that bought the places. The thing is that we are still recovering from the economical crisis and as an alternative many people found it more affordable to rent places for short terms and keep their money for doing what is really important in life. I guess the recession made us valuate our priorities again.

Maybe things don't look too

Maybe things don't look too good now but we are in recession, we can't expect to see a booming real estate market. Yes, the prices are low and it's a great time to buy but most people are low on incomes too, it shouldn't be a surprise. I should feel lucky I can afford to make plans and research for Akron apartments, the lower price actually helped me qualify as a possible home buyer.

All these figures are

All these figures are average and judged by him about the real state of affairs is problematic. After all, much depends on the type of house, its location, the demand for property in a particular region. A lot of factors affect the price of real estate. I think the market will figure out the price. Supply and demand no one has repealed. And if you have enough cash in your pocket, then you are left with 2 options: either take cash loan or seek a region where real estate prices lower.

Housing bust would help homeownership...

Marc: You offer a valid perspective -- there are people who might willingly buy homes if the prices were right. In capitalism as we know and love it, the weak would fail and the strong would survive, making room for bargain prices in homes. This same process of creative destruction should allow fortunes to be lost by inefficient companies so the money could be applied to more productive uses.

Call it the tyranny of the majority -- voters who already own a home outnumber those who don't. And the fat, inefficient firms did a good job of getting fat enough to be too big to fail.

Share a story about a f*cked homeowner

Maybe now people will see that renting is a viable alternative lifestyle choice. Help take the shine of homeowning by contributing a story about a really fucked homeowner here:


And yet the government legislates against renters...

And yet us renters appear to be completely invisible to the government. Now that home ownership continues to fall maybe President Obama won't ignore us like he has been as discussed here:


Homeownership Affordability study and related article

Interesting study but way to ambitious. To discuss this issue without addressing the regional differences in home affordability, which are substantial, and the impact of lowered equity requirements and underwriting standards in mortgage lending over the time periods in question takes away from the analysis and, consequently, the conclusions.

Regional studies

rfischer: You are right. A detailed regional study is the way to go, but the national picture can help inform those studies by presenting some "typical" measures for comparison. There are plenty of regions and this analysis is only a template for approaching them. All it takes is time and money; hence, the footnote on page 15 (http://ssrn.com/abstract=1348143).

Still, there are national issues. More so now that Congress, the Federal Reserve and Treasury are making policy, funding bailouts, changing bankruptcy laws, etc.

great article

great article