Wells Fargo: Drop in Homeownership Widespread

Since peaking in early 2004 at 69.2 percent, the U.S. homeownership rate has fallen steadily, to 63.7 percent in January, the lowest rate since the mid-1980s.

An analysis by Wells Fargo Securities, Charlotte, N.C., shows the drop in homeownership rates has occurred in every key geographical area and across every key household age group, particularly among younger households.

The analysis by Senior Economist Mark Vitner and Economic Analyst Misa Batcheller (http://image.mail1.wf.com/lib/fe8d13727664027a7c/m/1/regional-homeownership-20170301.pdf?utm_source=SFMC&utm_medium=email&utm_campaign=&utm_content=&utm_term=7230679&sid=40565) reported all states except South Dakota saw a lower homeownership rate in 2016 from 2005.

“Many factors play into the sustained drop in homeownership, ranging from payback for earlier extremes in some of the ‘Sand States’ to demographic changes and severe economic dislocations, the authors said. “Affordability hurdles have also become an even more formidable headwind in some areas, particularly along the West Coast and in Denver, where home price increases have significantly outpaced income growth over the past few years.”

States hit hardest by the housing crisis generally saw the largest declines in homeownership, the report said, led by Arizona, where the homeownership rate fell by 9.2 percentage points from 2005 to 2016. Mississippi and Nevada follow closely behind, with declines of 9.1 percentage points and 8.9 percentage points, respectively. Other states registering notable drops include Colorado, Louisiana, Florida, New Jersey and Ohio.

“While outsized home price drops are a common thread throughout most of these states, conditions vary considerably,” the report said. “There are special circumstances in Louisiana, and to some extent Mississippi, due to the loss of homes during Hurricane Katrina. The storm dramatically reshaped the economic landscape in New Orleans, which has seen its homeownership rate tumble 12.6 percentage points since 2005. Aside from these special circumstances, states with the highest shares of communities with
outsized homeownership declines tend to be those hardest hit by the foreclosure crisis.”

On the other hand, the analysis noted a handful of areas have seen only modest declines in homeownership. Most are slow-growing sparsely populated states in the Great Plains and New England.

Two notable standouts are Louisville, Ky. and Grand Rapids, Mch.. Both areas have generally enjoyed modest population and employment growth in recent years and face few development constraints, which has helped keep housing affordable. The homeownership rate in Louisville has risen 4.6 percentage points over the past 11 years to 67.6 percent and Grand Rapids has seen its homeownership rate rise 3.7 percentage points over the same period to 76.2 percent, the highest of the 75 largest markets tracked by the Census Bureau. Other notable areas posting an increase in homeownership include Charlotte and Salt Lake City, which both saw homeownership rise by just under a half percentage point over the past 11 years and Fresno, Calif., which saw homeownership rebound 4.5 percentage points off of some fairly low levels.

In the wake of the financial crisis, Vitner and Batcheller said investors exacerbated affordability and supply constraints, noting after home prices plunged, institutional investors swooped in and bought up much of the better located homes moving through the foreclosure pipeline and converted them into rental units. Three of the top markets for investor buyers included Atlanta, Tampa and Phoenix, which comprise nearly one-third of total single-family institutional holdings. Similar situations occurred in other attractive Sun Belt markets with strong demographics, including Orlando, Jacksonville, Nashville and Charlotte.
“The influx of investor buyers pushed home prices higher much sooner than would have occurred if the market corrected in its own right,” the report noted. “As a result, affordability challenges have worsened. The home price-to-income ratio has risen relative to its historical average in the majority of large U.S. metro areas. The reduction in affordability and supply of for-sale inventory has made it difficult for potential first-time buyers to buy a home and has fueled additional declines in homeownership. This occurrence is particularly evident in Phoenix and Miami.”

One of the more confounding issues surrounding the drop in homeownership, the report noted, is how pervasive the slide has been around the country. It said homeownership rates have fallen in nearly every region and among nearly every demographic group and age cohort. Some of the largest declines have been in communities with rapidly growing minority populations. The homeownership rate for minorities remains roughly 25 percentage points below that of whites and the growing share of the minority population has weighed on the overall homeownership rate.

The report noted the long slide in the homeownership rate may be coming to an end, noting the rate has improved over the past two quarters. “With the economy gaining momentum, we may see improvement on all fronts of the housing market over the course of the year. Income growth is already perking up and the homeownership decline appears to have leveled off this past year,” the report said. “Development also seems primed for more activity, with rising prices for existing homes making land development more attractive and local governments also showing renewed interest in helping developers bring more supply to the market.”