Recessions, Down Payments and Other Influences on the Housing Market

The current low interest rate environment and the evolution from a seller’s market to a buyer’s market are certainly driving recent mortgage activity. But what about other factors? Reports from Zillow, First American Financial Corp. and PenFed Credit Union offer unique perspectives.

Zillow, Seattle, said while the 2008 financial crisis dispelled the notion that housing was recession-proof, recent national and statewide recessions have not caused widespread home value declines. The Zillow analysis said other than the housing-led Great Recession of the late 2000s, home values have typically continued to grow through national and statewide recessions over the past quarter-century.

Although U.S. home values plummeted during the Great Recession, they broadly continued to rise faster than inflation during the dot-com crash in 2001. Excluding the Great Recession, annual home value appreciation across all states since 1997 has averaged 4.6% during times of economic growth and 4% during recessions.

The U.S. reached its longest-ever economic expansion this summer, though growth is slowing. And while economists are mixed as to whether a recession is on the horizon, a recent survey sponsored by Zillow and conducted by Pulsenomics LLC found that a panel of housing experts and economists most often expect the next recession to begin in Q3 2020.

“Demand for homes is expected to cool during the next recession, but few believe a housing slowdown will be a significant factor in causing it,” said said Zillow Economist Jeff Tucker.

Zillow said excluding the Great Recession, there have been 1,039 instances since 1997 of states being in a recession during a given month. Annual home value appreciation was positive 81% of the time in these months, an identical rate to months in which states were in economic expansion. Appreciation averaged 4.6% during economic growth and 4% during recessions. This indicates that while recessions do have an impact on the housing market, the widespread collapse of home values during the Great Recession is an outlier.

“The housing crash during the Great Recession left a lasting impression on our collective memory,”Tucker said. “But as we look ahead to the next recession, it’s important to recognize how unusual the conditions were that caused the last one, and what’s different about the housing market today. Rather than abundant homes, we have a shortage of new home supply. Rather than risky borrowers taking on adjustable-rate mortgages, we have buyers with sterling credit scores taking out predictable 30-year fixed-rate mortgages. The housing market is simply much less risky than it was 15 years ago, and our experience in recent localized recessions shows how home prices can weather normal economic headwinds.”

So for would-be homeowners, the market appears to be healthy. The Census Bureau last month reported the homeownership rate dipped slightly in the second quarter to 64.1%, but noted household formation, although hampered by lack of inventory, remains healthy.

However, Odeta Kushi, Deputy Chief Economist with First American, Santa Ana, Calif., said for those would-be homeowners, particularly Millennials, many barriers remain. Although Millennials have picked up the pace, taking advantage of low interest rates and relatively good housing affordability, the Millennial homeownership share of homeownership remain lower than previous generations at the same age.

One reason for the gap is that millennials have largely delayed important life choices, such as getting married and having kids, in favor of pursuing higher education. Common misconceptions held by many about what is needed to qualify for a mortgage are also holding back homeownership. According to the 2018 Barriers to Accessing Homeownership report from the Urban Institute, 19 million millennials in the 31 largest metropolitan statistical areas are qualified and able to afford a home, but are not buying one. Surveys, like those conducted by Fannie Mae, show many Americans still overestimate the qualifications needed to get a mortgage, resulting in qualified potential buyers not even considering homeownership. The Urban Institute report revealed that 16 percent of consumers believed that the minimum down payment required by lenders is 20 percent or more, and another 40 percent didn’t know at all.

This, Kushi said, is misleading. “The actual minimum down payment required to buy a home is only 3 percent,” she said. “Down payment assistance programs providing grants or loans to potential homebuyers exist in every state, while government-backed loans from the FHA and lower down payment conventional loans allow many more potential home buyers to qualify for a mortgage with only 3 percent down. The median down payment has decreased significantly in recent years, from 20 percent in 2006 to 5 percent in 2017.”

The American Housing Survey reported Millennials are much more likely to get a mortgage with a lower down payment (3-5 percent). It reported 20 percent of Millennials opt to do so, double the rate of all homeowners. By comparison, older generations tend to make a larger down payment, with only 13.6 percent of Gen Xers and 7.3 percent of baby boomers putting down the minimum amount.

“Millennials are more likely to be first-time home buyers, which partially explains why they don’t have the same amount of equity as older generations to use for a down payment,” Kushi said, noting in 2017, 73 percent of home buyers were first-time buyers in 2017, comprising the majority in every down payment bucket. “Though they are likely to gravitate to lower down payments, nearly 10 percent of first-time millennial buyers still put down 16-20 percent.”

Kushi said many Millennials may be unaware of lower down payment options, believing they need 20 percent down to qualify for a mortgage. “Saving for a down payment is one of the biggest obstacles faced by first-time home buyers,” she said. “Dispelling the 20 percent down payment myth could open the path to homeownership for many more.”

A recent survey by PenFed, Tysons, Va., found of those planning to buy a home in the next 12 months, 61 percent will be first-time homebuyers, and most prefer to finance a mortgage through a credit union or bank. Additionally, the survey said 40 percent of adults nationally report personal finances or job stability as the top decision-making factors when considering a new home purchase.

More than a third (37 percent) ranked low interest rates as the second greatest contributor. The national survey commissioned by Morning Consult highlights mortgage myths and reveals consumer sentiments and knowledge surrounding mortgages and home buying options. Other key survey findings:

–Nearly one in three (30 percent) of respondents said being unable to afford a down payment, in the city or town where they currently live, is the primary reason they are not looking to buy a home in that area in the next 12 months. Seventy-three percent cited down payment requirements as important when deciding on a specific lender.

–59 percent of adults say knowing about private mortgage insurance coverage would impact their decision to choose a specific lender.

The survey said those not planning to purchase a home report cited personal factors as the key reasons, such as being happy in their current living situation (42 percent) or personal finances (19 percent), rather than external factors, such as the state of the housing market (6 percent) or state of the economy (7 percent). Thirty percent reported the inability to afford a down payment as the primary reason for not purchasing a home in the city or town where they currently live in the next 12 months.