We research, you save.

Why haven’t more Americans bought homes?

 
Think Tank
Bill Watkins,
 Ph.D.
Associate Professor of Economics at California Lutheran University
Launched Cal Lutheran's Master of Science in Economics program>

We interviewed Dr. Bill Watkins, Ph.D., associate professor of economics and executive director of the Center for Economic Research and Forecasting at California Lutheran University, about why, despite low mortgage rates, more people haven’t bought homes.

Q: With mortgage rates still near their historic low, why haven't more people bought homes? Is it still too difficult to get financing, is it uncertainty in the job market or the lack of a down payment that prevents borrowers from purchasing homes? What is it?

A: There are several reasons. One contributing factor is that real estate loans are still a little difficult to get. I believe the bigger reasons are just due to the housing cycle itself. Let me explain.

Homeownership rates

In 2007, 2006, homeownership in the United States – the percentage of people who owned homes – peaked at about 69 percent. And if you look at historical data, it’s very rare for the homeownership rate in the U.S. to get above 64 percent. When it does, bad things can happen.

Our interpretation of the real estate collapse was that we wouldn’t see solid real estate markets return until the homeownership rate got down to about 65 percent. Now it’s around 65 percent. That’s a necessary pre-condition for markets to improve.

Investor participation

I would like to point out that a lot of the real estate demand that we saw over the past two years was the result of investor activity – and this had to happen. If homeownership rates went from 69 percent down to 64, somebody has to buy up those homes. We saw investors jump in to fill that need.

Since the investor model requires rents and capital gain to be sufficient in order to justify the investment, investors come in and go out at about the same time. I think it took investors quite a while to actually recognize the opportunity. But once they did, you had the big investment houses of the world doing this.

This has mostly run its course as we don’t expect to see a lot of price growth going forward.

Household formation

What it really takes to sustain an entire housing market is two things: household formation and births.

Household formation and births are being delayed because young people have had a tough time in this economy. Ever since 2007, young people haven’t been able to get the jobs they expected out of college, and many are saddled with lots of debt. Huge percentages are living with mom and dad. That is slowing the real estate recovery down.

In a good market, homeownership is the result of people getting married, forming a household, having kids and buying at the bottom and sort of pushing everybody up. But we’re not seeing that.

Until we see more household formation, we probably are not going to see real significant gains, preventing a return of what we generally consider a normal real estate market.

Luxury-home sales increasing

There is one caveat here: Luxury home markets are doing really well, and I believe the reason for that is a little different.

There are always a lot of wealthy people, even when the economy is doing poorly. Wealthy people tended to be hurt less by the recession than most of us because a smaller percentage of their assets are tied up in real estate. Wealthy borrowers were nervous and didn’t buy for a while. Wealthy Americans are not nervous right now and we are seeing some demand return to the high-end market as a result.

Predictions for the California housing market

In California, in particular, we expect luxury markets in attractive places such as in San Bernardino, Monterey and Marin County to do quite fine. However, there are huge variations in other California markets. The San Joaquin Valley is probably going to do poorly, unless locally propped up by oils, as in Bakersfield. Coastal markets in general seem to do better than inland markets, in part because coastal California is a desirable place to live. If you might not be able to afford a home in Montecito, where Oprah owns property, you might be able to afford a single-family home in Santa Maria.

Recommended Reading

  • image default

    The mortgage market's next opportunity

    Peter S. Reinhart, Esq., director of the Kislak Real Estate Institute at Monmouth University, discusses where the mortgage market is headed.
  • image default

    Why aren’t more young people buying homes?

    To find out why and to learn more about what can be done to attract more of this audience, we interviewed Mitchell Fillet, professor of business and finance at Fordham University and John Glascock, director of the Center for Real Estate at the University of Connecticut.
  • image default

    Has HAMP been a failure?

    Kristoph Kleiner, assistant professor of finance at the Kelley School of Business at Indiana University, explains his thoughts on HAMP, its implementation, its struggles and how the program can be improved.
  • image default

    How student loan debt is holding back first-time buyers

    Bennie D. Waller, Ph.D. of Longwood University and Bernard L. Weinstein, Ph.D. of Southern Methodist University discuss student loan debt on home-buyers.
  • image default

    Government regulation’s role in the mortgage market

    Dr. Mark A. Lane, associate professor of real estate and finance at Old Dominion University, offers his thoughts on the role of government regulation in the residential mortgage market.
  • image default