Economists' Outlook

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Homeownership and the American Economy

On July 16, 2019, I had the opportunity to attend an event hosted by the Urban Institute titled Data Talk- Black Homeownership Gap: Research Trends and Why the Growing Gap Matters. The United States Black homeownership rate today is lower than it was in 1968 when the Fair Housing Act, part of the landmark Civil Rights Act, was signed into law. Likewise, Blacks with college degrees have lower homeownership rates than Whites who never even completed high school (Choi, 2019).

Line graph: Homeownership Rate: White, Black, Hispanic, 1960-2017

The trend was not always so concerning. Homeownership rates, for all races, had been steadily improving throughout the 1990s and the first half of the 2000s. Since the Great Recession, however, homeownership rates, for all races, have declined from their peaks in the early 2000s. The Great Recession can be thought of in this context as an inflection point for not only homeownership rates – but for the entire American economy. It is not surprising that homeownership rates for everyone fell during the most severe economic downturn since the Great Depression. What is surprising is the rate of recovery, or lack thereof, since the recession.

Line graph: Homeownership Rate: Non-Hispanic White, Black 1994-2018

Why is the gap important?

Homeownership rates have important ramifications for long-term intergenerational economic well-being and security. First, homeownership is a forced saving mechanism, as people typically need to save money in order to put a down-payment for a mortgage, and once they have the mortgage, they need to keep saving money to keep paying the mortgage. As the payments continue, households keep gaining equity, thereby increasing their own wealth.

Second, homeownership is a hedge against future prices increases that may occur in the future real estate market. In the last six years (beginning in 2012), national home prices have increased by 47% while wages have only increased by 16% (Evangelou, 2019). Home price appreciation has certainly helped those who already own a home or who are locked-in on a mortgage, but for first-time and other prospective buyers this appreciation has priced them out of the market.

Third, previous research has suggested that homeownership encourages individuals to invest in their communities by becoming more involved in local politics, volunteering, and/or joining community organizations. Since homeowners are generally less mobile than renters, they are more likely to stay and become invested in their community (DiPasquale & Glaeser, 1999).

What can be done?

The short answer is, in terms of public policy, the housing supply must be increased, particularly in dense metropolitan areas where people are moving to. On a macro-scale, as the American economy continually shifts towards a technology and information-orientated economy from the agriculture and manufacturing-based one it once was, people will continue to migrate from rural to urban areas where these new jobs and industries tend to cluster. These migration patterns create more demand for housing in these areas, but housing construction and development are lagging behind. From 2012 to 2018, 99 out of the 100 largest metropolitan areas in the U.S. saw increases in home prices (Evangelou).

One reason in particular for the lack of housing construction is because construction companies are having difficulty filling their job openings. As of April 2019 (not seasonally adjusted), there were 404,000 job openings in the construction industry in the U.S. while, as of May 2019 (not seasonally adjusted) 294,000 unemployed people were searching for jobs in the construction industry. Likewise, the shortage of construction labor has slowed housing development overall, as the number of housing starts have fallen from 1.33 million in May 2018 to 1.26 million in May 2019, a year-over-year decrease of 70,000 housing starts (Cororaton).

However, this lack of construction does not necessarily mean that affordable housing production cannot still occur. Manufactured, modular, and panelized housing construction methods offer builders and prospective homeowners alternatives to traditional site-built homes. These three methods have lower construction costs because the homes are mostly built inside manufacturing plants in a controlled environment, and the employees in the plant are factory workers instead of construction workers, mitigating the construction labor shortage problem that increases prices.

Sources

Choi, Jung Hyun. Urban Institute. Black-White Homeownership Gap: A Closer Look Across MSAs. July 16, 2019.

Cororaton, Scholastica. National Association of REALTORS©. Nearly 110,000 Fewer Construction Job Seekers than Openings as of May 2019. July 3, 2019. https://www.nar.realtor/blogs/economists-outlook    

Dey, Jaya. Freddie Mac. Black Homeownership Gap. July 16, 2019.

DiPasqualte, Denise & Glaeser, Edward. Incentives and Social Capital: Are Homeowners Better Citizens? Journal of Urban Economics, Vol. 45, no. 2. March 1999.

Evangelou, Nadia. National Association of REALTORS©.  Wage Versus Home Price Growth. March 25, 2019. https://www.nar.realtor/blogs/economists-outlook

Urban Institute. Black Homeownership Gap: Research Trends and Why the Growing Gap Matters. July 16, 2019. http://www.urban.org/sites/default/files/black_homeownership_data_talk_slides.pdf

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