WASHINGTON – The number of first-time homebuyers in the U.S. declined by about 40 percent between 2004 and 2015, according to recent research from the Federal Reserve Bank of Philadelphia.
“It’s more difficult than ever for the average American to become a homeowner,” Susan Wachter, a real estate professor at the Wharton School of the University of Pennsylvania who co-authored the report, said in a recent interview.
Based on the group’s findings, the American home ownership rate was recorded at 63.5 percent in the third quarter of 2016, which is a 50-year low, and well below the 2004 peak recorded at 69 percent. The report analyzed data from the Federal Reserve Bank of New York Equifax Consumer Credit Panel.
Wachter said with the current trajectory, the U.S. could conceivably see a market composed of 50 percent homeowners and 50 percent renters in the coming years.
The trend is largely due to the fact that housing prices are far outpacing wages. In May, the Standard & Poor’s CoreLogic Case-Shiller 20-city home price index showed that home prices are rising at a rate more than double the pace of average hourly earnings.
Wachter said that while the number of jobs in the U.S. is growing, wages continue to stagnate. As more jobs are created in major cities, more individuals are moving to these cities offering opportunity, including Washington, D.C., New York, Los Angeles, Denver, Dallas and Houston.
Ed Pinto, co-director for the American Enterprise Institute’s Center on Housing Risk, said in a separate interview that housing prices are outpacing wages because the federal government has created artificial price increases by loosening credit requirements.
The federal government helps finance about 93 percent of first-time home purchases. Government-sponsored enterprises like Fannie Mae and Freddie Mac, and federal agencies like the Federal Housing Administration, Veterans Affairs and the Rural Housing Service all provide financing services, and government-guaranteed loans allow these organizations into the capital markets. While the federal government increases access to financing, Pinto said that it’s doing nothing to address the lack of supply of housing.
“How is it that the bottom tier can afford these soaring house prices? The only way they can do it is if their incomes are going up as fast, or faster, than the house prices, which that certainly isn’t happening,” Pinto said.
In turn, he said, the buyer’s increased leverage is transferred as a benefit to the seller, who enjoys increased prices as the result of the injected subsidies. While the government says it’s making it easier to purchase a home, Pinto argued that it’s actually making it harder because of the impact on housing prices.
To simplify his explanation, Pinto used the analogy of buying a car: A car company is selling a car for $10,000, and the government is offering $2,000 in financing to make it easier for the buyer to purchase the car. But the car manufacturer is unable to increase the supply of the car, and the demand has increased because the buyer has more leverage. This means that the car may now sell for as much as $11,500. The closer the price gets to exceeding that $2,000 mark, the greater the benefit to the seller, while the subsidy decreases in value.
American Enterprise Institute research, which analyzed the Standard & Poor’s CoreLogic Case-Shiller 20-city home price index, shows that housing prices for the lower income tiers have skyrocketed compared to the upper and middle tiers.
In Atlanta, for example, housing prices for the lowest tier of income earners have jumped about 175 percent in the past six years, while the middle tier saw an 80 percent increase, and the top tier saw a 45 percent increase. This trend between tiers is mirrored in every other major city included in the index.
“The lowest-income individuals have the least ability to ride this roller coaster,” Pinto said.