TheMReport — News and strategies for the evolving mortgage marketplace.
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20 | M R EP O RT FEATURE H omeownership is at the core of the quintes- sential "American Dream." People want a place to call their own and raise their families. Many also see homeownership as a way of accumulating wealth and sharing in the suc- cess of the American economy. For decades, the government has pursued policies that help Americans achieve the dream of homeownership, from tax incentives for homeowners and government-backed mortgage financing, to laws and regulations that protect mortgage borrowers. These policies have helped America achieve a high degree of homeownership, with over 60% of households owning their homes. First-Time Homebuyers and the American Dream T he housing boom and subsequent bust in the early 2000s reduced homeownership, started a painful recession, gave rise to increased inequality, and created hardship for over 8 mil- lion households who lost their homes to foreclosure. As a result, between 2012-2016, many argued that potential homebuyers were no longer interested in homeown- ership, or that they did not have the resources to afford a home. Neither of those descriptions have turned out to be accurate, as the homeownership rate has grown from 63.5% in Q1 2016 to 65.6% in Q1 2021. During this period, first-time homebuyers accounted for 89% of the growth in home sales. Furthermore, 2.38 million Americans became first-time homebuyers in 2020—up 14% from the same period a year ago, according to Enact data. Four rea- sons explain why the earlier pre- dictions of low homeownership did not pan out: demographics, low interest rates, the COVID-19 pandemic, and continuing home price growth. Much of this resurgence in homeownership can be attributed to the fact that most millennials are reaching their 30s, which is the peak homebuying age. The millennials make up the larg- est generation in history, and their decisions have the potential to influence both markets and society. Whether it was because they needed their own place to work from home or simply wanted to take advantage of low interest rates, this group of buyers took advantage of the opportuni- ties before them and were able to achieve the dream of homeowner- ship. Their influence on the hous- ing market is not limited to their individual decisions to buy and own a home, however. Through social media, television, and other media channels, their decisions influence other generations and buyer groups to become more interested in buying a home. Historically low interest rates also have placed the dream of homeownership well within reach. Since most home purchases are financed by a mortgage, mortgage interest rates form an important component of the cost of owning a home. Between 2010-2019, the 30-year conven- tional mortgage rate has averaged 4.1%, 2.2 percentage points below the previous decade's average. Following the pandemic, mortgage rates have come down by another percent. Lower mortgage rates mean that the cost of owning has decreased relative to renting. As we continue to work our way through the pandemic and begin to see light at the end of the tunnel, there is more demand than ever to own a home. In the early days of the pandemic, people were forced to stay home to stop virus transmission and stay safe. Over the ensuing 12 months, both employees and busi- nesses have discovered the joy of working from home. There's less of a commute, more flexibility, higher productivity, and huge potential cost savings. While it is unclear what the workplace will eventually look like, the pandemic will probably mean more flexibil- ity for people to work from home. People are excited to have their own place to call home—and an office, a gym, a classroom, and whatever else it needs to be. Home has become more than just a center for family life, but for all aspects of life—and while most of what we're used to is beginning to return to some sort of sense of normalcy, some of the preferences for fulfilling certain duties or ac- tivities at home are bound to stick around, likely keeping demand for homeownership high. This trend applies not just to first-time homebuyers, but to all buyers. Second-home buyers have been rapidly moving into the market as well. Since many of them no longer work with loca- tion or in-office constraints, they can buy a second home anywhere they like and work from there. This has made the decision to buy a second home very appeal- ing for those who can afford it, creating additional demand. As more people are buying second homes, they also are contributing to the lack of inventory in the Taking Inventory What does the housing market need to make the American Dream more attainable? By Tian Liu