Major Market Trends and Demographic Changes

In recent years, home ownership has become a feature of the American Dream. This was not always the case. Historically, the American Dream was characterized as people being rewarded fairly for their effort and each new generation being better off than the prior one (Adams 1931). The dream has evolved to include home ownership for reasons that are not entirely clear (Rohe and Watson 2007). Fulfillment of that part of the dream has been largely achieved. Since the end of World War II, home ownership in the United States rose from 55 percent in 1950 to 69 percent in 2004. By 2030, however, it will may be less attainable or even desirable. Reasons for this include rising energy costs, falling incomes, lagging employment, shifting wealth to upper classes, and tighter mortgage underwriting requirements. Added to these reasons are market trends including key population and sweeping generational changes, the rise of a new housing market, and important nonresidential trends. These trends and changes will lead to a new America in 2030.

RISING ENERGY COSTS

One key reason for the rise in home ownership has been the vast supply of inexpensive land available for home building outside cities. Another reason is that the cost of driving to work and other destinations was inexpensive because of cheap gasoline prices. This has changed.

Since the early 2000s, energy prices have been rising steadily (Energy Information Administration 2012), which makes supporting a home more expensive. It also makes locations far away from work, shopping, and other destinations more expensive because of vehicle fuel costs. For instance, from the early 2000s to the early 2010s, the national average price of a gallon of gasoline rose about 10 percent per year, compounded. At this rate, gasoline prices will exceed eight dollars per gallon by 2020 and more than twenty dollars per gallon by 2030. Higher gasoline prices might be offset by more fuel-efficient vehicles, but they are more expensive than conventional vehicles.

Steadily increasing gasoline prices dampen the attractiveness of suburban fringe and exurban areas for home buying. For instance, a study for the Federal Reserve Board by Molloy and Shan (2011) showed that, after a four-year lag, a 10 percent increase in gasoline prices decreases the demand for homes by 10 percent because of longer average commuting times relative to locations closer to jobs, a highly elastic outcome. On the other hand, homes closer in are usually more expensive to purchase. Without new approaches to mortgage underwriting, the overall effect of rising gasoline prices will be fewer households able to both buy homes and pay for gasoline (see chapter 7).

FALLING INCOMES

Incomes are falling in real terms. For instance, median household incomes for all age groups in each income category ended the 2000s lower than in 2000 (Harvard Joint Center for Housing 2011, 15). Along with falling incomes, America's household wealth in 2010 had fallen to levels not seen since the 1990s. Indeed, the Federal Reserve Board (2012) reported that median family net worth wealth fell from $126,400 in 2007 to $77,300 in 2010. In constant 2010 dollars, family net worth was at about the 1992 level.

Moreover, the poverty rate increased from 11.3 percent in 2000 (Dalaker 2001) to 15.1 percent in 2010 (DeNavas-Walt et al. 2011). The rate of increase appears to be fastest in the suburbs. Over the period 2000–2008, suburbs accounted for nearly half the increase in the population in poverty (Kneebone and Garr 2010). In contrast, primary cities accounted for just over 10 percent of the increase. Suburbs may be especially hard-hit because of rising gasoline prices (see above) and lagging employment (see below). These trends may further alter housing demand over the next several decades (McKeever 2011).

LAGGING EMPLOYMENT

It is not just that the unemployment rate spiked during the Great Recession of 2008–2009 and remained high well into the 2010s, but that the structure of the nation's labor force makes it prone to higher unemployment. A key feature of employment and income is preparedness based on education. Unfortunately, black and Hispanic students lag behind white students in reading and mathematics; indeed since the 1990s the gap has not been narrowed. As minorities increase their share of the nation's labor force, the nation could be challenged with developing enough talent to compete in the global market. The implication also is that the ability of workers in the future to afford homes may be compromised. Indeed, during the 2010s, whites will make up just 12 percent of the growth in the nation's labor force, followed in increasing order by Asians (16 percent), blacks (18 percent), and Hispanics (54 percent). As the nation's future labor force becomes less prepared through shortcomings in the education system, wages may be lower and unemployment rates higher by historical standards.

SHIFTING WEALTH

The nation's wealth has been shifting steadily to a smaller percentage of more households. In the 1980s, about 80 percent of the nation's wealth was held by the wealthiest fifth of America's households. By 2009, nearly 99 percent of America's wealth was held by the same quintile. The Great Recession and its aftermath can be blamed for reducing much of the wealth of the middle and lower classes. Historically, a large share of wealth in American households has been the equity in their homes. However, much of this was removed by the Great Recession, as homeowners lost a third of their equity. Moreover, on average, homeowner equity has fallen steadily since 1945, from about 85 percent to about 40 percent. The reason is the advent of highly leveraged home purchase opportunities that became widely available during the past generation. The Great Recession changed this, however, making buying homes more difficult.

WANING INSTITUTIONAL SUPPORT FOR HOME OWNERSHIP

The Great Recession of 2008–2009 was caused in large part by the bursting of the "housing bubble" of the mid-2000s. Some banks and other financial institutions were closed forever, millions of homes were foreclosed or "sold short" to avoid foreclosure, and home equity saw its biggest decline since the Great Depression of the 1930s. How did this happen? One factor (others will be discussed later) was "subprime" mortgages, in which people with insufficient credit could still buy a home, often with no money down and sometimes with money back, such as buying with no money down a $200,000 home that appraised for $250,000. Most of these subprime mortgages came with very low initial rates on adjustable rate mortgages, often around 3 percent, that would rise every six to twelve months until parity was achieved with a target index, often the London Interbank Offered Rate (LIBOR), plus two points (a 6.5 percent mortgage pegged to a 4.5...