The American dream of owning a home is as strong as ever, but the number of people who can afford homes is steadily shrinking. Instead of seeing the light at the end of the tunnel, some prospective homeowners are being told to learn to live with less.
Even though inflation has remained tame for the last few years, inflation-adjusted personal income has not kept pace and, as a result, the first-time home buyer now has about 90% of the home purchasing power that his counterpart had 15 years ago.
In 1980, the rate of homeownership peaked with 65.8% of the population owning their own homes, according to the National Assn. of Realtors, the nation's largest real estate trade association. By 1984, that had dropped to 64.5%.
Far Fewer Homeowners
A decline of 1.3% in four years may not seem like a big drop, but the association translates that downturn into one million fewer homeowners than there might have been based on trends before 1980.
When home mortgage interest rates reached their peak in 1980-81 at nearly 18%, the face of the housing industry underwent a radical change. Housing analysts agree that it could take many years, if not decades, to recover.
"The economic factor causing a drop in the homeownership rate is housing affordability, which has seriously deteriorated over the last four years," says George Tresnak, vice president in charge of special projects for the realtors organization. He also says slow income growth and interest rates have combined to deliver a one-two knockdown punch to the housing industry.
"Mortgage interest rates are high because of the huge federal budget deficit that makes it expensive for borrowers to compete for a dwindling supply of funds," Tresnak said in an interview.
Also exerting pressure on affordability is price. For an existing single family home, the median price was $73,800 in February, an increase of 2.9% in 12 months.
For a new house, the median price was $83,100, an increase of 4.9% over a 12-month period.
The median price means that as many homes are for sale above that figure as below it.
Consider these statistics:
--Sales of existing single family homes fell 2.7% from January to February to an annual sales rate of 2.92 million units. That is a scant 0.7% increase in 12 months.
--Sales of new single-family homes increased 6.2% from January to February; however the annual sales rate of 638,000 units was 8.9% below the sales rate reported in February, 1984.
--In February, some 2.54 million existing single-family homes were for sale, a 10.4-months supply, an increase of 300,000 homes from January levels.
Sales of both new and existing single family homes may be a cause for concern for the real estate industry, but for a lot of home-builders across the country, business couldn't be better.
"Ten years ago, if you were to ask a builder to describe the shape of the housing industry today, he'd say he'd be out of business, but now you build them as fast as you can," said William C. Apgar Jr., director of the Housing Futures Program at the Joint Center for Housing Studies at Massachusetts Institute of Technology and and Harvard University. "What we have now is a two-tiered system in which builders cut corners to deliver higher density to the first-time home buyer, while other builders cater to the trade-up market."
As it has with most other areas in society, the baby-boom generation has left its imprint on the housing industry.
What's fortunate for the home-building industry, says Apgar, is that the number of first-time home buyers is not growing, but dwindling, because the baby boom has already passed the first-time buyer stage.
Apgar says home builders can construct fewer units, but make more money because of "upsizing."
"Mobility is down as people stay in their homes a little longer, but when they decide to buy, they're in a strong trade-up market. Builders are putting up bigger and better units with a lot more amenities to satisfy the baby-boomers. That offsets some of the declines in numbers."
The importance of the first-time home buyer may be declining, because it is more profitable to cater to those who can buy more expensive homes. But that segment of the population armed with little cash and only a dream has not been been completely forgotten.
"Home builders are trying to build what first-time buyers can relate to," Apgar says. Where builders are cutting corners to offer affordable housing is in the size of the lots on which the homes are located. "You can't save much money on square footage," so builders will use zero lot lines and duplex housing and even shared property. "Land is where builders find the economies of scale."
Optimistic About Future
Both Apgar and Tresnak are optimistic about the future of the single-family housing industry.
"Both first-time buyers and those who want existing single-family homes are seeking the same goals and even with 14% interest rates there are a lot of people in apartment buildings who want to buy homes," said Apgar. "The strength is easy to underestimate."
"Even those who've give up on marriage and motherhood are interested in home buying. Some of the more interesting areas are in homes for singles who also want that sense of being able to control their own housing situation."
Tresnak also notices an increase in the demand for single-family housing despite the affordability problems. "A lot of households have two incomes so they can buy the kind of housing they want."