Trapped: Homeownership period extends to record length
With millions trapped underwater, and with those with equity experiencing weak wage growth, most people choose to remain in their homes rather than moving up.
Americans love their homes. Over the last decade, they became so enamored with their abodes that many decided not to leave. Prior to the housing bust, homeowners remained in place for a little over four years on average. Over the last decade, that timeline stretched to nearly eight years. Why are people staying in their homes so long?
While some people undoubtedly found their dream home years ago, people retain their current home for reasons other than their affinity for it. Nearly 6 million people remain trapped in their entry-level homes they purchased a decade ago. Perhaps they enjoy their gilded cage, but since they may not leave without severe financial consequences, their homes resemble a debtor’s prison.
People also remain in their homes longer because even with the newfound equity from reflating the old housing bubble, without increases in pay, they face limitations on borrowing enough to complete a move up. While their house increased in value, the move-up house they desire also increased in value, and unless they earn more money to borrow enough to make a trade, they gain little by moving. Since the last decade witnessed anemic wage growth, fewer people can borrow enough to move up.
Many homeowners gained a great deal of equity over the last four years as house prices rose. Many will foolishly borrow and spend this money like the Ponzis of yesteryear, so they won’t execute a move-up trade due to lack of available equity.
While reflating the housing bubble has done much to alleviate the plight of underwater borrowers, it’s created a secondary problem that’s a direct side effect. By inflating house prices well above trend, many first-time homebuyers are priced out, and many others worry about buying into another housing bubble.
Back in 2013 I wrote the Housing market impact of 25 years of falling mortgage interest rates. In that post I noted, “House prices have been boosted about 30% due purely to the decline of interest rates from the mid 90s to today.” This artificial inflation of prices shows up in charts like the one above.
Lenders allow many delinquent borrowers to stay in their homes, often for many years. This galling practice is a windfall for the squatter as they enjoy free housing. Many borrowers quit making payments 10 years ago, but they remain on title because lenders are unwilling or unable to force them out. The probably is particularly acute in judicial foreclosure states like Florida, New York, and New Jersey.
While these people technically meet the definition of homeowners, they behave more like squatters. They neglect their properties because they feel no motivation to renovate or even properly maintain the house. They merely hold the property for their lender while everyone waits for house prices to rise.
All these factors contribute to longer homeownership periods. Given the record lows in homeownership rates and the Millennial generation’s preference for renting, owning the same house for more time is hardly an affirmation of homeownership. Mostly, it’s a pragmatic decision based on an unusual set of economic incentives and circumstances.
Many homeowners are becoming equity rich because they’re staying in their homes longer, according to the Q3 2016 U.S. Home Equity and Underwater report from ATTOM Data Solutions, a fused property database. To be equity rich, homeowners must have a loan-to-value ratio of at least 50%.
In fact, 23.4% of all homeowners with a mortgage are now considered equity rich, an increase of 2.6 million from last year to 13 million in the third quarter, according to the report.
The number of homeowners who are seriously underwater (have an LTV of 125 or higher) decreased from last year by 854,000 homeowners to more than 6 million this year. This represents 10.8% of all homeowners with a mortgage. …
While some are equity rich, over 6 million claim no equity at all, and many are so far underwater, they won’t gain equity for many more years.
“… homeowners who sold in the third quarter had owned their home an average of 7.94 years — a new high in our data and substantially higher than the average homeownership tenure of 4.26 years pre-recession,” Blomquist said. “As homeowners stay in their homes longer before moving up, they are amassing more home equity wealth.”
The metropolitan statistical area with the highest share of equity rich homeowners, out of 88 areas with a population of 500,000 or more, is San Jose with 55.7%. Honolulu came in second with 39.3%, followed by Los Angeles with 38.2% and Pittsburgh with 34.5%.
Some homes, however, still showed a large percentage of homes still seriously underwater. Of those same 88 metros, the one with the most share of seriously underwater homeowners is Las Vegas with 25%, followed by Akron, Ohio with 24.2%, Cleveland, Ohio with 22.8%, Toledo, Ohio with 21.7%, Dayton, Ohio with 20.2%, Detroit with 20% and Lakeland-Winter Haven, Florida with 20%.
One of the reasons I still believe Las Vegas has plenty of room for appreciation is because so much potential inventory is locked up in these underwater houses. Supply will be limited for the foreseeable future.
While one generation is no longer trapped, the next generation isn’t eager to become their bagholders. Potential first-time homebuyers fear rising mortgage rates will cause another house price crash — or at best result in below-average rates of appreciation while the 30% overvaluation of the market is caught up to by fundamentals. It’s a rational fear, a fear keeping many first-time homebuyers out of the market. In fact, in 2014 the first-time homebuyer rate hit a three-decade low. Millennials, those born approximately between the early 1980s and early 2000s, who will soon become the majority of the workforce and the next generation of homebuyers.
The Millennials currently cope with excessive student loan debt, which is also preventing them from buying houses. Millenials delay marriage, and they form new households at lower rates than previous generations. Most housing market analysts blithely assume Millennials will follow the same path as preceding generations once they have an opportunity, but what if Millennials decide not to buy homes? Baby Boomers don’t want to think about that possibility.