One impact of the housing crisis and the Great Recession was a significant decline in the national homeownership rate. Falling from 69.2 percent in the middle of 2004, the homeownership rate stands at 65 percent as of the second quarter of 2013 according to Census data. However, the decline in homeownership is particularly concentrated among younger households. This fact presents distinct public policy and economic challenges, particularly with respect to tax and finance rules that govern the cost of buying a home with a mortgage.
From 2002 through the end of 2012, the homeownership rate for households headed by individuals aged 35 to 44 fell from 68.6 percent to 61.4 percent, a drop of more than seven percentage points. In percentage terms, the largest decline was actually for households 35 and younger, who historically have lower rates than older, wealthier households. Over the last ten years, the homeownership rate for those 35 and younger fell more than 11 percent from its 2002 base, declining from a rate of 41.3 percent in 2002 to 36.7 percent for 2012.
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Over the same time period, smaller declines were experienced for older households, while homeownership rates actually increased for those 65 and older.
In terms of counts of households, declines in homeownership among the young were also large. From 2002 to 2012, the total number of homeowning households fell by almost 3.7 million. Keep in mind those are household counts, so when considering spouses and children this implies at least 5 million fewer people living in owner-occupied housing for these age groups.
In contrast, with the relatively smaller declines in homeownership rates for older households and the overall aging of the U.S. population, the number of homeowning households aged 55 and higher rose by nearly 4.3 million over the last 10 years.
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Some of the decline in homeownership is related to the housing boom and bust, with the onset of foreclosures for those who were not ready for homeownership or lost a job due to the recession. However, recent declines are connected with tighter access to credit to buy a home due to stricter lending standards, increased unemployment and lack of wage growth for younger workers. Falling home prices may have been an economic opportunity for all-cash buyers, but for those dependent on debt – particularly aspiring younger households – the inability to access an affordable mortgage or save for a downpayment meant a closed door during a unique buying opportunity.
And while these housing changes are most apparent for homeownership, the count of independent households by age class shows the impacts of a weak labor market on those leaving school. While the stylized lifecycle of those graduating (a few years of renting, followed by marriage, homeownership and children) varies by location, education, sexual orientation, etc., this general pattern of life events has been interrupted for many younger than 35.
The "boomerang" generation has witnessed growing rates of adult children living with parents, as opposed to renting or owning their own homes. For example, there are 1.6 million fewer independent renting or owning households in 2012 headed by individuals aged 35 or younger compared to 2002. While some of that change is structural related to underlying aging trends, much of this decline is related to economic conditions.
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These distinct, age-focused changes in housing tenure will in turn have significant long-run consequences for social and economic outcomes. For example, as a practical matter, it is harder to start families and have children when living with one's own parents. Falling national fertility rates are consistent with this claim, and in fact, state-level data indicate that in recent years the largest declines in births are occurring in states with more significant challenges for housing.
Decreased opportunities for homeownership for the young will also have impacts on economic outcomes like wealth accumulation. Housing remains an important, if not primary, source of wealth for American households because it is both a source of a flow of services (housing itself) and a capital asset. While it is partly cause-and-effect, even after the dramatic home price declines of recent years, 2010 data from the Federal Reserve indicates a stark divide of the net worth of homeowners and renters.
These housing and demographic changes have important public policy implications, particularly for housing finance and tax policy. First, distributional analysis of proposed finance and tax rules should take into consideration age/demographic classes in addition to income and other economic analysis. In many cases, higher incomes are indicative of where someone lives (high-cost states) rather than standard of living. Age-analysis can clarify the picture particularly for housing-focused policies.
Second, changes to rules that increase the cost of buying a home with debt will have greater impacts on younger households because such individuals are more dependent on a mortgage to purchase a home. Examples include the mortgage interest deduction and rules concerning the future of the government backed mortgage companies Fannie Mae and Freddie Mac, as well as programs administered by the Federal Housing Administration.
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For example, my analysis of 2009 Statistics of Income data from the IRS indicates that in terms of the average deduction, the highest mortgage interest deduction amount ($13,154) is for those aged 35 to 44 with progressively smaller deduction totals as homeowners age. The reason for this effect is that, in general, homeowners pay relatively more interest in the early years of a mortgage and more principal in the latter years.
This declining importance of the mortgage interest deduction with age is actually an interesting contrast with other tax items, like deductions for state/local income taxes or charitable deductions, which increase in size with taxpayer age.
In total, these data emphasize that housing policy decisions will have long-run impacts on economic and social outcomes. And these decisions should reflect fairness and prudence across income and wealth distributions but must be generationally fair as well.
- Robert Dietz