Why We Should Care About the Great Recession’s Most Unfortunate Victim: Homeownership

by Rob Couch
Guest Blogger

From time to time, Housing Perspectives features posts by guest bloggers. This post was written by Rob Couch, a member of the Banking and Financial Services, Real Estate and Governmental Affairs practice groups at the law firm Bradley Arant Boult Cummings in Birmingham, Alabama.  Rob also serves on the Housing Commission of the Bipartisan Policy Center in Washington, DC..  Previously, he served as General Counsel of the U.S. Department of Housing and Urban Development and as President of the Government National Mortgage Association (Ginnie Mae). His post reflects thoughts he shared at a Brown Bag Lecture delivered at the Harvard Kennedy School on November 14, 2013.

In my lunchtime talk at the Harvard Kennedy School, sponsored by the Joint Center for Housing Studies, I discussed why recent government efforts enacted in the wake of the financial meltdown have caused increasingly stringent underwriting standards. These efforts have resulted in fewer homeowners, particularly first time purchasers, and the widening of the homeownership gap between certain minorities and white Americans. One of the questions from the audience during my talk came from a young man who challenged the continuing validity of the “Dream of Homeownership.”

After the bubble of 2007, some might think homeownership isn’t as worthy a goal as it used to be. In particular, younger Americans who have recently witnessed homeowners suffer financial loss or foreclosure due to declining home values or job loss may be especially wary.  A sizable percentage of young people are not yet in a stable career and want the flexibility that renting offers, and many young Americans who do want to own a home cannot meet underwriting criteria or afford a down payment given the combination of student loan debt and high unemployment.

Nonetheless, as Eric Belsky explains in his paper, The Dream Lives On: The Future of Homeownership in America, most young adults surveyed say they intend to buy a home in the future.   Furthermore, the results of several surveys cited in Belsky’s paper reveal that a majority of both owners and renters believe that owning makes more sense than renting. And for good reason; numerous studies have confirmed the economic and societal benefits of owning a home.

As a homeowner makes payments against his mortgage, and as the value of the property appreciates, the borrower’s equity in the home increases. If necessary, this equity can be accessed though the sale of the home or through a “cash out” refinance or a revolving line of credit. Homeowners also enjoy tax benefits as, in most cases, the annual interest paid on a mortgage and property taxes are fully deductible. Due to the long-term fixed-rate feature of most mortgages and the lifetime cap placed on adjustable-rate mortgages, homeowners are insulated from some of the inflationary pressures on the cost of housing faced by renters.

For the past thirty years, the wealth gap between the most affluent citizens and moderate wealth families in the United States has steadily widened. Households that are able to convert their greatest monthly living expense – rent—into a tax protected asset through amortizing long-term debt have a powerful tool for accumulating wealth. The family that owned its own home in 2010 had a median net worth of $174,500, compared to families who rented and had a net worth of $5,100. Belsky’s paper provides a more detailed analysis of the financial benefits of homeownership.

The benefits of homeownership extend beyond the financial ones, though. Children who grow up in owned homes have higher academic achievement scores in both reading and math and have a 25% higher high school graduation rate than children whose parents rent. Children of homeowners are twice as likely to acquire some post-secondary education, and they are 116% more likely to graduate college. As adults, they earn more and are 59% more likely to own their own home, extending the benefits of homeownership on to the next generation.

Society as a whole also benefits from homeownership. Research has shown that homeowners are more likely to be satisfied with their neighborhoods, and thus more likely to give back to their communities. People who own their homes more often participate in civic activities and work to improve the local community, and they are 15% more likely to vote. Lastly, they tend to have greater longevity in a residence, leading to a more stable neighborhood.

Considering the benefits homeownership offers to society as a whole, young Americans aren’t the only demographic group affected by recent policies. Recent reports estimate that the African-American community, with wealth more concentrated in homeownership than any other asset, lost more than 50% of its net worth during the housing crisis. The deterioration in homeownership has been disproportionately severe on African-Americans, Hispanics, and younger people, leading to a widening of the gap in minority/white homeownership rates.

Recent government efforts to protect borrowers who fail to pay their loans, particularly settlements that have been extracted from the industry and increased servicing standards, have had the effect of compounding the losses from bad loans, thereby encouraging even more conservative lending and hurting a much larger group of potential borrowers by depriving them of the opportunity to achieve homeownership. The overarching policy goal should be to facilitate homeownership, not to shift the burden of non-performance from defaulters to aspiring borrowers. Policies need to change if we wish to continue making homeownership a reality for the broadest group of eligible borrowers in the United States.  My recent paper, The Great Recession’s Most Unfortunate Victim: Homeownership, discusses how we can address this important issue.

Fertility Rates and Age Structures – The Underpinnings of Replacement Fertility in the U.S.

by George Masnick
Fellow

The U.S. fertility rate is at near replacement level, where a woman bears two children over her lifetime (just enough to ‘replace’ herself and her partner).  The Total Fertility Rate (TFR), which is how many children the average woman in the U.S. will have if she survives through the reproductive ages and bears children at each age at rates U.S. women are currently experiencing, is just below this level.  Replacement fertility leads to a “pillar” like age structure, where the base of the pillar (children) contains about the same number of people per five-year age group as the middle of the pillar (parents).  For the U.S., that number is currently about 20 million (Exhibit 1).

Source: http//www.census.gov/population/international/data/idb/informationGateway.php

This situation can be contrasted with fertility rates and age structures in most other industrialized countries.  Below-replacement fertility in much of Europe and in a number of Asian countries has created “mushroom cloud” shaped age structures where the numbers of children are just fractions of the size of the parents’ generations.  In Germany, for example, the 0-4 and 5-9 age groups are only about half the size of the 40-44 and 45-49 age groups (Exhibit 1).  Age structures for other countries with TFRs of 1.6 or less are broadly similar to Germany’s (Table 1).  Such an imbalance in age structures has the potential to create enormous problems for these societies in areas such as institutional stability (e.g. schools), labor force succession, housing market dynamics, and old-age social security.  Shrinking class sizes, workforce shortages, declining demand for larger homes that prevent older households from downsizing, and payroll tax collections that are insufficient to pay for retirement benefits are all consequences of long periods of below-replacement fertility.

Source: http://www.oecd.org/berlin/47570005.pdf

So why is the U.S. such an outlier compared to other industrialized countries in having experienced recent near replacement-level fertility and a relatively healthy age structure?  And, is the U.S. likely to retain this advantage in the future?  The answers to these questions point to the importance of immigration in shaping the present demography of the U.S., and to uncertainty about future levels of immigration and the role it will play in the future.

Decomposing the U.S. age structure into immigrants (first generation), the children of immigrants born in the U.S. (second generation), and third or higher generations (parents born in the U.S.), illustrates the importance of immigration in both backfilling the smaller baby bust cohorts born between the mid-1960s and mid-1980s and in increasing the cohort size of children born here in the past 20 years (Exhibit 2).  According to a recent Pew Research Center report, immigrant fertility rates are about 50 percent higher than native-born rates.    While in 2010, only 17 percent of women of reproductive age were immigrants, immigrant women bore a quarter of all children born in the 2000s. Replacement level fertility in the 2000s was achieved by above-replacement immigrant fertility counter balancing below-replacement native fertility.

Current Population Survey Annual Socialand Economic Supplement, 2010, Table 26

The future stability of the age structure of the U.S. will depend on levels of immigration and on fertility trends of both the native born and of immigrants.  The Pew report cited above documents how dramatically fertility rates have fallen since the Great Recession, with the largest percentage declines occurring among immigrants.  Between 2007 and 2010 the number of births per 1,000 women age 15-44 (the General Fertility Rate) fell for native-born women by 6 percent while for foreign-born women the decline was 14 percent. Whether fertility declines have been mostly driven by high unemployment and low wages and so will rebound with an improving economy is too soon to tell.  Any rebound could still leave fertility levels below the replacement rate.  But in any case, it is unlikely that U.S. women will soon adopt the very low levels of childbearing that characterize much of the developed world.  The influence on fertility of “pro-family” fundamentalist religions in the U.S. and the not-unrelated political hostility to birth control and abortion in many parts of the country continue to support higher levels of U.S. childbearing. 

However, the size and composition of future streams of immigration are very much in question.  Immigration reform has been slow to gain traction in the U.S. Congress, and the outcome of any new legislation on future immigration levels remains uncertain.  More to the point, perhaps, is the fact that several important sending countries are undergoing fundamental transformations in both their economies and demographics that will diminish their propensities to send immigrants.  For example, Mexico accounts for about 30 percent of all foreign-born living in the U.S., and immigration from Mexico has long been a safety valve to release excess population growth in that country.  But Mexico has reduced its fertility by over one-half since 1985, with much of the reduction occurring in the past decade.  In the future, as long as Mexico’s economy continues to prosper, we can expect fewer will need to leave Mexico to find work.  Similar transformations are occurring in other sending countries such as India and China. Age structures in these countries have begun to transform from “pyramid” to “pillar” shapes.

Before closing, I want to say a few words about one industrialized country, Sweden, which has succeeded in maintaining near replacement fertility without depending on high fertility immigrants.  There are indeed immigrants to Sweden who are needed to fill certain jobs, but they mostly come from other low fertility countries in Europe, especially the Balkans, and the immigrants retain the low fertility of their countries of origin.  Sweden has a long history of low native-born fertility going back to the 1970s, and has gradually adopted strong social policies to encourage its citizens to voluntarily become parents, including generous maternity/paternity leaves, significant health care and housing benefits, and low-cost, high quality, and readily available daycare. But even with such strong pro-natalist policies, Sweden can barely keep its fertility at near-replacement levels.

We should be thankful that our recent history of high-fertility immigration has helped create an age structure that will lead to far fewer problems in the near future compared to those facing other industrialized countries.  Whether we continue to retain this advantage will depend on future levels of both immigration and fertility (of both the native-born and the newly arrived).  To avoid the U.S. moving toward a mushroom cloud like age structure, absent widespread pro-natalist programs and policies as in the case of Sweden, the depressed immigration levels and declining fertility trends of recent years will need to be reversed.  

A Word of Caution about Census Bureau Projections

by George Masnick
Fellow

The Census Bureau recently released its high and low immigration series population projections going out to 2060, complementing its middle series released in December 2012.  Among the talking points in the press release announcing the projections was the assertion that the high immigration series “projects that the U.S. resident population will become majority-minority by 2041, two years earlier than the December (middle series) projection of 2043.”

The point is well taken that the growth of the minority population depends upon future levels of immigration, and higher immigration means an earlier date at which the country becomes majority-minority. But between now and the 2040s there is a great deal more uncertainty about immigration trends than is captured in the Census Bureau’s latest assumptions, including uncertainty about how attitudes and norms will affect who is counted as minority.  In addition, all three of the Census Bureau’s population projections use the same assumption about projected fertility levels of each race/Hispanic origin group.  Not only are fertility trends difficult to predict over many decades, but different immigration levels will surely affect fertility rates.

The new middle series immigration assumptions trend from 725,000 per year in 2012 to 1.2 million in 2050. Low assumptions trend from 702,000 to 808,000, and high assumptions from 747,000 to 1.6 million annually.  All three immigration assumptions are well below those of the previous Census Bureau population projections released in 2008 and 2009, with the new high immigration series even projecting fewer immigrants in 2050 than the previous low immigration assumption (Figure 1). Such a wide range of uncertainty about future levels of immigration should make one wary about the reliability of projections that reach almost 50 years into the future.

Source: U.S. Census Bureau 2009 National Population Projections

However, the projected level of immigration is not the only area of uncertainty that will affect the projected white-minority tipping point.  Predicting a specific year when the population actually becomes majority-minority sometime three decades ahead will also require assumptions about how Americans in the future will identify themselves in terms of race and ancestry.

Perhaps the most important wild card is the growing rate of inter-ethnic/race marriages, particularly when one parent is non-Hispanic white and the other is not, both because the rates of intermarriage will help determine the future minority composition of the population and because it is unclear how the children of such unions will be classified in future censuses and how they will self-identify as adults.  According to a Pew Research Center report, among all newlyweds in 2010, 9% of whites, 17% of blacks, 26% of Hispanics and 28% of Asians “married out."  Most of these marriages involved one partner who was non-Hispanic white. The same report notes that during the past 25 years, public sentiment about inter-marriage has changed markedly: in 2010, nearly two-thirds of Americans said it “would be fine” with them if a member of their own family were to marry someone outside their own racial or ethnic group, while in 1986, two thirds of the population held the opposite view.  During the next 25 years, marrying out is likely to become even more common and more widely accepted.

Such trends in inter-marriage tell only part of the story regarding inter-racial childbearing, however. The percentage of births that are non-marital has been increasing steadily since the 1940s, and the greatest increases have taken place in recent years.  Today, 36 percent of all births taking place in the U.S. are non-marital, with much higher percentages among teens (86 percent) and women in their early 20s (62 percent). Given that younger cohorts are more favorably disposed to inter-racial relationships, many of which result in childbearing outside of marriage, the statistics on inter-marriages in the Pew report could well underestimate the implications for future inter-racial/ethnic childbearing.

The number of inter-marriage/partnerships taking place over the next 30 years, the number of children born to these relationships, and how the race/ethnicity of these children get classified in censuses and surveys will fundamentally affect the share of the population that is identified as minority.  More importantly, how these children will self-identify as adults in 2040 is basically unknown.  Census Bureau population projections tacitly assume that this variable is held constant at today’s levels, and that young adults will self-identify in the future the same way that they were identified as children by their parents.

A strong argument has been made that racial and ethnic identity is highly variable over time and depends upon social and political conditions. In 1970, the question on Hispanic origin was added to the Decennial Census, and in 1980 the question on ancestry, both after concerted political lobbying by Latinos in the case of the former and those of European descent for the latter.  The Asian community successfully lobbied to expand the number of Asian options listed in the 1990 census. However, since then the percentage of the population whose ancestry was not identified by the census has increased, slightly between 1980 and 1990, and dramatically between 1990 and 2000 (increasing from 11 percent to 20 percent).  In 2010 the ancestry question was shifted to the American Community Survey.  In that survey ancestry was unidentifiable or not reported for about 12 percent of the population, but only after a persistent effort with follow-up interviews with respondents having not answered this and other questions. Such follow-up was not conducted for the 2000 census.  

In short, ancestry appears increasingly to be less important in how Americans identify themselves. And if ancestry, and perhaps by extension race and ethnicity, becomes less important in how we self-identify as Americans, it is entirely likely that in 30 years the percent minority will become a statistic that has become less robust.  Specifically, fewer persons of Hispanic origin might check that box. Likewise, fewer of mixed-race ancestry might identify as such.

A third way that the majority-minority tipping date might be influenced are the apparently arbitrary definitions of whom the Census Bureau counts as minority.  For example, immigrants from Brazil are not counted as minority (Hispanic/Latino) because of Portuguese ancestry, even though most Brazilians also have some indigenous South American native ancestry.  Persons with ancestry in the Middle East and in North Africa are also categorized as white. But a future OMB directive could require that these persons be counted as minorities.

Finally, it has already been demonstrated that such simple factors as questionnaire wording, order of asking questions about nativity, race and ethnicity, and examples used as prompts to questions, will all influence responses.  It is very unlikely that current questionnaire protocols for these items will be used decades in the future.

While there is a lot of uncertainty about the projections 30-50 years into the future, the new projections for the next 10-20 years are likely to be much more accurate.  And they are extremely valuable for showing the magnitude and importance of different immigration assumptions for relatively near-term trends in population growth and for broadly understanding the changing age, race and ethnic composition of the population. Longer-term trends in race and ethnic composition will depend as much on fertility levels, on rates of intermarriage, and on how we think about others and about ourselves, as it does on actual immigration trends.

Failure to Launch

by Dan McCue
Research Manager

With graduation season behind us, millions of newly minted college graduates will be returning to live in their parents’ homes. For some, it won’t be just for the summer. According to the US Census Bureau’s American Community Survey, at last count in 2011, fully 41 percent of college graduates under age 25 lived at home with their parents (Figure 1) along with 18 percent of graduates aged 25-29.

Source: JCHS tabulations of US Census Bureau, 2011 1-Year ACS.

As the figure shows, many college graduates have come to be known as “boomerang children” - those who, instead of venturing out and forming their own household after graduating college, return to live with their parents.  Since the recession began, the term boomerang children has become well known, largely because the situation has become so common.

Source: JCHS tabulations of 2007 and 2011 1-year ACS.

In 2011, there were 16.5 million 18-24 year olds living with their parents and another 4.9 million aged 25-29.  Combined, that’s over 2.9 million more young adults living with their parents in 2011 compared to four years earlier, before the Great Recession. While population growth has helped lift these numbers, the increase in the share of young adults living with their parents in 2007-11 has meant that, among those aged 25-29 alone, there were nearly a million (945,000) more adults living with their parents in 2011 than there would have been had 2007 population rates held constant, while for adults aged 18-24, there were fully 1.2 million more.

Such large numbers living in what many parents and children alike would call an unsustainable situation are why boomerang children are now being looked at as a possible boon to household growth.  As these young adults start to move out of their parents’ basements, they add so-called “pent-up” demand on top of normal household growth. However, a pent-up demand estimate requires an assumed return to earlier “normal” rates – and what is to be considered normal is a tricky thing to determine these days.  For example, if the change in rates of adult children living with their parents in 2007-11 had not occurred, 1.5 million more adults under 30 would have been heading independent households in 2011.  Assuming no change in rates in 2000-11 would lead to even higher estimates of pent-up demand.

Although a return to 2000 or 2007 rates may or may not be in the cards, mere stabilization of current rates will help household growth rebound. Indeed, population growth among 18-29 year olds was expected to push up the overall number of households by over 400,000 in 2007-11; it was the drop in rates of headship that led to the significant declines. With no more drops in rates of household headship, and no more increases in shares of adults living with parents, then population growth can take over again and return significant household growth levels among young adults, regardless of pent up demand. This fall, data releases from the Census Bureau and the Bureau of Labor Statistics will provide updated information that will shed light on whether or not such stabilization is starting to occur or, alternatively, if rates are heading in one direction or another.  Perhaps then we’ll be blogging about the growing number of empty-nester households. 

Childless Households Have Become the Norm

by George Masnick
Fellow

In 1960 almost half of all households were families with children under 18.  Since then, the number has fallen to under 30 percent (Figure 1).  By definition, the declining share of family households with children exists because households without children have increased more rapidly (Figure 2).  There are many reasons for this trend: delayed age at marriage and later age at childbearing, smaller family sizes, higher divorce rates, and more couples choosing not to have children (Table 1).  The changes in each of these measures over the last few decades are quite striking. In 1960 the median age at first marriage was 22.8 for men and 20.3 for women, compared to 28.6 and 26.6 in 2012.  The share of households with four or more people in 1960 was over 40 percent, falling to just under 23 percent in 2012.  Women who were 25 in 1960 ended their childbearing years in the mid 1980s with only 8.5 percent of them remaining childless. Women born in 1960 finished childbearing in 2010 with nearly twice as many of them childless (16.3 percent). In 1960, only 13 percent of all households were single persons, but by 2012 that percentage had risen to 28. All of these trends result in households having fewer children and fewer households having any children at all. (Click charts to enlarge.)

Source: Current Population Survey March and annual Social and Economic Supplement, 2012 and earlier. Table FM-1.  Minor children numbers from Census Bureau's population estimates for July 1 of each year.

Source: Current Population Survey March and annual Social and Economic Supplement, 2012and earlier. Table FM-1

Source: Census Bureau Current Population Survey historical tables.

The interesting aspect of this long-term trend is that it continued in spite of the strong upswing in the sheer number of American children, which grew after 1990 (also Figure 1).  That increase is due to the largest baby boomers having their own children (the echo boom) and to childbearing by the flood of immigrants who arrived between 1985 and 2005.  (Note that in 2012, fully 87.5 percent of children under the age of 18 who have an immigrant parent were themselves born in this country.) 

To be sure, baby boomer and immigrant childbearing did increase the actual number of households with children.  For example, the number of households with children under the age of 18 increased from 33.3 million in 1985 to 38.6 million in 2012. This 5.3 million increase was far less than the 11.3 million increase in total number of children in the population over this period because many households with children contained two or more children under the age of 18.  More importantly, however, the increase in households without children surpassed the 5.3 million growth of households with children by a considerable margin.

Two key reasons for the recent increase in childless households have been the aging of the population and increasing longevity. The large baby boom generation (age 45-64 in 2010) is now entering the empty nest stage (at least regarding children under 18). Between 2002 and 2012, households with at least one child, headed by today’s 45-64 year old cohort, declined by 12.3 million. There are still 11.5 million 45-64 year old headed households with children, and most will become households without children over the next decade.  Furthermore, empty nest households headed by those over the age of 65 are surviving longer and longer, making it likely that the trend in the decline of households with children will continue well into the future.

Significantly, the decline in the number of households with children accelerated after 2007.  Much of the decline can be explained by the sharp drop in the number of births. Annual births rose from just over 4 million in 2001 to over 4.3 million in 2007, the highest on historical record, but then fell to just below 4 million in 2011.  The total fertility rate (births per 1000 women age 15-44) fell from 69.5  (a 17 year high) to 64.4, a decline of 7.3 percent over this same period. Both the decline in births and the drop in the fertility rate are linked to the decline in immigration that followed the Great Recession. Because newly arrived immigrants are concentrated in the childbearing ages, and because immigrants have higher fertility than the native born, the loss of immigrants has had a disproportional effect on declining fertility.  The effect of the Great Recession on lowering fertility among the native born is also of importance, but this decline could be temporary.  The echo boom generation began to turn 25 in 2010, and has most of its childbearing years yet ahead of it. A return to higher levels of immigration and/or a rebound in fertility could reverse the decline in number of births and ease the long-term decline in the share of households with children, but will not likely reverse it.