In the Wake of the Housing Bust, Fewer Young Homeowners

The Great Recession hit the younger generation the hardest, and homeowership has suffered as a result.

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While 2012 marked a turning point for housing in terms of prices and new construction, the scars left by the Great Recession and housing crisis are still apparent today.

One of the most glaring impacts is homeownership rates across the country, which have fallen significantly as a result of the housing crisis. According to the Census Bureau, the homeownership rate stood at 69.2 percent at the end of 2004. By the third quarter of 2012, it had fallen to 65.6 percent.

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The picture is even more grim for younger households who make up most of the important class of first-time homebuyers. Census data reveal that the biggest declines in homeownership were among households headed by those under 35 years of age, with rates plunging from their highest level of 43.6 percent in mid-2004 to 36.3 percent as of the third quarter 2012. Households aged 35 to 44 experienced a decline in homeownership from 70.1 percent at the beginning of 2005 to 61.8 percent as of the third quarter 2012.

(Source: Census)

The reasons for the decline in homeownership among the younger demographic are twofold. First, foreclosures caused some of these homeowners to become renters or cease to be households entirely and move in with family or friends. Second, tight lending requirements and weak labor markets made homeownership unattainable for many younger households, reducing the flow of potential new homeowners.

A similar story has played out when it comes to household wealth. According to preliminary data from the Federal Reserve's 2010 Survey of Consumer Finances, from 2007 to 2010, overall household net worth declined nearly 40 percent, largely due to steep housing price declines. Households aged 35 to 44 experienced the largest drop with a stunning 54 percent median decline in net worth. The value of primary residences also fell the greatest in percentage terms for the youngest homeowners: Those 35 and under saw a 23 percent median decline, followed by 21 percent for those aged 35 to 44 and 65 to 74.

What do these facts suggest about future policy debates? Declining homeownership rates for younger households have far-reaching ripple effects including delays in marriage, having children, and wealth accumulation. Fertility rates in the U.S. have fallen significantly as a result of the Great Recession, with the largest declines associated with states with more serious housing challenges.

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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. Consider the mortgage interest deduction, the benefits of which are strongly correlated to age according to data from the Internal Revenue Service. Homeowners 55 and younger claim 71 percent of the total MID deduction amounts on itemized tax returns. In terms of the average deduction, the highest MID amount ($13,154) is for those aged 35 to 44 with progressively smaller deduction totals as homeowners age.

All these data emphasize that housing policy decisions will have long-term 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.

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  • Robert Dietz is an economist with the National Association of Home Builders (NAHB). Previously an economist with the Congressional Joint Committee on Taxation, Robert writes on housing and policy issues at NAHB's economics blog Eye on Housing. Follow Robert on Twitter at @dietz_econ. The information presented here does not necessarily represent the views of NAHB or its membership.