A Homecoming For Home Buying

U.S. home ownership is growing again, thanks to low rates, stable prices, and lots of new households

Home, sweet home. Without much notice, at a time of widespread economic anxiety and deep-rooted fears over living standards, home ownership is reviving. More and more people are starting to own what has long been a vital element of the American Dream, their home.

The trend is unmistakable. The proportion of all households that own their own home, the so-called home ownership rate, shot up in the last quarter of 1995, to 65.1%--the highest level since 1981. The spurt in home ownership is being fueled by powerful, long-term forces. Low interest rates and slow price appreciation are making a home far less costly now than at any time in the past two decades. Demographic trends are mostly favorable, too, including strong home buying by immigrants. Mortgage lending to low-income households and minorities is way up, and accelerating. "By the turn of the century, we will have record rates of home ownership," says Kenneth T. Rosen, head of the Fisher Center for Real Estate & Urban Economics at the University of California at Berkeley.

Robust home ownership is critical to the economy's health. Housing activity, ranging from residential construction to expenditures on furniture and appliances, adds up to some 15% of gross domestic product. And the impact of home purchases on economic activity is enormous: According to DRI/McGraw-Hill, for every $1 spent on housing, the economy increases by an additional $1.40--far more than with most other purchases. Indeed, when the U.S. came out of recession early this decade, housing directly accounted for nearly one-fifth of total growth during the following two years.

SHARP TURNABOUT. Today's improving outlook is a sharp turnabout from the 1980s, when a collapse in home ownership seemed imminent. After rising steadily for much of the post-World War II era, the rate began declining in the mid-1980s. High mortgage rates and mind-boggling prices put buying a home out of reach for an increasing number of families. Potential home buyers fled when home prices plunged in many markets toward decade's end. Some economists feared the worsening market was a harbinger of a long-term decline in home values since new-household formation was expected to plunge in the '90s, reflecting the sharp drop in the number of babies born two decades earlier.

Instead, the housing market has stabilized. What happened? Low interest rates, for one thing. Buying a home became far more affordable as fixed-rate 30-year mortgages fell from an average of almost 10% in 1989 to a little over 7% in recent months. At the same time, although there are sharp regional differences (with prices weak on the two coasts and strong in the Midwest), overall home price inflation has been moderate. In 1981, according to Fannie Mae, principal and interest payments for a new median-price home absorbed 41% of the typical family income; in 1995, it was 23% of income. Investing in real estate is "staggeringly more attractive for the home-buying public," says Sheila Rice, vice-president at Henry S. Miller Co. Realtors in Dallas.

To be sure, although sales of new single-family homes rose at a robust 4.2% annual rate in January, the recent turmoil in the bond market could push mortgage rates up sharply, and sales could fall off in coming months. Corporate downsizings and layoffs are overhanging many real estate markets. Still, with inflation running well below 3%, it's hard to see any sustained upward movement in mortgage rates.

The demographics are also mostly positive for home ownership. The Census Bureau has hiked its population-growth forecast for the 1990s to 27 million, from an earlier estimate of 16 million. With this new forecast, instead of new-household formation plummeting as many experts had predicted, the total number of households in the U.S. should increase by 13 million in the 1990s. That's about the same as in the 1980s, says William Apgar, economist at Harvard University's Joint Center for Housing Studies. "There are a lot more people than we thought," says Karl Case, a professor of economics at Wellesley College.

Immigrants, who are flocking to America in record numbers, play a big role in the population gain. And the newcomers usually value home ownership highly. According to Harvard's Joint Center, among immigrants 25 to 34 years old in 1980 (who came to the U.S. between 1970 and 1979), some 24% owned their own home in 1980. A decade later, the rate for this cohort, now age 35 to 44, had more than doubled, to 55%. Some immigrant groups have made astonishing strides in home ownership: Among Chinese immigrants age 25 to 34 in 1980, 39% were homeowners. By 1990, at ages 35 to 44, some 83% owned their own home. "New immigrants have a strong orientation to savings, to family, and they have even more of a commitment to achieving home ownership than Americans as a whole," says James A. Johnson, chief executive of Fannie Mae.

Other demographic trends are also supporting the rise in home ownership. Baby boomers are aging, entering their peak earning years--when their demand for housing is typically strong, especially for trade-ups. Even boomers nearing retirement are likely to live in a home of their own: Home ownership rates among the elderly are extremely high. At the same time, younger households priced out of the market during the 1980s are eagerly joining the ranks of first-time home buyers. Says Mark Zandi, economist at Regional Financial Associates Inc.: "With the aging of the population, there are fewer prospective renters and more prospective homeowners."

There are hints that a core home buyer--the traditional family--is making something of a comeback. Over the past several decades, the huge rise in single-parent households has been a powerful drag on home ownership. Yet from 1990 to 1995, the numbers of two-parent families with children increased by 701,000, reversing a 20-year pattern of decline, according to Carol J. De Vita of the Population Reference Bureau Inc. True, the number of single-parent families grew by 3% per year at the same time--but that is well below the 6% annual rate of the 1970s.

URBAN PUSH. Buttressing all these factors is a surge in mortgage lending to low-income households and minorities--albeit from a low base. Low rates are the most important factor behind the increase, says Lawrence B. Lindsey, a Federal Reserve Board Governor. For another, government regulations are exerting pressure on banks and other mortgage-market players to enlarge their low-income lending. Mortgage loans to African American households in 1994 rose by 55%, and loans to Hispanic households by 42%, compared with 1993, says Allen Fishbein, general counsel at the nonprofit Center for Community Change in Washington, D.C. Experts predict another big gain for 1995. "More and more lenders are starting to believe in a calculated way that the untapped potential of the mortgage market is low-income and minorities," says Fishbein.

In addition, many community groups are working to expand home ownership, especially in the cities. For instance, nonprofit Habitat for Humanity International is now one of the largest homebuilders in the U.S., and the average price for a three-bedroom Habitat house is $34,300. Habitat's largest affiliate is in Atlanta, where the nonprofit has built and sold all its homes in the inner city. "We're definitely down to the lowest income level," says Lawrence Arney, executive director for Habitat's Atlanta affiliate.

Owning a home has long been a goal of most American families. And home ownership has traditionally spurred economic growth. Good news on the home front is good news indeed.

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