As recently reported by the National Association of Realtors, the share of first-time homebuyers is approaching a 30-year low. But the striking absence of these buyers in the market today is not the result of shifting aspirations. Surveys consistently show that young adults, those who typically make up the bulk of first-time home purchasers, do in fact aspire to own a home.
What's happening is that stagnating wages, high student loan debt, an insufficient supply of lower-cost “starter” homes, and excessively tight mortgage credit conditions have all conspired to make it more difficult than ever to purchase a home, particularly for those just starting out in the home-buying market.
In the absence of a strong and sustained public policy response, this situation will only worsen in the coming decade as two groups in particular – Millennials (born between 1980 and 2000) and Baby Boomers (born between 1946 and 1964) – seek out rental housing and put upward pressure on rents.
During the Great Recession and the years immediately following it, millions of Millennials were relegated to the housing sidelines. Their huge “pent-up” demand is now being unleashed as large numbers of young adults begin to form households for the first time. Not surprisingly, burdened with student loan debt and facing tighter mortgage underwriting standards, most are opting for rental housing. Many are seeking rental homes in city centers in order to be close to employment and other opportunities. Some are unsure of their financial future and appreciate the flexibility that renting provides.
With 10,000 Baby Boomers turning 65 daily, seniors are also making a significant contribution to rental demand. Some already rent, but many are former homeowners who need less living space and do not want to deal with the property upkeep that homeownership requires. Not having to pay property taxes is an added bonus. In fact, the Urban Institute projects that the number of senior renters will more than double between 2010 to 2030 – from 5.8 million to 12.2 million.
Unfortunately, the supply of affordable rental homes has failed to keep pace with this surge in demand. Those families with the lowest incomes have been hit the hardest by this supply/demand imbalance. The result has been an unprecedented number of renters who find themselves paying unsustainable portions of their income just on housing. According to Harvard’s Joint Center for Housing Studies, nearly 21 million renter households devote in excess of 30 percent of their incomes on housing. More than 11 million of these households are “severely cost-burdened,” spending in excess of 50 percent of their incomes on rent. The number and percentage of renters with housing cost burdens has steadily increased over the past decade.
This new reality – a rental market that is becoming increasingly unaffordable and a homeownership market bereft of first-time buyers – should be a wake-up call to the entire housing industry.
It is time for those on the rental and homeownership sides of the industry to combine forces to develop a comprehensive strategy that directly responds to the rental-affordability and homeownership-access problems.
At the core of this strategy must be an understanding that renting and homeownership are inextricably linked. After all, today’s renters are tomorrow’s homeowners. Without a prudent and rational plan to increase the supply of affordable rental homes and ease the pressure caused by rising rents, millions of families will be unable to accumulate the resources for a mortgage down payment and will fail to realize their dream of purchasing a home of their own. With fewer and fewer first-time buyers, the homeownership market will continue to sputter.
Ultimately, what's at stake is our nation’s economy. Historically, new homebuilding and housing-related construction have been key to economic recovery. Implementing a balanced set of public policies to improve the affordability of rental housing while expanding access to homeownership can give the economy the powerful jolt it sorely needs.
Lazio served in the House from 1993 to 2001. He is currently a partner at Jones Walker LLP and serves on the executive committee of the J. Ronald Terwilliger Foundation for Housing America’s Families.