1. Serving the Underserved
August, 2016
#FirstAmEcon
@mflemingecon

2. Median Value=285K Wealth=209K Median Value=80K Down Payment=4K
What other asset is the average main-street consumer allowed to use financial leverage against in such as strong way. When one buys a home with just 5 percent down any growth in that value of the home is 100% theirs. For example, if one bought the median priced home in 1984 (80K), with 5 percent down (4k), in the first year the price would appreciate to just under 84,000 (actual appreciation of 5 percent). Yet that adds 4000 to the existing down-payment equity of the owner, a total of 8K in equity or a 100% return. The power of leverage!
By 2014, 30 years later, the initial wealth of 4000 will have turned into 209K, and that doesn’t account for any of the wealth gained by paying down the mortgage. Homeownership is a huge leveraged wealth creation engine!

4. Affluence Changes The Source of Wealth
Homeownership Wealth as a Percentage of Total, (Homeowner Households)
Yet, what wealth is created is more likely to be generated by housing the lower don the income distribution one is. Housing wealth is the primary source of wealth creation for the bottom 40 percent of the income distribution. Middle-class America relies on homeownership to create wealth, save for retirement, create financial stability, and provide access to safe and economically mobile communities.
Source: Federal Reserve, Survey of Consumer Finances, 2013

5. Homeownership until the 1990’s remained a consistently within the percent range. Then in the 1990’s through a variety of ways (regulatory, policy, financial, and demographic), homeownership rose dramatically. This was partly driven by baby-boomers aging into prime homeownership years, financial innovation, and policies to encourage homeownership. The recent decline has been largely economically driven, but also partly because young households are being formed primarily as renters and driving down the share of household homeowners relative to the total. Not all of the decline is because of the crisis. (The Potential for the American Dream)

6. Source: Current Population Survey/Housing Vacancy Survey, Bureau of the Census, 2014

8. The Rental return is measured based on the rent of primary residence sub component of the CPI shelter index. This is based on asking renters only what they pay for their housing. As opposed to owner-equivalent rent that asks owners what they think they could charge for rent. Owners user cost is calculated by taking combination of inflation and financing costs (30yr fixed+cpi), adjusting for the mortgage interest deduction (1-.26), plus maintenance and upkeep adjusted for taxes (.02*.26), plus property and other local taxes (.04) minus the benefit of appreciation.
See here for more info on CPI rent components

10. Real Prices Remain Low In Most Markets
Source: FHFA, Freddie Mac, Census, First American, April 2016

11. Baby Boomers, Generation X, and Millennials measured as year-olds in 1980, 2000, and present data respectively unless otherwise specified. Spider graph shown as ratio to Baby Boomers for successive generations

14. Age has a very important role to play in the decision to be a homeowner. Lifestyle (marriage, children) and economic (income, education, economic conditions) also play an important role, but are also often correlated with age (higher income, marriage and children as one gets older). Among all ethnicities, homeownership increases with age. What’s most interesting is the starting point at age 25. particularly for non-Hispanic Whites. This could possibly due to the higher likelihood of young people in this group receiving intergenerational wealth transfers to facilitate homeownership, which is itself more likely given the very high homeownership rate of their older parents.
All ethnicities reach high homeownership levels by about 60, yet significant gaps remain- particularly between non-Hispanic Whites, Blacks, and Hispanics.

15. Census projections actually indicate that our population will get significantly older as baby boomers survive and Hispanics, in particular, thrive. This has negative implications for the workforce and future economic growth. The burdens placed on social security and medicare etc. and the working age labor force relative to the non-working population will be significant, but this is a good thing for homeownership.

16. For example, in 2012 the age distribution of Whites an Hispanic’s was dramatically different. White’s were significantly older than Hispanics. In fact, a large share of the Hispanic population was not yet or only just of traditional home buying age.

17. Future demographic trends show that the collective minority will, by 2045, be the majority and the concern is homeownership will suffer because these ethnicities have lower homeownership rates. What this fails to consider is the age profile of the different ethnic groups.

18. The future of the housing market will be critically dependent in the coming years on the buying patterns of today’s Millennials. In this chart we are forecasting the net new owner-occupied households (first-time homebuyers) formed by today’s year olds (current Millennials). This is based on census projections of the age and demographic profile of the US population and historic ownership rates by age and ethnicity. So it accounts for the changing ethnicity mix and likelihood of homeownership based on age, but because it uses historical age/ethnicity homeownership rates it also assumes that, for example, the 25 year old hispanic today will have the same likelihood of becoming a homeowner when they are 40 as today’s hispanic 40 year old. We do this because otherwise we need to forecast lots of things like marriage rates, number of children, educational attainment and subsequent incomes. This is likely a lower bound of true demand as the high levels of educational attainment among Millennials should yield higher incomes and subsequently higher homeownership rates at future ages than the historical averages.
The result….we expect Millennials will be the source of at least 10 million home sales in the next ten years and by the time they start to age out of homeownership, will have contributed over 20 million first-time homebuyers. Ethnic minorites will collectively contribute at least 25% of those sales.

21. All Mortgage Risk Created Markets Are Not Equal
Mortgage Risk Index (SA, April 2013 = 100)
Source: AEI International Center on Housing Risk, May 2016

22. There Are More Potential Homeowners Out There
316 million
Aggregate US Population
227 million
Credit Eligible Universe
< 18 years
No credit file
220 million
Scoreable w/ VantageScore 3.0
Conventionally Scoreable
185 million
Unscoreable
Inquiry only
“Credit Invisible”
30-35mm new-scoring consumers
One of the challenges for potential homeowners is their ability to access credit markets, of which the first step is being credit “scoreable”. There are a large number of potential homeowners who are currently invisible based on analysis by VantageScore. About 11 percent of the U.S. population, and significantly more if one only considers the adult population.
Source: VantageScore Solutions LLC, 2015

23. And Creditworthy Under Current Standards
New Scoring Consumers by Score
500 – 580 : 21 million
580 – 620 : 6 million
620 – 850 : 7.6 million
Millions of credit-invisible borrowers have sufficiently high scores to qualify under today’s standards. Of course, this is not the only underwriting criteria that has to be met for eligibility, but it is certainly a gating factor. There are 7.6 million potential homeowner households with credit scores of 620 and above, and many of them are young and ethnically diverse households.
Source: VantageScore Solutions LLC, 2015

24. And Even No More Risky Than Existing Borrowers
Does a newly scored consumer exhibit the same risk profile as a conventionally mainstream consumer?
“Newly scored” consumers default with a similar first payment default profile as “conventionally scored” consumers
Newly Scored
First Payment Default Profiles
Percent of defaulters (90 days+ past due)
The risk profile of the newly scored is no different than the conventionally scored. So, if credit was provided to newly scored 620 and above borrowers there would be no additional risk added to the system. Is this a one can have SOME cake and eat it too?
Source: VantageScore Solutions LLC, 2015
Months

25. This forecast is based on Census based forecasts of population age and ethnicity, converted into headship rates using the 2013 ACS (same cohort headship rates). This converts population into households current and forecasted. Note that by doing this we assume that household formation rates within an age/ethnicity cohort are constant. In other words, year old whites will form households at the same rate as they did in Using Census IPUMS data for 2014 we measured actual homeownership rates by the same age/ethnicity cohorts and used these 2014 fixed homeownership rates combined with the age/ethnicity household forecasts to project the homeownership rate.
Note that this amounts to a demographics-only forecast. In other words, what would happen if all economic and lifestyle conditions remained constant and only age and ethnic mix of the population changed.

26. Office of Economic Research
First American’s
Office of Economic Research
FirstAm.com/Economics
@mflemingecon
#FirstAmEcon