We Must Restore the American Dream of Homeownership


Photo of Alexander Andrews | Unsplash

Photo of Alexander Andrews | Unsplash

Former Fed. Chair Janet Yellen will have a herculean task ahead of her as the new Treasury Secretary inside the Biden Administration. Of all of Biden’s presidential appointments, Yellen has the monstrous undertaking of putting the economy back on track, protecting small businesses, and protecting the financial wellbeing of average Americans. But above all, she must restore the American Dream of homeownership for everyone in this country. 

 

The Trump administration is dealing Yellen a difficult hand as she takes over the job. With 11 million unemployed in October, the November S&P CoreLogic Case-Shiller U.S. National Home Price Index reported a 7 percent annual gain in September, up from 5.8 percent in the previous month and the highest monthly increase since May 2014. After President-elect Joe Biden officially announced Yellen for the Cabinet post on Monday, she said the following: “To recover, we must restore the American dream—a society where each person can rise to their potential and dream even bigger for their children,” Yellen said.

 

In homeownership, the picture is bleak, especially for young adults. Student and auto debt today are higher than mortgage debt for ages 18-39, according to the New York Fed’s Household Debt and Credit Report for 3Q 2020. Unaffordable home prices, low housing inventory, and the economic impact of COVID-19 has made housing wealth another brick in the wall dividing economic prosperity into the United States. 

 

Since the housing bubble burst into a Great Recession in 2008, institutional investors bought up hundreds of thousands of bank REO or foreclosed homes, and by doing so, housing inventory declined. Home prices had bottomed out and as the purchase market came roaring back, bidding for homes became extremely competitive due to low inventory and no construction of single-family homes. The result was higher home prices.



The U.S. Census Bureau now reports that of the 90 percent of residential units occupied in the third quarter of this year – over 60 percent were owner-occupied, and nearly 30 percent renters. The homeownership rate for ages under 35 in the third quarter was 40.2 percent compared with almost 64 percent or higher for homeowners age 35 and over. 

 

As home prices rise too quickly, “first-time buyers will increasingly face difficulty in coming up with a down payment,” Lawrence Yun, chief economist at National Association of Realtors (or “NAR”), said in November. “The consequent rise in home prices has boosted wealth accumulation for homeowners. But the opposite side of this will mean the continued decline of housing affordability and will limit future homeownership opportunities for young adults if housing supply is not greatly increased.”

 

Meantime, the pandemic will likely widen the financial divide in housing and wealth. Unemployment—furloughs and layoffs—can add delinquency to debt, turn credit scores lower and make it even more challenging to qualify for a mortgage.

 

According to Ellie Mae’s Origination Insight Report (OIR) released on November 18, purchase loans in October dipped further to 40 percent of all closed loans from 42 percent in September. Refinance loans accounted for 60 percent of all closed loans. With average FICO scores at 753, loan-to-value (LTV) ratios at 73 percent, and debt-to-income (DTI) ratios at 23/35 (the latter debt includes the mortgage payment), most homebuyers in October had excellent credit and the ability to repay loans. In fact, 82 percent of borrowers had conventional mortgages than 10 percent of home buyers using FHA loans and 5 percent with VA loans.



The American Dream of homeownership also has a racial divide between White and non-White homeowners. According to the Census Bureau, a 25-point divide exists between non-Hispanic White and Hispanic homeowners and a 30-point divide between non-Hispanic White and Black homeowners.

 

On November 30, the NAR reported pending existing home sales dropping by 1.1 percent in October and by 2 percent in September. “The combination of these factors – scarce housing and low rates – plus very strong demand has pushed home prices to levels that are making it difficult to save for a down payment, particularly among first-time buyers, who don’t have the luxury of using housing equity from a sale to use as a down payment,” Yun said. “Work-from-home flexibility has also increased the demand for both primary and secondary homes.” 

 

A vaccine is on its way in 2021 to help cure the pandemic, but how long will it take to remedy the wealth divide in the United States restore the American Dream of homeownership? Unless Yellen and the Biden Administration can unify Congress to pass a robust stimulus package to small businesses and the people, the American Dream will continue to fade into just that — a dream.

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