Realty Times: National Boom Builds Equity, Raises Affordability Concerns

June 27, 2000

National Boom Builds Equity, Raises Affordability Concerns
by Broderick Perkins

The nation's longest economic expansion on record has spawned an equally prosperous housing market, but escalating home prices, higher rents and increasing interest rates are pricing a growing number of consumers out of the market.

The rush to meet the demand to build ever more homes is also raising concerns about sprawl and related infrastructure headaches on the edge of cities, according to "The State Of The Nation's Housing: 2000" a Ford Foundation-sponsored study conducted by Harvard University's Joint Center For Housing Studies.

The latest in a flurry of New Millennium studies about the nation's beleaguered housing market says soaring home prices have been a boon to existing homeowners' equity, but those who don't own are buffeted between high rents and the inability to save enough for a down payment.

"In the midst of this remarkable prosperity, the home ownership gap between whites and minorities has hardly narrowed. Even worse, millions of very low-income households still lack adequate, affordable housing at a time when losses of subsidized units are rising," according to the report's executive summary.

Strong income and employment growth pushed the home ownership rate to 66.8 percent in 1999. The report also credits innovative mortgage programs to increases in ownership among low-income buyers. In metro areas home loans to low-income buyers was up by 55 percent from 1993 to 1998 compared to a 40 percent increase among high-income borrowers.

Meanwhile 90,000 subsidize housing units were lost to private owners opting out of the federal program, often to capitalize on higher rents.

Along with income and employment growth spurring demand for housing, the growing number of empty nesters and single households, more baby boomers buying second homes, older people living longer and more home-buying immigrants all contributed to demand that's depressing inventories and pushing up prices.

Good times

Widespread prosperity in the form of home equity is evident in numerous demographic groups.

The average net capital gain on a home sale has exceeded $25,000 for the past five years.

Stocks have surpassed home equity as a share of total household wealth, but 59 percent of home owners with stock holdings had more equity in their homes than in stocks in 1998.

Among non-elderly homeowners with incomes under $20,000 in 1998, half held 69 percent or more of their net household wealth in home equity.

Of home owners with incomes of $50,000 to $60,000, half held 38 percent or less of their net wealth in home equity.

Home equity accounted for 57 percent or more for half of black homeowners' net wealth, 71 percent or more for half of Hispanic home owners and 40 percent or less for half of white home owners, who had more of their wealth in stocks.

Flip side

Unfortunately, prosperity is a double edged sword. Rising home prices and interest rates have begun to push up ownership costs.

Average annual after tax payments on a typical home with a 10 percent down payment and a 30 year fixed loan climbed 4.5 percent or $372 in 1999 alone. Down payment costs rose 3.5 percent or $442.

Home prices, rising 11.1 percent between 1994 and 1999, far outpaced inflation.

Home prices hit record highs in 1999 in 15 of the nation's 39 largest metropolitan areas and stood at post-recession peaks in most of the remaining areas.

While sub-prime lending has helped increase home ownership rates among low income and minority buyers, predatory lenders have flourished. From 10 to 35 percent of sub prime borrowers could have qualified for prime loans and are paying more for housing than necessary.

Rents in 1999 rose faster than inflation, for the third consecutive year.

Low-income renters suffered income declines between 1996 and 1998 while rents increased by 2.3 percent.

As of 1997, nearly 10 million low-income renters and homeowners, who did not receive financial housing assistance, had severe housing problems -- they had to devote more than half their incomes to housing.

The contrasting housing market conditions don't bode well for the housing market.

"The current housing expansion is the longest in at least a half century, with a record increase of seven million home owners over the past five years," says Nicolas P. Retsinas, joint center director.

"But house price increases now rival those experienced during the 1980s and interest rates are well over a point higher than last year, making it difficult to sustain growth," he added.

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