Demographics. Geopolitics. Innovation.
The following interview was published for YRP several years after the 2008-2009 financial crisis in the United States.
Based on your research regarding the real estate market, what have you observed about Millennial homeowners at this point in time?
The Millennial generation suffered a worse recession than older adults. The unemployment rate of 25-to-34-year-olds rose higher than the unemployment rate overall and only recently fallen back in line. Many Millennials doubled up or stayed at home with parents rather than entering the housing market on their own as renters or buyers. But they won’t live with their parents forever. As the economy recovers, they’ll enter the housing market: nearly two-third still say that homeownership is part of their American Dream. Buying, though, will be a challenge for many of them: for Millennials, the downpayment remains the biggest obstacle to homeownership, and with rents rising rapidly and student debt hanging over their heads, saving for a downpayment is a challenge.
For the Millennials who question the value of homeownership, are there economic benefits to renting as opposed to owning a home?
There are good arguments in favor of renting, depending on your situation. Buying a home involves upfront costs, as well as time and effort – which may not be worth it unless you plan to stay in your home at least 5-7 years. Also, renting may make more sense if you are new to a city and aren’t sure which neighborhood is a good fit for you. Finally, in some markets buying is not really cheaper than renting – such as Honolulu and San Francisco, as well as Manhattan – especially if your tax bracket is low and you therefore benefit less from the mortgage interest deduction. Still, with the huge price declines in the past five years, and rising rents, buying is quite affordable relative to renting in most markets, especially in the Midwest and the South.
We don’t see Millennials rushing out and buying a home and when they do, there may not be a mortgage interest deduction. From an economic standpoint, is the mortgage deduction a good idea?
The mortgage interest deduction is politically popular, but one of the few areas of possible bipartisan agreement on tax reform might be to reduce tax deductions – of which the mortgage interest deduction is a major one. On one hand, the housing market is still fragile, and rising prices have real benefits for the economy, so reducing the incentive to buy a home right now could hurt the economic and housing recovery. On the other hand, because of the way the mortgage interest deduction works, it gives a much bigger tax break to richer taxpayers, particularly in geographic areas with higher home prices. Only 30% of taxpayers even itemize their deductions in the first place, so the benefits of the mortgage interest deduction goes to some homeowners and not others. The mortgage interest deduction is – and will remain — in the crosshairs of two big policy debates: how much should government spend to encourage homeownership, and what’s the fairest and most efficient way to spread those benefits?
As of the end of 2011, housing prices are on the rise. Can we expect housing prices to continue to rise? And what’s been assisting this rise?
The Trulia Price Monitor – which tracks asking prices – shows that prices have been rising for six months and have been rising in most major housing markets. Job growth, along with declining vacancies and inventories, are pushing prices higher. Job growth means more people are interested and able to buy, and the decline in vacancies and inventories means that buyers are chasing fewer available homes and therefore bidding prices up. A big reason for lower inventories is fewer foreclosed homes on the market. Since foreclosed homes are often at the lower end of the market, first-time buyers will find fewer bargains listed for sale then they would have a year ago. We’ve seen asking prices continue to rise in July, which means sales prices should keep rising at least through the fall.
Jed Kolko applies a background in economic development and research methods, transforming real estate data, economic trends, and public policy debate into digestible insights for home buyers, sellers and renters. In Jed’s prior role as Associate Director and Research Fellow at the Public Policy Institute of California, he led research projects and advised policymakers and business leaders on economic, housing and technology policies. Jeff has a Ph.D. in economics from Harvard University.
Before we interviewed Jeff, our research showed that renting beats homeownership except if one of four situations applies to a person: