California's Sliding Homeownership Ladder

the first step is the hardest: CALIFORNIA’S SLIDING HOMEOWNERSHIP LADDER

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY, MAY 2023

DANIEL SHOAG, PHD, METROSIGHT

ISSI ROMEM, pHd, METROSIGHT & TERNER AFFILIATE

DAVID GARCIA, TERNER CENTER

Highlights

• Homeownership in California continues to be eroded: 43.5 percent of people aged 25–75 were homeowners in 2021, down from 49.8 percent in 2000. The decline was even more pronounced for younger Californians aged 35–45, an age range when many people in other states become homeowners. For that group the share that owned a home declined from 49.5 percent to 39.7, almost 10 percentage points in just 20 years.

Figure 1. Trends in Homeownership Over Time in California

• Homeownership in California is increasingly out of reach relative to the country: in 2021 the share of adults who own their home in California was just 43.5 percent, more than 15 percentage points lower than the rest of the United States, which is the largest the gap has ever been. In California, the age at which more than half of residents are homeowners is 49; by comparison, across most of the United States that age is 35.

Figure 2. Changes in the Homeownership Rate Over Time in California by Age

• The ability to afford a home, as opposed to the desire to own one, accounts for most of California’s homeownership gap versus the nation: while the typical timing of life cycle milestones such as marriage and childbearing can also influence rates of homeownership, most of the gap follows from residents’ financial ability to afford a home in the state. We estimate the difference in financial ability to afford a home accounts for 55.6 percent of the observed difference in homeownership rates between residents of California and the rest of the U.S. (ages 25–75).

• How much would slower housing price growth have helped? Had housing prices in California risen from 2000 to 2021 in line with those in the rest of the country, about half (48 percent) of California’s decline in homeownership rate over the period could have been averted.

Click here to read the entire research paper by the Terner Center

Struggling to Live in the Communities They Serve

how housing affordability impacts school employees in California

TERNER CENTER FOR HOUSING INNOVATION UC BERKELEY

sHAZIA MANJI, PUBLISHED ON MARCH 1, 2022

The combination of stagnant incomes and California’s continually rising housing costs weighs heavily on public school employees across the state. Numerous recent headlines (see Mercury News, San Francisco Chronicle, and NPR, among others) highlight stories of teachers who are struggling to afford housing in the communities where they work, forcing them to take on long commutes or pushing them to leave the education sector altogether. These financial constraints contribute to the ongoing challenges California faces in attracting new teachers and have implications for students as well. Teacher recruitment and retention challenges negatively affect student achievement, especially in schools serving low-income and predominantly Black, Indigenous, and People of Color (BIPOC) communities.

California’s public school districts (also referred to as Local Education Agencies, or LEAs) own land in every county that could be used to create housing opportunities for their employees. Analysis from our new research report, Education Workforce Housing in California: Developing the 21st Century Campus—developed in collaboration with the Center for Cities + Schools at UC Berkeley, cityLAB UCLA, and the California School Board Association—sheds light on where and for whom housing affordability challenges may be particularly pronounced among the state’s public education workforce. 

WHERE ARE CALIFORNIA’S TEACHERS STRUGGLING TO AFFORD HOUSING?

To better understand how school employee salaries across the state stack up against housing costs, we first analyzed where beginning teacher salaries for each school district fall in relation to their county’s median income, referred to as the Area Median Income (AMI). Benchmarking incomes to the local median helps account for geographic variation in the cost of living, including the cost of housing. 

Beginning teacher salaries in California range from $30,000 to $84,500 per year. As Figure 1 shows, 43 percent of districts pay a beginning teacher salary that falls below 80 percent of AMI—a level that qualifies as “low income” according to the U.S. Department of Housing and Urban Development (HUD). These districts employ nearly 18,000 beginning teachers. 

Figure 1. Beginning Teacher Salary by Area Median Income

Source: California Department of Education Certificated Salaries & Benefits data, 2018-2019. The Department of Housing and Urban Development Income Limits data, 2018

These starting salaries translate into very weak purchasing power in many local housing markets, particularly in high-cost areas of the state. Half (52 percent) of California school districts are located in counties where someone earning the beginning teacher salary cannot afford the median asking rent without becoming rent-burdened, meaning that they spend more than 30 percent of their income on housing. This includes 81 districts that pay a middle-income (80-120 percent AMI) starting salary.

Click here or on the image to explore the interactive map on teacher salaries and housing affordability in school districts across California.

Click on the image to explore the interactive map on teacher salaries and housing affordability in school districts across California.

For example, Santa Clara Unified offers a starting salary of $73,103, but the median asking rent in Santa Clara County is $2,348, a full $500 above what would be considered affordable for a single-earner with that salary. A beginning teacher at Los Angeles Unified is considered low-income with a salary of $46,587, and cannot afford the Los Angeles County median asking rent of $1,472. For some, even the cost of a studio or one-bedroom unit is out of reach. At San Marcos Unified in San Diego, less than one third (30 percent) of the county’s studio and one-bedroom stock is affordable at the district’s starting salary. For a new teacher at South San Francisco Unified, only 11 percent of studio and one-bedroom units rent at an affordable price.

These housing pressures are most acute in coastal areas, but are of concern in other areas of the state as well. In the Sacramento Valley’s Yolo County, the median asking rent is not affordable for beginning teachers working at five of the county’s six school districts. Rental affordability is also a challenge for new teachers working at certain districts in Riverside County. For example, despite earning what HUD considers a middle-income salary, a new teacher at Desert Center Unified cannot afford the typical asking rent in the county.

Click here to read the entire blog by Shazia Manji at the Terner Center

69% of Households Now Priced Out of Home Market

GlobeSt.com, By Paul Bergeron | February 17, 2022

When the median price increases by $1,000, another 117,932 households are priced out of the market, reported by NAHB.

A near-staggering seven out of 10 households lack the income to qualify for a mortgage under standard underwriting criteria, according to the National Association of Homebuilders (NAHB).

The report (NAHB, Priced-Out Estimates for 2022) said that rising home prices and interest rates “are taking a terrible toll” on housing affordability, with 87.5 million households—or roughly 69% of all US households—unable to afford a new median-priced home.

These “staggering statistics” are part of NAHB’s recently released 2022 priced-out estimates, which further show that if the median new home price goes up by $1,000, an additional 117,932 households would be priced out of the market. These 117,932 households would qualify for the mortgage before the price increase, but not afterward.

Criterion: No More than 28% of Income for Housing

The underwriting criterion used to determine affordability is that the sum of mortgage payments, property taxes, homeowners, and private mortgage insurance premiums (PITI) during the first year is no more than 28% of the household’s income. 

Key assumptions include a 10% down payment, a 30-year fixed-rate mortgage at an interest rate of 3.5%, and an annual premium starting at 73 basis points for private mortgage insurance.

Among all the states, California registered the largest number of households that would be priced out of the market. A $1,000 price increase would push 12,411 households out of the market in the Golden State, followed by Texas (11,108), and Florida (6,931). It should be noted that these are the country’s three most populous states.

The metropolitan area with the largest priced out effect, in terms of absolute numbers, is New York-Newark-Jersey City, N.Y.-N.J.-Pa., where 4,734 households would be squeezed out of the market for a new median-priced if the price increases by $1,000.

Click here to read “69% of Households Now Priced Out of Home Market“ by Paul Bergeron, GlobeSt.com

Click here to read the NAHB’s full report, “Priced-Out Estimates for 2022.”

Homeowners Have a Huge Advantage Over Renters

from The state of the nation’s housing report 2021

JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY

Homeowners have a huge advantage over renters. At last measure in 2019, the median wealth for homeowners was $254,900—more than 40 times the $6,270 median for renters. Even excluding home equity, the median wealth of owners was $98,500, or more than 15 times that of renters (State of the Nation’s Housing Report 2021, page 17).

Joint Center for Housing Studies of Harvard University

Click here to read more from the State of Nation’s Housing Report, 2021

The Impact of High Income Renters on Our Communities

Growth in high-income renters signals that access to homeownership is being limited to all but the highest-income households.

JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY

DANIEL MCCUE, SENIOR RESEARCH ASSOCIATE

One of the major stories highlighted in our new America’s Rental Housing, 2020 is the growth in high-income renter households. After not growing between 1990 and 2004, the number of renter households shot up by over 10 million households since 2004. In the early years, between 2004 and 2010, households earning less than $30,000 per year accounted for two-thirds of the growth in renter households. But between 2010 and 2018, more than three quarters of all growth was among renters with incomes of $75,000 or more (Figure 1).

Figure 1: High-Income Households Have Driven Most of the Growth in Renters Since 2010

Meanwhile, rental markets are tight, with the US vacancy rate at its lowest level since the mid-1980s. The combination of high-end-driven rental growth and tight markets has created a challenging dynamic with several implications for renters and rental markets that practitioners, policymakers, advocates, and analysts need to keep in mind. These implications include the following:

• Growing demand from high-income renters puts pressure on middle-and lower-income renters. read more

• Growth in high-income renters limits the ability of high-end rental construction to ease pressures for lower-income renters. read more

• Growth in high-income renters can mask growing difficulties faced by low-income renters. read more

• Growth in high-income renters signals that access to homeownership is being limited to all but the highest-income households. read more

Joint Center for Housing Studies, Harvard University

Renter attitude surveys find that the majority of young renters still aspire to become homeowners and report affordability as the major barrier to homeownership. Indeed, as detailed in our latest State of the Nation’s Housing report, the income needed to afford the median home price rose 26 percent from 2013-2018 to $67,300. In 2018, households earning less than $100,000 could not afford the median-priced home in over 13 metro areas, and would need to earn over $347,000 to afford the median-priced home in the San Diego metro area – an area with a population of over 3.3 million. Since 2018, NAR data show the median US existing-home sales price was up another 5 percent in 2019 and 7 percent year-over-year in January of 2020.

In conclusion, the growth in high-income renters across the US creates unique challenges for lower-income renters that can be understated or even missed in the aggregate statistics on renter affordability.

Analysis of these challenges also shows how homeowner and renter markets are intertwined, and how affordability challenges faced by low- and modest-income renters are related to reduced homeownership opportunities among middle- and upper-income households.

Click here to read the full perspective from Harvard Joint Center for Housing Studies

Homeownership Assistance, Including for First-Generation Homeowners

A statement of Janneke Ratcliffe, Associate Vice President, Housing Finance Policy Center, Urban Institute before the Committee on Housing & Community Development Boston City Council on August 10, 2021.

“The Views expressed are my own and should not be attributed to the Urban Institute, its trustee, or its funders. I thank Jung Choi for her excellent research in preparing this testimony.” - Janneke Ratcliffe

Chair Edwards and councilors of the Committee on Housing & Community Development, thank you very much for inviting me here today. I am Janneke Ratcliffe, Assistant Vice President of the Urban Institute’s Housing Finance Policy Center; the views I express today are my own and should not be attributed to the Urban Institute, its board, or its funders.

Homeownership brings many benefits. Compared with people who rent, homeowners are more civically engaged, experience better mental and physical health, and have a greater sense of control over their lives. Financially, homeowners lock in most of their long-term housing cost with a fixed rate loan, and with each monthly payment, they build more equity. Even with modest appreciation, investment in a home can easily beat the return that might have been had putting the down payment into the stock market.

These facts together make homeownership the cornerstone of wealth building in the US, and homes are most households’ largest asset. As this asset grows, it forms the basis for further wealth by funding businesses, paying for higher education, and helping children buy their first home. In fact, all else equal, we find that when parents own a home, their children are more likely to be homeowners as young adults (ages 18–34).

Click here to read Janneke Ratcliffe's full statement to the Boston City Council

Learning from the History of the Homeownership Rate

The homeownership rate and housing finance policy, Part 1: Learning from the rate’s history

JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY

DON LAYTON, SENIOR INDUSTRY FELLOW

Among the thousands of statistics that the government produces to describe the country’s economic and social health, the homeownership rate has an exalted place among policymakers in Washington. This single statistic – currently running about 65 percent – is regarded as one of the most important comprehensive measures of how well the country’s socioeconomic system is “delivering the goods” for the typical American family. A high homeownership rate reflects that many families have income large enough not only to cover monthly living costs but also to generate enough cash surplus to save for a downpayment and then to sustain homeownership. It also indicates that the cost of purchasing a house and financing a mortgage on it is affordable.

In addition, homeownership is regarded as causing an improvement in the quality of life of a typical family. It is the most common method for such a family to build wealth: by paying down mortgage principal each month and participating in the long-term appreciation of home values, a family can build wealth that can be used for retirement or other needs, including helping the next generation. Such wealth creation therefore provides a major social as well as economic benefit. Add in protection against being forced to relocate by a landlord due to unaffordable rent increases or other actions, and homeownership is validly seen as a source of family stability.

Not surprisingly, politicians and policymakers are therefore often focused on finding ways to push the homeownership rate higher. As a participant in the housing finance policy community since 2012, when I became CEO of Freddie Mac, I have heard often how crucial housing finance was in creating the much higher rate of homeownership that evolved after World War II – roughly 65 percent, compared to less than 50 percent prior to the Great Depression. I have also heard frequently from housing advocates how specific proposed change in housing finance, including some that seem quite limited to me, would result in many more families (“millions” is sometime claimed) becoming homeowners. Unfortunately, despite such claims, through decades of the government’s implementing various programs in housing finance aimed at increasing the sustainable rate of homeownership, it remains today at almost exactly the level achieved over fifty years ago – about 65 percent.

It thus seems time to step back, take stock, and look for fresh ideas.

Top 100 U.S. Cities Ranked by Homeownership Rate 2014-2018

Sources: U.S. Census Bureau, American Community Survey (ACS)

As such a step, my new paper “The Homeownership Rate and Housing Finance Policy: Part 1 – Learning from the Rate’s History,” reviews the history of the US homeownership rate over roughly the past 130 years. The objective of this review is to establish a foundation for determining what policy choices, especially in the field of housing finance, would likely be successful in finally raising the rate – which will then be explored in Part 2.

It would indeed be a major socioeconomic success for the United States if the homeownership rate could rise from its 65 percent level to 70 or 75 percent on a sustainable basis: about 6 to 13 million more families (respectively) would become homeowners, with all the economic and social benefits that increase would generate. (As will also explored in Part 2, that can’t realistically happen without addressing the major racial homeownership gap that exists.) But, as already noted, after so many programs designed to do just that have failed for the past half century, it obviously isn’t an easy thing to accomplish – in fact, one inescapable conclusion from the history is how incredibly hard it is.

Part 2 will include an examination of the proposal made by the Biden campaign to establish a large and generous downpayment assistance program with Federal government funding. That proposal, which represents a change in the thinking that has dominated policymaking for many years, does indeed have the potential to be a major component of a successful effort to, at long last, materially and sustainably raise the homeownership rate above its long-standing 65 percent level.

Click here to read the full paper from Harvard Joint Center for Housing Studies

Availability of Mortgages in the Pandemic

America's Housing Finance System in the Pandemic: The Causes and Policy Implications of Credit Tightening

JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY

DON LAYTON, SENIOR INDUSTRY FELLOW

As the economic impact of the pandemic continues, one of the biggest issues to emerge in housing finance is the availability of mortgages. Media reporting and policy discussions often imply that mortgage credit tightening – which has undeniably occurred – is a major problem, perhaps even on par with what happened in the financial crisis just over a decade ago. Additionally, especially in the housing finance policy community, the implication seems to be that somehow much or even all of the tightening is illegitimate, a failure of government policy; that it should be largely if not completely avoidable with the right government actions; and that those actions should not require the kind of subsidies we are seeing for small business or specific industries, like the airlines.

Is this view legitimate? Or is it all-too-common Washington wishful thinking? Or perhaps something in between?

In my (Don Layton) new paper, “America’s Housing Finance System in the Pandemic: The Causes and Policy Implications of Credit Tightening,” answers these questions by examining how mortgages get made in 21st-century America, who sets the credit standards, why those standards are not – and should not be – fully immune to economic conditions, and to what extent government policies other than overt subsidies can help mortgage credit resist unnecessary tightening.

The conclusions reached are: 1) that the mortgage credit tightening we are seeing is much less of an issue than encountered in the prior financial crisis; 2) that it is reasonable and appropriate that there should be tightening to a modest degree, even with the best possible government policy, as risks have gone up in the current economic environment; and 3) that the tightening we are seeing is overwhelmingly a byproduct of the private sector, as it performs its major role in housing finance, behaving as one would expect in an economic downturn – and it would be even worse if government played a lesser role than it currently does.

However, also exacerbating the tightening, and probably in a significant way, is the unintended consequence of the generous mortgage forbearance program established by the CARES Act in late March.  This is because it applies not only to then-outstanding government-supported mortgage loans, for which the forbearance program was originally designed, but to newly-made ones as well. This is explored in some depth, and is the cause of significant friction between the mortgage industry and the government mortgage agencies of Freddie Mac, Fannie Mae, and the Federal Housing Administration.

The paper also notes that the public perception of the causes and possible cures for credit tightening is too much driven by a combination of mortgage industry lobbying narratives and the media viewing the issue excessively through the lens of the prior financial crisis.

Click here to read more America's housing finance system

The Color of Law

A forgotten history of how the U.S. government segregated America.

Federal housing policies created after the Depression ensured that African-Americans and other people of color were left out of the new suburban communities — and pushed instead into urban housing projects, such as Detroit's Brewster-Douglass towers. Photo: Paul Sancya/AP

Terry Gross, Heard on Fresh Air

The following story, featuring Terry Gross’s interview with Richard Rothstein, is from NPR on May 3, 2017.

In 1933, faced with a housing shortage, the federal government began a program explicitly designed to increase — and segregate — America's housing stock. Author Richard Rothstein says the housing programs begun under the New Deal were tantamount to a "state-sponsored system of segregation."

The government's efforts were "primarily designed to provide housing to white, middle-class, lower-middle-class families," he says. African-Americans and other people of color were left out of the new suburban communities — and pushed instead into urban housing projects.

Rothstein's new book, The Color of Law, examines the local, state and federal housing policies that mandated segregation. He notes that the Federal Housing Administration, which was established in 1934, furthered the segregation efforts by refusing to insure mortgages in and near African-American neighborhoods — a policy known as "redlining." At the same time, the FHA was subsidizing builders who were mass-producing entire subdivisions for whites — with the requirement that none of the homes be sold to African-Americans.

Click here to read the full story on NPR