Home Ownership: The American (Pipe)Dream?

July 24, 2013 at 7:02 am 1 comment

imagesThis article in the Wall Street Journal underscores one of the reasons the housing market hasn’t led a robust economic recovery despite the fact that interest rates have been so low for so long: the first time buyer is being squeezed out of the market.

According to the National Association of Realtors, first time buyers accounted for 40% of home sales over the past 30 years and 50% of homebuyers in 2009.  In June, they accounted for less than 30%.

This trend reflects more than a sluggish economy. It is the latest example of how the American dream — where hard work and a decent education is supposed to translate into a comfortable middle class existence — is threatened by well-meaning but ultimately counterproductive mandates, demographics and an increasingly cut throat economy.

The Dodd-Frank myth has been that you could somehow tighten lending standards without cutting back on the number of homeowners.  Do you want to ensure that people have demonstrated the ability to handle credit before taking on a mortgage?  Well, better established home owners looking for a new home have a median credit score of 750 compared to a score of 720 for first time buyers. And with QM mortgages being tied to debt-to-income ratios, of course financial institutions are going to think twice before offering mortgage options requiring next to nothing be put down.

As much fun as it would be to blame regulators for the squeeze being put on younger borrowers, there are forces at work here that predate the CFPB.  A neighbor of mine who is pretty good at making money grow argues that demographics is at play as well. Simply put, the 60 something baby boomer knows his days climbing up the ladder to clean the gutter are numbered. He is downsizing and has lots of cash to spend — meaning he is well positioned to outspend the first time home buyer and doesn’t have to worry all that much about interest rate shifts.

And the economy isn’t exactly churning out the job growth to justify an ever increasing student debt load. Example 1A of this trend is the legal profession where an estimated 50% of law school graduates don’t have jobs requiring a law degree nine months after graduating. The jobs aren’t there, but the debt sure is.

I know you grizzled veterans of the industry have heard howls that young people are being denied their first home in the past. Go back to the early 80’s and double digit interest rates didn’t exactly make home buying an attractive investment. But there is mounting evidence that our economy is being divided between the haves and the have-nots. By some measures there is now more social mobility in Europe than in the U.S.  If another five years go by and we see McMansions popping up quicker than sexually charged internet postings by Anthony Weiner while young people continue to be shut out of the housing market, well, then we have a problem and not just a temporary trend.  At least we have not-for-profit, tax-free institutions dedicated to giving the American consumer a break as they try to save and invest for the future.


Entry filed under: Economy, Regulatory. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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