John Petro

Homeownership and the Middle Class

In an earlier post, I began to imagine a new direction for our country's housing policy - especially an urban housing policy - now that we've seen that pushing for homeownership is not necessarily the answer. Yesterday, the NYTimes ran an article that discussed some of the ramifications of policies, beginning with the Clinton administration, that had the best of intentions - to increase homeownership for low-income families - but led to the current housing market we see today.

One effect of the "homeownership push" has been the dramatic escalation of home prices. Between 1996 and 2006, median home prices rose by 60 percent in inflation-adjusted dollars while wages have grown considerably slower. According to data from the Joint Center for Housing Studies of Harvard University, the monthly costs of homeownership as a percentage of monthly income was 18 percent in 1996 and increased to 24 percent in 2006. the percentage of middle-income homeowners who are cost-burdened, meaning that housing costs are greater than 30 percent of their income, grew from 24 percent in 2001 to 31 percent in 2006.

Housing prices only began to drop in late 2006. However, according to the Joint Center for Housing Studies,

"Even with widespread price declines, affordability for would-be homeowners has not improved significantly. Assuming a 10-percent down payment and a 30-year fixed-rate loan, the real monthly mortgage costs for principal and interest on a median priced single-family home bought in 2007 was only $76 lower, and the down payment $1,000 lower, than on a home bought in 2006."

Home prices would still have to drop significantly in order to be an affordable option for many households.

"At current interest rates, the national median price would have to fall another 12 percent from the end of 2007 to bring the monthly payments on a newly purchased median-priced home to 2003 levels. In 40 metros, prices would have to drop by more than 25 percent. Even if interest rates were to come down by a full percentage point, the national median home price would still have to decline by 2 percent—and by more than 25 percent in 18 metro areas—to reduce mortgage costs to 2003 levels."

The result is that homeownership is now a more distant reality for many middle-income households. In a future blog post, I will discuss how rental prices in urban markets also affect homeownership.

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Posted at 9:18 AM, Oct 20, 2008 in Housing
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