Why More Renters Aren’t Buying (Hint: Weak Incomes, Savings)

REAL ESTATE TOPICS

A new survey says that younger workers and other renters aren’t turning away from homeownership because they lack the desire to own homes. Instead, they’re staying on the sidelines because they lack the capacity to purchase.

The analysis from the New York Federal Reserve Bank comes via their survey of consumer expectations in February. It polled 867 homeowners and 344 renters on their attitudes toward homeownership and their plans to move.

One popular trend cited frequently in the press is that millennials and other renters have permanently turned away from owning homes after watching their parents’ generation take it on the chin during the housing bust. How else to explain the fact that home buying has remained soft despite the fact that homeownership has rarely been more affordable, given low interest rates and the recent home-price crash.

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But the New York Fed researchers say their survey points to a different conclusion: borrowers want to buy, but they can’t cut it financially. Conservative mortgage lending standards are only likely to exacerbate this problem.

Their summary offers three takeaways. First, a majority of renters opt against owning because their incomes or savings are too low, or their debts too high, to handle homeownership. Around 40%, moreover, say their credit isn’t good enough.

“Weak fundamentals and limited access to credit, rather than a lack of desire to own, are preventing renters from buying,” write Andreas Fuster, Basit Zafar and Matthew Cocci in a blog post examining their findings.

Second, the research shows that renters, on balance, think it’s hard to get a mortgage. And the findings suggest that the perceived ease of credit access is tied to the probability of buying. That is, the harder you think it is for you to get a loan, the less likely you are to say that you’re interested in buying.

For example, just 5.5% of respondents said they think it’s very easy to get a mortgage, and nearly two-thirds of those renters say they’re likely to buy if they move. Around one-third of respondents said they think it’s very difficult to get a mortgage, and only one-third of those are likely to buy if they move.

Third, the research shows that psychological damage from the housing-price collapse may be overstated. It wouldn’t be a shock for renters to look at the collapse in home prices between 2005 and 2008 and conclude that owning a home is a bad financial deal. But the New York Fed survey doesn’t find a lot of evidence to back up that idea.

Around three in five respondents think that buying a home in their ZIP Code is a good investment, compared with one in eight that think it’s a bad one. “Current renters are as bullish on housing as current owners, or perhaps even slightly more so,” the authors conclude. Renters expect prices to rise at a slightly faster pace than owners over both a one-year and a five-year horizon.

So what does all of this mean? The good news from the standpoint of the real-estate industry is that there’s less evidence of a structural shift in Americans’ preference for owning homes. “With a stronger economy and eased credit standards, homeownership would pick up,” the authors write.

The bad news, of course, is that these cyclical problems dragging on the housing market may take longer to repair given the overall weakness of the economy and the fact that lenders will be shy about lending to borrowers with marginal credit given both the experience of the bust and the more litigious regulatory environment they now face.