Redefining Urban and Suburban America: Evidence from Census 2000

Rising Affordability Problems among Homeowners

During the 1990s the U.S. homeownership rate increased more than at any time since the 1950s. Growth in the number of homeowners was the second largest on record, exceeded only by the gain registered during the 1970s.1 Minorities shared in this boom, supported by numerous public and privateeffortstoexpandhomeownershipopportunitiesforhistoricallyunderserved population groups.2 Recent studies, however, have uncovered a troubling aspect of the 1990s homeownership boom: rapid growth in the number of homeowners facing severe affordability problems. According to a recent study by the Harvard Joint Center for Housing Studies (2003), the total number of homeowners spending more than 50 percent of their income on housing rose by 27 percent between 1997 and 2001. Working families saw an even more pronounced increase. According to Lipman, the number of working families who owned 267 Rising Affordability Problems among Homeowners P A T R I C K A . S I M M O N S 9 Adapted from Patrick Simmons, Rising Affordability Problems among Homeowners: 1990s Homeownership Boom Leaves a Hangover of Owners with Severe Cost Burdens (Census Note 13, June 2004). ©2004 Fannie Mae Foundation, Washington, D.C.; and Patrick Simmons. A Tale of Two Cities: Growing Affordability Problems amidst Rising Homeownership for Urban Minorities (Census Note 14, June 2004). ©2004 Fannie Mae Foundation, Washington, D.C. Used with permission. The author thanks Amanda Elk for her research assistance. He also thanks Jack Goodman of Hartrey Advisors, Kathryn Pettit of the Urban Institute, and Amy Bogdon and Shelia Maith of the Fannie Mae Foundation for invaluable comments on earlier drafts. 1. Simmons (2001a). 2. Myers and Painter, chapter 8, this volume; Turner and others (2002); Simmons (2001b); Listokin and others (2000). their homes and paid more than half their incomes for housing rose by 65 percent , or nearly 900,000 households, during 1997–2001.3 Rising homeownership affordability problems suggest that millions of homeowners are struggling to sustain homeownership. Loss of the home can impair the creditworthiness and wealth of the affected family and hurt financial institutions and neighborhoods. Even if affordability problems do not lead to home loss, high housing costs can strain the family budget and squeeze expenditures on health care, education, and food. This chapter uses decennial census data to examine recent trends in severe homeownership affordability problems. Unlike earlier studies that analyze only national data, this chapter examines trends for states and large cities as well. It also describes the characteristics of homeowners with affordability problems and specifically examines changes between 1990 and 2000 in homeownership rates and severe owner cost burdens among blacks and Latinos living in the nation’s twenty-five largest cities. The chapter concludes by briefly discussing the policy implications of rapid increases in homeownership affordability problems. METHODOLOGY Housing affordability can be defined and measured in a number of ways. This section explains the approach adopted in this chapter. Measuring Homeownership Affordability Therearetwobasictypesofhomeownershipaffordabilityindicators.Onetype quantifies the financial ability of households to purchase homes given typical household income levels and prevailing house prices, interest rates, and mortgage terms. This class of affordability measures includes such well-known indicators as the National Association of Realtors’ Housing Affordability Indices and the National Association of Home Builders’ Housing Opportunity Index. The second principal type of housing affordability indicator is the housing cost-to-income ratio. The housing cost-to-income ratio, which is used in this study, compares a household’s out-of-pocket housing expenditures with its income. 268 Patrick A. Simmons 3. Lipman (2002) defines “working families” as households that meet all of the following criteria: 1) total earnings from wages and salaries exceeding the full-time minimum-wage equivalent; 2) wages and salaries representing more than half of household income; and 3) total household income less than 120 percent of the U.S. Department of Housing and Urban Development (HUD)–adjusted area median family income. As noted by Goodman, out-of-pocket expenditures are a poor measure of the true economic costs of owner-occupancy.4 More comprehensive measures of the “user costs” of owned housing would capture not only cash outlays but also noncash costs, such as depreciation, unrealized capital gain, tax benefits, and the opportunity cost of home equity. Selecting a Standard for Identifying Excessive Housing Cost-to-Income Ratios Standards used to identify households with excessive housing cost-to-income ratios are somewhat arbitrary and have changed over time. Originally, housing costs consuming...