Zillow Home Values

What Drives Homeownership? It’s More than Just the Sticker Price

Claudia Sharygin
Topic: Housing

According to conventional wisdom, now is a great time to think about becoming a homeowner. The storm clouds of the housing market crash and financial crisis are revealing their silver linings: home prices have declined substantially since their pre-crash highs across the vast majority of U.S. metros, and continuing government measures to inject liquidity into capital markets after the financial crisis have plausibly lowered mortgage interest rates to record lows. Falling home prices and mortgage rates, along with increases in rents over the same period, make homeownership even more attractive relative to renting. Arguably, owning a home should be a better bet than it was during the housing boom for buyers who plan to stay put for a few years, and are able to find an affordable home while meeting the now-stringent requirements for obtaining a mortgage.  Metros where prices have fallen the most present even more opportunities, because the cost of owning a home has declined the most relative to what it was during the boom.

So does the evidence support this argument-is homeownership picking up again, and is it increasing more in metros where prices have become more affordable as a result of the housing bust? Data from the first MetroTrends Quarterly Housing Report can be used to explore these questions. In short, many more factors besides housing prices play into determining whether people become (and stay) homeowners, and these factors outweigh the effects of house price declines. However, some evidence does support the argument that falling house prices encourage homeownership.

On average, home values nationwide declined 4.2 percent in each of the past five years, according to's Zillow Home Value Index. Over the past year, the homeownership rate declined 1.2 percent, based on the Census Bureau's Housing Vacancy Survey. Across the top 100 metros, home values on average declined 4.9 percent in each of the past five years; the homeownership rate declined 1.4 percent over the past year. Of course, these aggregate figures may mask metro-level patterns in house prices and homeownership rates, but surveying the metro-level data doesn't reveal much of a pattern either. The figure below plots, for each metro, its average percent change in housing prices during the housing bust over the past five years, versus its percent change in homeownership over the past year. As expected, there are few metros on the right-hand side of the chart, where house prices increased during this period; in those metros, homeownership declined over the past year.

Looking at metros where house prices declined, there seems to be no relationship between the extent of the price decline during the housing bust and the recent response in homeownership rates. The map below displays the annual average price decline during the bust and the change in homeownership over the past year, as well as the current Zillow Home Value Index and homeownership rate. Many metros that were hit hard during the housing bust continue to experience falling homeownership rates-most drastically in Bakersfield, California, and Orlando, Florida. On average, house prices fell by 11.4 percent in Bakersfield and by 11.7 percent in Orlando annually during the housing bust, but homeownership rates fell over the past year by 10.6 percent in Bakersfield and by 6.9 percent in Orlando. In contrast, house prices in Fresno (also in California's hard-hit Central Valley) fell by an average of 10.6 percent annually during the bust, while the homeownership rate increased by 12.4 percent over the past year.

While in general homeownership is not increasing in areas where prices have become more affordable, there is some evidence that large house price declines may have helped make homeownership more affordable and feasible. Table 1 looks at percent changes in homeownership rates over the past year, comparing the metros where prices dropped the most ("hardest-hit metros") during the housing bust to the metros where prices declined slightly or increased ("stable metros"). Among the 10 most stable metros, homeownership rates declined by 1.8 percent in the past year, while rates declined by only half as much-0.9 percent-among the hardest hit metros. In other words, people have recently become homeowners (or held on to their homes) more in the hardest-hit metros than in the more stable ones.

What emerges from these data on house price declines and homeownership trends is that the other factors besides the price of the house that enter into the decision to become (or to stay) a homeowner are key to explaining why homeownership continues to decline nationwide. Although house prices have fallen, incomes have also fallen for many families, so owner-occupied housing remains unaffordable for many households. Even among households that can afford mortgage payments at today's exceptionally low interest rates, many have damaged credit histories or lack the down payment required to qualify for a loan. And while the foreclosure crisis is no longer a front-page staple, falling house prices continue to influence underwater borrowers' decision to walk away from homeownership. When it comes to making homeownership affordable, the sticker price matters less than the broader health of the housing market, mortgage markets, and the national economy.

(The MetroTrends Quarterly Housing Report contains information from several sources, including the Census Bureau and the real estate marketplace, on recent housing market trends for the top 100 metros. The report includes information on housing values, housing transactions, building permits, foreclosure activity, and rents. Data from this issue of the report, which cover the third quarter of 2012, can be downloaded from the MetroTrends website.)

Claudia SharyginClaudia Sharygin
Research Associate
Metropolitan Housing and Communities

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