Who Benefits From Affordable Homes?

In the "be careful what you wish for" category, we can now add "affordable homeownership."

Over much of the past two decades, there was a lot of hand-wringing about people who were being locked out of homeownership by prices that were rising far faster than personal income. When the complaints were voiced by young adult renters desperate to buy their own homes, they seemed very real and poignant. But when I heard longtime homeowners voicing the same concerns, they often struck me as disingenuous -- or at least, clueless. It's as if the homeowners didn't recognize that their good luck -- many years of soaring property prices -- was the main reason that their children and grandchildren could not afford to buy a home.

I would sometimes ask a homeowner if he or she would accept a few years of flat home prices to improve the affordability of houses for the next generation. Or for a greater improvement in affordability, I suggested, how about a few years of falling prices?Needless to say, I didn't get any volunteers willing to make the sacrifice. I suspect that most homeowners were secretly overjoyed at surging home prices, even as they paid lip service to the "affordability crisis."

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Then the bubble burst. In many areas of the U.S., four years of declining prices and foreclosures have taken back most of the price appreciation of the first decade of the 2000s. The only fortunate homeowners are those who bought much earlier -- in the '70s, '80s and '90s -- and still have sizable gains over their purchase price, if they didn't withdraw and spend all the appreciated equity.

Who can benefit? The trauma of the housing slump is undeniable, but we should at least acknowledge the flip side: a stunning improvement since 2007 in the affordability of homeownership for first-time buyers. As is often the case in drastic market adjustments, one party's pain is another's gain. Today, a median-price home in most communities represents a smaller multiple of household income than at any time in the past ten years.

But not all hopeful home buyers can benefit -- just those who have stable jobs, good credit histories and a slug of cash for a big down payment, sometimes as much as 20%. Yes, mortgage rates are still near historic lows, and there are great bargains in distress sales, but many wannabe home buyers are finding it hard to qualify for a loan from skittish lenders.

However, a lot of young adults who are financially well qualified for homeownership are afraid to jump in. They fear that prices will continue to fall until the bulging pipeline of foreclosures is finally empty. Better to wait, they think, until prices have bottomed and seem to be heading back up (not that anyone can tell them when that will be). Plus, there is concern that Congress, in a quest to find more revenue, will trim the mortgage interest tax deduction -- a recommendation of the President's budget deficit commission.

This fence-sitting by prospective buyers, coupled with former homeowners who are now renters, has raised rents and lopped three points off the U.S. homeownership rate, which is now down to 66% of all households.

Homeownership has never been the right choice for everyone in every circumstance and stage of life. And I suspect that in most parts of the country, future price increases will merely match the rate of inflation or exceed it by a percentage point or two over the span of many years -- the historical norm.

But for many young adults who intend to stay put for several years, have good prospects of employment security and can qualify for a plain-vanilla fixed-rate mortgage, I believe this will turn out to have been a good time to buy a house or condo. And if the young home buyers are handy with tools and can find a fixer-upper at a great price, so much the better.

Columnist Knight Kiplinger is editor in chief of Kiplinger's Personal Finance magazine and of The Kiplinger Letter and Kiplinger.com.

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Knight came to Kiplinger in 1983, after 13 years in daily newspaper journalism, the last six as Washington bureau chief of the Ottaway Newspapers division of Dow Jones. A frequent speaker before business audiences, he has appeared on NPR, CNN, Fox and CNBC, among other networks. Knight contributes to the weekly Kiplinger Letter.