NAR Study: Majority of Metro Areas Experiencing Widening Inequality
WASHINGTON (May 7, 2015) – Rising home prices in many metro areas have helped homeowners build housing wealth in recent years, but the continued decline in homeownership means the gains are going to fewer people and likely leading to worsening inequality in the U.S., according to new research from the National Association of Realtors®.
NAR reviewed data on homeownership rates1, changes in single-family median home prices and a measure of inequality (the Gini Index) between 2010 and 2013 to estimate wealth and income inequality in 100 of the largest metropolitan statistical areas2 across the U.S.
The findings reveal that over 90 percent of metro areas have experienced declining homeownership rates at a time when home values have risen and incomes have remained flat. According to the study, wealth distribution is seen as most unequal in metro areas with the lowest homeownership rates, including high-cost areas such as Los Angeles, New York and San Diego.
Lawrence Yun, NAR chief economist, says home prices have steadily recovered in most metro areas in the past five years, providing a boost of $5 trillion in housing wealth (from the downturn’s cyclical low) for homeowners during this time. “Homeownership plays a pivotal role in the U.S. economy and has historically been one of the primary sources of wealth accumulation for middle class families,” he said. “Unfortunately, due to an underperforming labor market, insufficient housing supply and overly-stringent underwriting standards since the recession, homeownership has plunged to a rate not seen in over two decades. As a result, the country has become more unequal as the number of homeowners has fallen while the number of renters has significantly risen.”
Yun says the inability for renter households to become homeowners is leaving them behind financially. A typical homeowner’s net worth climbs because of upticks in home values and declining mortgage balances. On the other hand, renters have likely seen increased rental housing costs and are less likely to have been active investors in the stock market’s strong growth in recent years.
NAR’s study examined intensifying or lessoning inequality by measuring the change in the number of owners and renters during the recent period of rising home values. The findings show that an overwhelming 93 out of 100 analyzed markets experienced a declining homeownership rate from 2010 to 2013.3
Because renters typically have much lower net worth than homeowners, a metro area’s low homeownership rate is associated with greater wealth inequality. As a result, Los Angeles; New York Las Vegas; Fresno, Calif.; and San Diego were found to have the most unequal wealth distribution.
“Changes in wealth during this period are especially profound in high cost metro areas that have seen robust price growth,” adds Yun. “For instance, a typical homeowner in San Jose, Calif., enjoyed an increase of $210,671 in housing wealth while renters were left behind and likely exposed to annual rent increases.”
In addition to looking at housing wealth, the study also analyzed the same metro areas against the Gini Index – a commonly used measure of inequality – to highlight the fact that both wealth and income inequality are intensifying throughout the country. According to the data, 93 out of the 100 reviewed metro areas show a rising index – which indicates growing inequality. Bridgeport-Stamford-Norwalk, Conn.; New York; Miami and New Orleans were found to have the most unequal distribution of income.
“The decline in homeownership has serious implications for our economy and is currently leading to a more unequal America,” says Yun. “Although better economic conditions should eventually open the door for more prospective buyers, improving access to mortgage products to creditworthy borrowers and ramping up new home construction – especially to entry-level buyers – will help ensure the opportunity is there for more American households to enjoy the potential wealth benefits and long-term stability homeownership provides.”
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.
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2Areas are generally metropolitan statistical areas as defined by the U.S. Office of Management and Budget. NAR adheres to the OMB definitions, although in some areas an exact match is not possible from the available data. A list of counties included in MSA definitions is available at: http://www.census.gov/population/estimates/metro-city/List4.txt.
The only valid comparisons for median prices are with the same period a year earlier due to seasonality in buying patterns. Quarter-to-quarter comparisons do not compensate for seasonal changes, especially for the timing of family buying patterns.
Median price measurement reflects the types of homes that are selling during the quarter and can be skewed at times by changes in the sales mix. For example, changes in the level of distressed sales, which are heavily discounted, can vary notably in given markets and may affect percentage comparisons. Annual price measures generally smooth out any quarterly swings.
NAR began tracking of metropolitan area median single-family home prices in 1979; the metro area condo price series dates back to 1989.
32010 was chosen as the start year because it was the year home prices reached their cyclical low point in most markets. Data is not available for 2014. However, based on the national trend, expanding the analysis to 2014 would have resulted in even a larger decline in homeownership in most metro markets.