Mark Fleming serves as the chief economist for First American Financial Corporation. In his role, he leads an economics team responsible for analysis, commentary and forecasting trends in the real estate and mortgage markets. Fleming's research interests primarily include real estate and urban economics, applied econometrics and mortgage risk. He has published research in the American Journal of Agricultural Economics and Geographic Information Sciences. His research has also been published in the book, "Advances in Spatial Econometrics," and is a U.S. patent author.
We have been hearing a lot about the “recovery” of housing. Do you think housing has “recovered” from the crisis?
“Recovery” implies backward looking. Rather than trying to keep looking back and asking, “Are we recovered or not?” I think the more interesting challenge today is to focus on looking forward and saying, “Who are we going to be financing? Who are the first-time homebuyers of the future? What are the kinds of mortgage products that we need to create? What are the impediments to those communities for becoming homeowners in the future?” and having that much more forward-looking perspective. If we aren’t cognizant in recognizing the fact that the future will look different than the past has, there may be a lot fewer mortgage loans to do. Maybe housing might recover, but the mortgage finance industry won’t, because we’ll have a lot less business to do. So our challenge in the mortgage finance industry today is to figure out how to lend to the buyers of the future.
You have said that baby boomers are aging out of homeownership while millennials are hesitant to age into homeownership. Why do you think this is?
In the United States today, you have the baby boomers, which are a very large group, and then their children, the millennials, which is a larger group than the baby boomers in terms of sheer population size. Baby boomers are basically at their peak homeownership age year. If you look at homeownership rates by age, they rise from the mid-20s into the 40s and 50s, and when you hit around 60, they begin to flatten out. So the baby boomers are beginning to age out of traditional homeownership years. When you get into the 70s and 80s, you eventually get out of your home and go to assisted living or other non-ownership-based tenure types. The baby boomers are beginning to reach that point.
The millennials aren’t aging in necessarily as fast as the baby boomers are aging out. You have generation X stuck in the middle, and there are just not enough of them to make up for that. So you have this barbell-shaped situation. Not only are millennials not aging into homeownership—the youngest millennials are not even out of high school yet—but they’re delaying life events like getting married and having children, in large part, likely because they’re going to school and getting more educated. They’re going to be the highest educated generation in history in the United States. And that takes time. All of those things are delaying the decision to become a homeowner. So baby boomers are aging out, millennials not yet aging into homeownership—so we’re not going to have a perfectly smooth transition
That being said, there is absolutely no evidence that millennials don’t want to become homeowners when they make those life decisions, or that they won’t make those life decisions. So it’s just a matter of time before we start seeing strong demand for homeowner housing, because they’re already demanding it from a rental perspective. They’ll become homeowners in the coming years—it’s just a matter of time.
Where do you see this issue heading in the next few years?
There are two things. We did an analysis to look at what will happen to the homeownership rate if we just took into account demographics. When I look at demographics, I’m going to consider age and ethnicity. We have a very good handle on how age cohorts are going to move over time. Just accounting for age and ethnicity, the fastest growing segment of households—the fastest amount of household formation—that’s happening in the U.S. today is in the young Hispanic community. That community is expected to grow most dramatically in the next 20 to 30 years. Taking the homeownership rate for the different age categories of Hispanics, Asians, African-Americans, and whites, and projecting out using what the ethnic mix and age composition will be, it creates a demographic-forecasted homeownership rate. It’s going to remain amazingly stable—it’ll probably go into the mid-60s, around 65, and hover in that range. Right now, we’re a couple of percentage points below that. The Q3 estimate is up 63.7 percent from 63.3 in the previous quarter (a 48-year low), so we’ve reversed the trend that has been happening for the last couple of years.
So just by the sheer force of the demographics alone, the homeownership rate will probably rise another percentage point or two over the next two decades, which I think is a good thing for the mortgage finance industry. Demographics will drive that because you have large, growing ethnically-diverse millennial minority populations in the United States. That’s not even accounting for actions taken on our part to make things better, to make access to credit easier, and to figure out ways to lend to these ethnically-diverse communities differently from the way we did it in the past. That forecast doesn’t account for our innovation and our desire to find ways to increase homeownership in sustainable ways.