posted on 25 September 2016
American homebuyers are on the move, but maybe not in the direction that most people think. The much-discussed "return to the cities" movement is happening, but from a mortgage industry perspective it may be something of a "head-fake."
While there is no doubt there's been an urban rebound in many of America's cities, it has been driven by educated and affluent households. This sorting is leading to more concentration of affluence in cities and inner suburbs and higher prices. During the 1980s and 1990s, the ratio of city and inner suburban prices to middle suburban prices was 80 percent to 90 percent  (Figure 1). In other words, sales prices of city and inner suburban properties were 10 percent to 20 percent less on average than middle suburbs. However, since the very early 2000s when the urban rebound began, prices for inner suburban properties soared in relation to the middle suburban ring .
While the urban rebound has been well documented, there is a countervailing trend in the suburbs. Higher prices in cities and inner suburbs has caused purchase applicants and especially lower credit borrowers to seek affordability further out in the outer suburbs. During the boom years of the mid-2000s, 38 percent of low credit purchase mortgage applicants applied to the outer suburbs  (Figure 2).
As the recession began in December 2007, there was a noticeable shift in lower credit borrower demand moving further out and by the fall of 2008 44% of lower credit borrowers were applying to outer suburbs. During mid-2010 there was a decline in the lower credit share applying to the outer suburbs, which is explained by the temporary first-time homebuyer tax credit implemented in mid-2009 through mid-2010, which allowed some borrowers to move closer in than they otherwise would. After the tax credit expired in 2010, the shift to the outer suburbs resumed.
By mid-2016, nearly half (48 percent) of lower credit purchase applicants were applying to the outer suburbs, a substantial 10 percentage points higher than in 2004 and the highest since CoreLogic began tracking . For comparison, higher credit borrowers are also increasingly applying to live in properties in the outer suburbs, but the rate of increase is less than half of lower credit borrowers. There is a clear sorting of lower credit and income borrowers to the outer suburbs.
The combination of an improving economy and jobs outlook is driving purchase demand higher. However, the rising prices in cities and inner suburbs has been driven by affluent borrowers and it has caused a sorting of lower credit borrowers to apply to the more affordable outer suburbs. The increased sorting has economic and policy implications for spatial risk and increased concentration of lower credit borrowers in America's outer suburbs.
1 Suburban rings were divided in 3 equal weighted rings based on the percent of residential properties. This allows the rings to be fluid and expansive in sprawling metros like Houston, but be very compact in smaller, denser markets. This analysis was produced on the 20 largest MSA's.
2 The ratio of middle suburb to outer suburb prices remain fairly constant during the same time period.
3 Low credit applicants defined as those with credit scores at or below 660 and high credit applicants are defined as those with credit scores at or above 780.
4 After 2008 there was a large decline in lower credit borrowers, many of whom are renters. There was a CoreLogic blog by Archana Pradhan that discussed this trend (link here). While this analysis is about purchase applicants, some demographic analyses point to similar trends among lower income renters sorting to the suburbs as well.
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