The Harvard Joint Center for Housing Studies recently released its annual State
of the Nation's Housing report for 2007. It is dismal reading.
While it states that the longer-term outlook for housing is (more) upbeat,
the length and depth of the current correction will depend on the course of
employment growth and interest rates, as well as the speed with which builders
pare down excess supply. The influx of immigrants and their children has and
should continue to drive household growth between 2005 and 2015 and, with the
enormous increase in household wealth over the past 20 years, healthy income
growth will help propel residential spending to new heights.
That's the good news. The flip side is that basic housing affordability
remains a major problem. "In just one year, the number of households with
housing cost burdens in excess of 30 percent of income climbed by 2.3 million,
hitting a record 37.3 million in 2005."
The report reprises the run-up in housing demand and prices over the last few
years, placing much of the responsibility for both with falling interest rates
and the increased and probably inappropriate availability of credit in many
sectors of the market.
The State of the Nation's Housing pegs the beginning of the downturn
to late 2005 although it didn't show up in most economic reports until mid 2006.
According to the Joint Center by late 2005 the combined impact of rising mortgage
interest rates and higher house prices were beginning to force buyers out of
the market. Magnifying the problem was a growing number of foreclosed homes
returning to the market and investors seeing the end of the big show, beginning
to exit the market. At this time builders pulled back hard on production but
"the retrenchment came too late."
By the third quarter of 2006 the correction had begun to spread to numerous
metropolitan markets and 277 of these registered a falling rate of housing permits
in the fourth quarter of 2006 compared to the fourth quarter of 2005. 74 of
the 148 metro areas studied by the National Association of Realtors' (NAR)
showed a year-over-year decline in median home prices.
The report notes that, now that the downturn is in full swing,
the question of its depth and duration hangs over that market. While the economy,
interest rates, and credit availability will pay major roles in the outcome,
so will the rapidity with which builders can work off excess inventory.
The number of vacant homes for sale jumped by one-half million between the
end of 2005 and the end of 2006 but this figure may be misleading as some seasonal
or occasional use home may have been taken off the market until conditions improve.
Assuming this oversupply "overhang" as the study calls it, is correct,
this means that demand for new homes was running about a quarter-million units
below the 2 million plus production in 2004 and 2005. This translates to a sustainable
demand for houses of about 1.9 million homes during that pre-slump period. As
this was about the number of homes built (or in the case of manufactured housing,
placed) last year, no progress is being made toward cutting inventories. Any
meaningful progress in this area would require that production falls to 1.66
million and it would take at least two years to work off the excess inventory.
"In the most pessimistic view, the overhang may exceed 1 million units,
meaning some rental vacancies may need to be worked off as well."
But yet, the report concludes, the potential impact of the
slowdown on consumer and remodeling spending hasn't quite hit. Home prices are
bound to soften further as they follow the downturn in home sales and starts;
homes will stay on the market for longer periods, and motivated sellers, builders,
and investors will reduce their prices. This process only began in late 2006
and then only in some locations. It has a ways to go.
With house prices no longer appreciating at a break-neck price, the risks inherent
in subprime lending products will increase. As more and more borrowers risk
losing their homes to foreclosure an accompanying problem is the number of mortgage
companies that have been and will be driven into bankruptcy and those that will
increase their reserves against losses.
But the study emphasizes the growing lack of affordability of housing in the
United States. The stagnant income growth among those households in the bottom
half of the economic distribution as well as restrictive land use regulations
which discourage production of lower cost housing are both responsible for forcing
up home prices and rents. While federal tax credit programs contributed to the
addition of about 133,000 new and renovated units in 2005, the supply of affordable
rentals continues to shrink.
In one telling graphic, a map of the United States is colored to reflect the
hourly income necessary to afford a home - rented or owned
- across the country. With the exception of pockets along the coasts and in
resort areas in Colorado and the Southwest where incomes of up to or in excess
of $21.75 are needed to afford even modest rentals, the map is a uniform grey
indicating a required income of $7.25 to $14.49 per hour. The federal minimum
wage is currently $5.15 per hour although many states have implemented higher
rates. Even when or if the proposed new federal wage is fully phased in it will
not cover the bottom end of this requirement given only one income earner in
And, Harvard says, the pressures of high housing costs are moving up the income
scale. Severely cost-burdened households in the bottom expenditure quartile
had only $436 a month to cover all other non-housing needs in 2005. This is
not a lot to feed, clothe, school, and provide transportation for even the average
family of four. Because of these housing costs, more and more people are resorting
to long commutes or moving in with other family members. The study does not
address the possibility that households are trading heat, food, and certainly
health care for shelter.
Federal assistance to very low-income householders is currently reaching only
about 25% of renters and virtually no homeowners. Without some commitment from
state and local authorities to lower the barriers to affordable housing the
prospects for a reduction in the numbers of households that are suffering from
housing cost burdens is not likely to improve.
So, what of the future of housing? The study concludes that
it is too early to make many guesses. Prices have just begun to soften, risky
loans are just now hitting reset dates, and lenders are beginning to tighten
credit standards. Still, no matter how long it takes, the market will eventually
recover. "Once excess inventories and credit problems are worked out and balance
is restored, ongoing demand for new and improved homes promises to lift the
value of new construction and remodeling to new highs. Greater productivity
will help raise real incomes for many while record wealth will allow households
to spend more on housing." And, house prices will continue to move up.