Harvard Finds Homes Less Affordable But Housing Bubble Unlikely To Burst

The Joint Center for Housing Studies of Harvard University has released its yearly State of the Nation's Housing report for 2004. The Joint Center is collaboration between the Harvard School of Design and the Kennedy School of Government and, supported by the Ford Foundation, The Mortgage Bankers Association, Fannie Mae Foundation, and a dozen other groups with in an interest in housing, is one of the nation's leading centers for research on housing.

The study notes that the current housing boom, in spite of occasional fits and starts, has lasted for 13 consecutive years, the longest expansion since 1970. This boom continued through the recession of the early 1990's, becoming the first time since World War II that the housing sector did not actually lead the nation into recession.

The number of metropolitan areas where the average home costs more than four times the average income has more than tripled from 10 to 33 in the past five years and this ratio is now at a 25 year high in more than half of the metropolitan areas in the study and these metro areas, largely in Southern California, New York City and Southern Florida are home to about one quarter of the nation's households.

Outside of these 33 areas, however, real estate prices are more in line with household incomes. Of 110 areas evaluated 77 have price-to-income ratios of less than 1:4 and, coupled with continued low interest rates, housing is still relatively affordable in those areas.

Still, the housing boom was broad-based with existing home sales up in every state but three (Michigan, Montana, and Utah).

As home prices have increased there has been a ripple effect on current homeowners. As tax assessments rise and insurers raise their estimates on replacement costs, property taxes and premiums go up with particular impact on those on fixed incomes.

However, much of the report provides reassurance on several fronts for those who fear a pop of the much-reported "housing bubble."

• Although housing starts and manufactured home installations have averaged more than 1.9 million units each of the last five years, the new construction appears to be roughly in line with demand. The Joint Center cites as evidence the small inventory of homes relative to house sales, near its lowest level ever. The report speculates that, given the small backlog, new homes sales would have to drop by more than one-third and stay there for over a year to flip the current seller's market over into one favoring buyers.
  
  
• Continued high immigration rates will contribute to continued household growth in the next decade and if the children of those immigrants, who now account for 21 percent of children between the ages of 1 and 10 and 15 percent of those between 11 and 20, follow in the historic footsteps of other second generation Americans, they are likely to out-earn their parents and become a great source of housing demand over the next 20 years.
  
  
• Between 1991 and 2003 minority homeownership has increased from 22 percent to 35 percent of first time home buyers and minorities are clearly making economic progress. Both white and minority households have benefited from the strong income and wealth gains of the past 15 years. This is strengthening housing demand across the board.

The report, however, did cite concerns about the share of home purchase loans made to other than owner-occupants. This figure climbed from 7 percent to 11 percent between 1998 and 2003. A large portion was vacation home purchases, but there is also a strong real estate investment component buried in this figure, indicating that speculation is beginning, once again, to creep into the picture. The report cites Freddie Mac data on loans it originated in 1998 and 2003. The share of homes "flipped" within a single year of purchase in 1998 was 5 percent and was 6 percent in 2003. The share that was sold after two years rose from 11 percent to 14 percent.

It might also be scary to know that condominium starts jumped from 71,000 in 2003 to 121,000 in 2004. The report states, however, that there is little evidence in rental data to suggest that this is investor driven; most of the growth has probably gone toward satisfying growth in owner demand.

The sudden and rapid growth in the use of interest only loans may also indicate that a number of buyers are "hitting the wall" on affordability.

In spite of the fact that rent increases in recent years have been modest, more and more low and moderate wage workers and many senior citizens can no longer afford to rent even the most modest two bedroom apartments anywhere in the country. Almost one in three households spends more than 30 percent of income on housing (the old rule of thumb was no more than 25 percent) and more than one in eight must commit 50 percent of their income to it.

Purchase and rental costs are also helping to fuel housing decentralization. The report predicted that the nation will add as many as 20 million new housing units between now and 2015 and a large majority of these will be built well outside of central business areas (CBDs) where land is cheaper and density regulations are usually much less stringent. In fact, what new rental housing that is being built near CBDs is largely high end while lower costs units are consistently disappearing from the market.

The number of the largest metropolitan areas where more than half of households live 10 miles or farther outside of the CBD has tripled from 13 in 1970 to 46 in 2000 and the number with more than a fifth of its households living 20 miles away has jumped from 17 to 44. In six metro areas more than 20 percent of households lived 30 miles from the CBD. This has contributed to longer commutes, increased pollution and stress, and has forced many households to trade lower housing costs for greatly increased transportation expenses. On the other hand, the time, costs, congestion, and hassle have begun to push people to demand newer and more affordable housing solutions in or close to the CBDs and communities, Chambers of Commerce, and employers are beginning to respond.

It is clear that the Joint Center, while not making strong policy recommendations, does feel that metropolitan areas need to reevaluate restrictions on high density construction to lessen urban sprawl and provide more affordable alternatives for households that are increasingly overwhelmed by the cost of housing.

Anyone wishing to read the entire report can find it at www.jchs.harvard.edu.

Harvard's Joint Center on Housing finds little to fuel fears of a bursting bubble but lots of disheartening information about housing affordability.