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.
Repeating what we have heard over and over, in 17 locations nominal home prices
surged by 20 to 30 percent in 2004, on top of 9 to 18 percent increases the
previous year. Another 57 metropolitan areas saw increases of 20 t 20 percent.
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
- 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.