The gloomy picture painted by The State of the Nation's Housing report released yesterday by Harvard's Joint Center on Housing Studies has but one bright spot - the improving rental housing market.
On virtually every other level it appears that a housing recovery is still months if not years away. Rather than leading the country out of the recession as it has done in prior downturns, the housing industry is holding back economic growth. The report details a number of housing areas where, rather than the outlook improving as the economy began to pick up, things actually got worse.
First of all, household growth has dropped precipitously since 2007. In the four years since, an average of 500,000 new households have formed each year compared to the 1.2 million annual pace averaged between 2000 and 2007. This is even more disheartening as the "echo boomer" generation, those born after 1986, is the largest generation in our history to reach its 20s, peak household formation years. Instead of forming households, many in this age group have stayed in or returned to their parents' homes. At the same time, for the first time in decade the rate of immigration as slowed. From 2004 to 2007 the number of new households headed by foreign born citizens increased by 200,000 per year but since 2007 the number foreign-born non-citizen households have declined by the same amount.
The rental and the homeowner market have diverged. There has been a net shift of 1.4 single family homes from owned to rental property between 2-007 and 2009, almost twice as many as in the previous two year period. Still, rental vacancies are down, dropping from about 3.5 million to less than 2 million between 2009 and 2010, and rents have begun to move up. At the same time homeowner vacancies, which dropped from over 9.5 million in 2008 to about 7.8 million in 2009 has declined only fractionally since even though new home construction has slowed considerably and banks appear to be holding large numbers of foreclosed homes off of the market. Still, housing prices, unlike rents, have resumed their decline. Unusually large numbers of households are switching from owner to renter and the ownership rate has fallen from 69 percent in 2004 to 67 percent in 2010. The report says that the continuing foreclosures and reluctance on the part of owners to buy as long as prices are unstable will cause home ownership to continue its decline through 2011.
The Harvard report cites a Fannie Mae study showing that while attitudes toward homeownership have become more negative over the last few years, 74 percent of renters and 87 percent of the general population still view homeownership as safe investment.
While many households aspire to homeownership, tightened underwriting standards may stand in their way and the report speculates that the proposed 20 percent down payment requirement for qualified residential mortgages could sharply curtail homeownership unless the borrower obtains a government guarantee. "Over the longer term, it is unclear how the impending reform of the housing finance system, (...) will influence the cost and availability of mortgage loans.
The number of rental households accelerated in the second half of the last decade, swelling by an estimated 3.9 million between 2004 and 2010 but rental vacancy rates increased and rents fell during the same period as new units were added and homes were converted from ownership to rentals. In 2010, however, the rental market moved into high gear and the vacancy rate dropped from 10.6 percent to 9.4 percent over the course of the year. MPF Research reported vacancy rates below 5 percent in almost one third of the 64 markets it studied and more than half had rates below 6 percent. As vacancies declined, rents rose. Rents in professional managed apartments were up 2.3 percent last year with most of the growth in metropolitan areas. As employment grows, especially among younger persons, and homeownership continues to decline there will be pressure on the rental market, pushing rents up and encouraging multi-family construction. Given the time line for new construction, however, rents are likely to remain tight in the short term and will present increased affordability challenges for low-income renters.
There is much uncertainty in the market regarding access to mortgage credit, home buying attitudes, immigration trends and laws, and household formation, but there is certainty about some factors related to demographics. It is known that the aging baby boomers will drive up the number of older households by some 8.7 million by 2020. This tends not to be a mobile population and will provide "ballast" for the owner market, offsetting in part the lower homeownership rates among younger households.
While the senior population is likely to age in place, if boomers follow the pattern of the preceding generation some 3.8 million will downsize their homes over the next ten years, lifting demand for smaller housing units and having a major impact on the housing markets in preferred retirement destinations. The large pre-boomer population will create a similar demand for assisted and independent living developments.
The echo-boomer generation will have a less predictable impact on housing markets. There are questions involving their homeownership attitudes and the net impact of immigration. There is reason to believe that this generation will be large enough to boost household formation and the demand for starter homes and apartments. The report states that if household formation (headship) rates return to their pre-recession average and if immigration is just half of what the Census Bureau projects, the number of households under age 35 will grow to nearly 26.5 million in the next decade.
Affordability is another challenge facing the housing market. In 2009 10.1 million renters and 9.3 million owners paid more than half their income for housing. While this hits low-income households the hardest, households with incomes under $15,000 pay over 80 percent of their incomes for shelter, the cost pressures have been moving up the income scale. Households earning $30 to $45 thousand increased the proportion of their incomes spent on housing from 30 percent to 40 percent over the ten year period ending in 2010.
The recent crash has wiped out household wealth, ruined credit ratings and devastated communities with foreclosures and has left nearly 15 percent of homeowners in homes that are "under water". This has reduced the amount that owners can cash out of their homes by selling or refinancing.
The report concludes by saying that the strength of the housing recovery, when it does finally occur, will depend on how fully employment bounces back, and then local markets will revive in proportion to the increase in jobs, the depths housing fell during the recession, and the amount of overbuilding that occurred before the downturn. But the most critical factor for housing recovery in the resumption of household growth and it may be that the unemployment rates on top of the long-term housing affordability issues may have lowered the baseline trend of household growth itself. "To match the 1.12 million annual rate average in the 2000s, household formation rates must return to their 2007-2009 average and net immigration must reach at least half of Census Bureau projections," the report says.
In the near term it will be rental markets that are likely to lead the housing recovery, but once consumers decide that a floor has formed under house prices, their reentry into the market could quickly burn through the lean inventory of unsold new homes and reduce the excess supply of existing homes on the market. There is also the danger that government programs to address rent affordability and assisting distressed neighborhoods will feel the budget axe just as affordability problems are escalating.
Related MND comments....
"Take note of HUD-sponsored initiatives aimed at rebuilding America's dilapidated housing stock." says MND's Managing Editor Adam Quinones. "This is where housing professionals will find the most opportunity in years ahead. The FHA should reopen the 203(k) program to investors if they want to encourage private investment in the U.S. housing market."
"With so many foreclosed properties sitting empty on the market we can expect remodeling and rehabbing to be a leading indicator of a bottom in the housing market", says MND's Managing Editor Adam Quinones. "We already know there is dearth of affordable rental housing available to low income renters. From that perspective, FHA should open its 203(k) program to investors if they want to accomplish their affordable housing goals."