State of the Nation’s Housing
Long-time housing expert, head of Harvard’s Joint Center for Housing Studies, former FHA Commissioner, and AHI Affiliate Nic Retsinas and his colleague Eric Belsky have issued the fourteenth annual edition of their essential work, The State of the Nation’s Housing (executive summary and full report, both in .pdf).
With far too much policy driven by anecdote, Nation’s Housing provides a comprehensive statistical overview of the
The authors are careful reporters who anchor their views in large-scale statistics — but their policy recommendations do more than peep out of their findings and comments:
1. The homeownership engine is humming along
Aside from modest pullbacks in starts and sales, the current housing boom has lasted for 13 consecutive years.
The long-running rise is raising many households to homeownership:
Homeownership posted an all-time high of 69% last year, with households of all ages, races, and ethnicities joining in the home-buying boom.
It’s also bringing minorities into the American Dream:
Between 1980 and 2000, over 6.2 million minority households joined the ranks of middle income earners - a number nearly equal to that of whites.
Equal numbers in absolute terms means a significant increase in minority homeownership participation.
2. Consumers view their homes as accessible investments
In every way measurable, American homeowners are betting that their homes have value.
They are paying larger multiples of income for housing:
Ratios of house prices to median household incomes are up sharply and now stand at a 25-year high in more than half of evaluated metro areas.
Some of this is fueled by lower interest rates, and as we have seen, the market believes that they will stay low.
They are using the equity in their homes as a source of liquefiable wealth:
Although refinancing volume dropped by half in real terms to $1.4 trillion, the amount of equity borrowers cashed out held fairly steady at $139 billion.
Money is liquid; if it moves, it continually circulates; so when wealth can be liquefied, it moves back into the economy. Some of that equity is going into the purchase of homes as an investment:
Between 1998 and 2003, the share of home purchase loans made to other than owner-occupiers climbed from 7% to 11%.
This last is significant, because as Mr. Greenspan pointed out, investment homes will trade and clear much faster than owned homes. If the trend continues — we’re talking a 50% increase in market share! — for a few more years, not only could they be a significant market factor, with increased price volatility.
3. Housing is significantly stimulating the economy
Money is liquid, if it moves, it continually circulates; so when wealth can be liquefied, it moves back into the economy, and the spending thus created sustains jobs and job creation. Housing continues to be an enormous driver for the
As cash-rich households stepped up their spending, housing wealth effects again accounted for a third of the growth in personal consumption last year.
4. There’s no evidence of a housing bubble
All the trading in houses, and the even fluffier news stories about a bubble, have obscured a fundamental insight: the total homes should match the total homeowner households:
The unprecedented length and strength of the boom has, however, fanned fears that the rate of construction far exceeds long-un demand. Although averaging more than 1.9 million starts annually since 2000, housing starts and manufactured home placements appear to be roughly in line with household demand.
As evidence, the inventory of new homes for sale relative to the pace of home sales is near its lowest level ever. Given this small backlog, new home sales would have to retreat by more than a third — and stay there for a year or more — to create anywhere near a buyer’s market.
So while it seems unlikely we will be facing suburban wastelands any time soon, might the bottom fall out of the refinancing market? The authors say no:
Moreover, the
This gives borrowers more flexibility to shift to loans tied to lower adjustable rates in the event o fan interest-rate rise. Although adjustable loans do increase the risk of prepayment shock at the end of the fixed-rate period, borrowers are increasingly choosing hybrid loans that allow them to lock in favorable rates for several years.
Faced with choice, customers choose — and in choosing, they increase their financial literacy and financial sophistication. This too is an element in a diversified ecosystem:
Smarter customers make better markets.
We may be small investors, but we’re smart!
5. Housing demand will continue to diversify throughout the country
All this homebuilding represents not just a market movement, but also the consequence of
Demand for new homes is on track to total as many as 2 million units annually between now and 2015.
Roughly 5.5 million new Americans a year drives a lot of economy and a lot of homebuilding. They can only go two spaces: up in the cities (more on this below), or out into the wide-open spaces:
People and jobs have been moving away from central business districts (CBDs) for more than a century.
6. Owners are haves, renters are have-nots
While homeowners have levered their rising prices into homeowner equity, the rising market has left someone behind: those who do not own homes:
Today, nearly one in three American households spends more than 30% of income on housing, and more than one in eight spend upwards of 5%.
Thatt trend is worsening because lower interest rates have boosted owner values much more than those for rental, with a consequent drop in rental production:
Renters face a diminishing supply of apartments because rental housing construction fell to a 10-year low in 2004 and affordable units that are being demolished to make way for high-end condominiums are not being replaced.
Forty years ago, the average American spent closer to 25% for housing; with increasing land values, the line has risen to 30%. It likely will keep slowly rising as American becomes more urbanized. As that happens, the affordability crunch hits them harder, and government is moved to act:
The federal government remains under fiscal pressure to cut rather than expand housing assistance programs.
A huge tax cut, a prescription drug benefit, and a major war will do that to you. So if the Federals are retreating, who is advancing?
In response, state and local governments have stepped up their funding for housing, although most have done little to relax the regulations that make affordable housing so difficult to build.
This trend too will continue, whether through Section 8 block-granting, cuts in CDBG and other grants, or simply through funding pressure.
“There’s increasing distance between the housing haves and have-nots,” Retsinas said.
And really, it’s a divide between owns and own-nots. (More on this in posts to come.)
The affordability crunch is most severe in cities:
These figures miss the 2.5 million households that live in crowd3ed or structurally inadequate housing units. They also exclude the growing number of households that move to distant locations where they can afford to pay for housing, but must spend more for transportation to work.
7. Urban affordability requires changing zoning/ density laws and incentives
In every urban environment, there is a direct linkage between housing prices and transportation costs: the closer you can get to work, the more your housing costs. Conversely, if there is no urban affordable housing, lower-end workers face lengthening commutes, clogging the highways for everyone and straining urban resources.
Meanwhile, worsening congestion, longer commutes, and higher infrastructure costs will no doubt add fuel to the smart growth debate.
Anyone who has ever navigated an African city like
Work in Rosebank, live in
Commute via taxi
Meanwhile, affordability is not simply a problem of demand (raising renter ability to pay); it’s equally, if not more, a problem of supply. Where will the affordable homes go?
Without looser restrictions on higher-density construction closer to city centers, though, the lion’s share of new development will occur in cheaper, outlying areas.
At the other end, cities are engaged in a slow pretzel hold:
Land constraints in many of those cities make it likely that the regions will have “permanently higher prices,” the report said.
But as urban land prices rise (land value is a residual), affordability is ever-harder to achieve, unless government does something, either with higher-density bonuses (inclusionary zoning) or through linkage or similar payments:
With sprawl encroaching father into undeveloped areas, the public calls to allow higher density residential construction near city centers will become louder even as the opposition to new development remains firmly entrenched.
