STATE OF THE NATION'S HOUSING - 2015

No, I didn't think of this post title myself, it's plagiarized from the latest report by the same name issued by the Joint Center for Housing Studies at Harvard, that I discuss here. This year's report is another of a long sequence of annual reports going back to the 1980s, where the Joint Center offers its analysis and views on demographics and housing in the U.S.

As always, the reports are well written and strongly based on facts and good analysis, highlighting key events in the housing markets during the previous year and where things stand today. Following are a few key points taken from the report, that you can download for free here (http://www.jchs.harvard.edu/research/state_nations_housing).

The report is divided into five sections, led by an executive summary and ending in an appendix of data tables. The five sections cover the following areas described in the chapter titles: Housing Markets, Demographic Drivers, Homeownership, Rental Housing and Housing Challenges. The data appendix is available in Excel format, which is always a nice and convenient gesture. An overview of each section follows, ending with a brief critique of my own.

Housing Markets
In a retelling of last year's housing market, they point out that its contribution to GDP of just 3.2% is significantly less than the 4.5% average since 1969. Home improvement expenditures, that peaked at about half of the total residential construction spending, was down to a third of the total. Both new and existing home sales were weak last year, relative to their volume in the early 2000s, although they were already above the recession lows in 2008. However, the housing markets last year slowed down relative to the modest recovery in the previous two years.
Many homes are still stuck in the foreclosure process, with an estimated 920 thousand units in foreclosure. These homes in foreclosure, combined with homeowners who can't move because they have little equity in their current home (thus being unable to come up with the required down payment) or are underwater- 10.8% of homeowners fall currently in this category.
Further, the lower residential mobility due in part by aging of the population is reducing the inventory of homes for sale. (For details on mobility trends see my post http://econlives.blogspot.com/2015/03/are-we-becoming-sedentary-nation.html)
Their outlook for the housing market is that the "...recovery is likely to continue at only a moderate pace until income growth picks up and rising home prices help to reduce the number of underwater and distressed homeowners."

Demographic Drivers
Two well-known trends are the focus in this section: aging of the U.S. population and the rise of minorities. The pressures of these two trends will change the dynamics of housing in the U.S. The majority of household growth in the next decade, 76% according to Joint Center calculations, will be due to minorities; this will rise to 85% in the next twenty years. The foreign born represent a significant source of housing demand, accounting for nearly a third in the 2000s. Event hough immigration slowed down after the 2008-09 recession, net international immigration jumped to just under a million last year. Interestingly, the Joint Center reports that Asians make up now the largest shared of immigrants while Hispanics, particularly from Mexico, continue to lose share.
The report also points out that although median real household income has rose 2% between 2012 and 2013, to $51,900, it still is 8% below its 2007 peak, and in reality equivalent to 1995 income. And median household wealth is, in real terms, still 40% from the 2007 peak and at its lowest level since the 1990s. The fall in wealth is due mainly to the losses suffered in the housing crash. The median home equity in 2013 was nearly a third below that of five years before.
Even though households' home equity has improved, many are still burdened with huge student debt. The Center indicates that 20% of all households had student loan debt in 2013, more than double the rate of 25 years before.
The Joint Center is calling for a growth of about 1.2 million households annually in the next 10 years. But they warn about the 42% rise of older households (over 65 years of age) and the doubling of those 80 years and older. This "...will test the ability of the nation's housing stock to address the spiraling needs for affordable, accessible and supportive units."

Homeownership
Although homeownership is not covered in detail until the fourth chapter, this is first topic discussed in the Executive Summary. The main point is the disastrous decline in homeownership since the housing crash in 2004, to the current rate of 63.7%- the lowest it's been in more than twenty years. Plaudits to me for having discussed this issue in an earlier post in this blog (http://econlives.blogspot.com/2015/06/fewer-homeownersmore-renters.html), so nothing new here, at least for me or anybody else who may have read my post.

The Joint Center report, however, points out that a further reason for the decline is the inability of many people to obtain mortgage loans, due to more stringent standard followed by lenders, who were bitten after the housing boom.
The report concludes this section saying that most households "... regardless of race/ethnicity, age, and lifestyle - still consider homeownership a positive goal." Surveys conducted by Fannie Mae reveal that 82% of respondents think that owning made more financial sense than renting. So the only constraint to a recovering of the homeownership rate is whether households can obtain the means to achieve it.

Rental Housing

The report indicates that the flipside of declining homeownership is a concomitant increase in rental housing. The chart to the right, also taken from my earlier post, clearly shows this phenomenon.
But the Joint Center report further illuminates how a large number of single family units are taking the role of rental homes. In fact, the single family units share of rental market has risen from 31% in 2004 to 35% last year. That is, the supply of rental units is not met by multifamily structures alone, but also single units.
An interesting point regarding this is that large rental companies have been purchasing many of these single units to use them as rental. But, as was pointed out during the web conference, it's still an open question whether those rental companies can manage well those units given that it's difficult to standardize and apply the same practices across all units, as you would do in a multifamily building where all the units are very similar.

One of the valuable traditional roles of these reports is their evaluation of the policy implications of the current state of affairs in housing. This year's report is not different. Although the number of households with high house cost burden has fallen, this improvement comes from the homeowner side; primarily due to falling mortgage costs and modest income gains (p. 30). But for renters, the situation is not better- particularly for low-income renters. They recognize the continuous need of good quality rental units that are within the financial ability of renters. The report does not provide any specific advice on how this can be achieved, other than it "requires the persistent effort of both the public and private sectors."

Housing Challenges
The main challenge is the heavy cost burden for many renter households. While the burden for homeowners eased a bit, first because many lost their homes to foreclosure and then low interest rates reduced their monthly payments, the burden on renters has increased. The Joint Center finds that just under half of all renters fall in this category, that is their rental payments take 30% or more of their paycheck, thus cost-burdened renters reached a high of 20.8 million households. High rental costs leave those households with little to spend on food, clothing and other things naturally.

Additionally, even though housing may take a large share of their income it does not ensure that housing will be adequate; that is, housing with deficiencies in plumbing, electrical and heating systems. This is the second challenge posed by the Joint Center in its report. About 10% of renters who earn less than $15,000 live in inadequate housing. The supply of housing for low-income households is also wanting. The Center reports that in 2013, 11.2 million low-income renters (that is, earning less than 30% of the area's median income) competed for the 7.3 million affordable units- this leaves a shortfall of 3.9 million units.

The solution proposed is more housing assistance, either by tax credits or subsidies, and also a capitalization of the National Housing Trust Fund. They point out an advantage of this fund is that it is not subject to annual appropriations but, rather, has a predictable stream of funding.

Any Criticism on the Report?
The only thing that seems to be missing from this report is an evaluation of the impact that regulations, both building code regulations and financial ones imposed by the Dodd-Frank bill, have on low-income housing and housing overall. Each individual building code has its own merit indeed, who wouldn't want to not use safer materials, for instance? But what is the combined effect of all those codes, both national and local, on building costs? Similarly, the 2,300 original pages of Dodd-Frank bill have already spawned about 14,000 pages of regulations, many of those impact mortgage lending through additional paperwork. What are the additional costs on a house or rental unit?
But maybe this analysis is out of the purview of these Joint Center reports.

RISING EMPLOYMENT BUT FLAT INCOMES, WHY?

The last two months' employment reports have been hailed in some quarters as a sign that the economic recovery is finally on. At the same time consumers' income continues to be stubbornly flat, if not declining. What is going on? Shouldn't more working people lead to higher incomes? We hear about the 10.7 million jobs created since the end of the recession (somehow attributed to the magnanimous hand of the government) but little is said of the fact that most of those "new" jobs are simply a catch-up to the employment losses suffered during the 2008-09 recession. In fact, only 3.3 million of those job gains truly represent new jobs, that is jobs over and above the number of people employed in January 2008 right when the recession hit. In this note we will review some explanations of this apparent disconnect between job and income growth.

Employment Growth Data Are Misleading
Currently, national employment is only 2.4% above the pre-recession peak of 138.4 million employed in January 2008. This growth translates to a dismal rate of only 0.8% per year, far below the 2.3% annual growth rate maintained between 1940 and 2007. Also since the end of the recession, U.S. population has increased by 5.9%- that means that employment growth is not even keeping up with population growth.  The chart nearby compares the average annual employment growth over the six years from the 2008-09 recession, to similar 6-year periods after each of the recessions since 1960. It can be seen clearly that the current recovery, as well as the post-2001 recession one, are far below par.

Many States Continue to Fall Behind
Underlying the slow pace of employment growth are several states that still have to regain the losses suffered during the 2008-09 recession. We find that 15 states still show a gap to the pre-recession employment peak. These 15 sates represent nearly one quarter of total U.S. employment, accounting for 34 million jobs. Leading the pack is Nevada that first enjoyed tremendous growth during the housing bubble years, only to see its economy collapse when the housing market crashed. The state had the highest rate of foreclosure filings in the nation in 2010, with an astounding 9% of all housing units in the state in foreclosure- that is, one out of 11 houses.
Second in line is Michigan, still reeling from both the housing crisis and the collapse of its auto industry, with two of its three automakers being forced to take advantage of the Obama's stimulus plan. Other states in similar straits are listed in the chart.

More New Jobs in Lowest Earning Sectors

A key reason for low income growth, and lackluster GDP growth, lies in the fact that the largest employment gains are in sectors that generate the lowest earnings. Nearly two-thirds of the new jobs created since the beginning of the recovery, six years ago, are in the four lowest paid sectors. The sharp path in job growth for these four sectors is shown in the chart nearby.
Yes, the number of workers in these sectors has been increasing rapidly, but little mention is made of the fact that these same sectors and jobs are among the lowest paid.



A simple graph showing average weekly earnings by sector against the relative contribution of each sector to total employment growth provides a clearer view. On the chart to the left, we can see that the sectors with the highest contributions to growth, highlighted in read, are also the ones that generate the lowest earnings.
The sector with the lowest weekly earnings, Leisure & Hospitality, contributed nearly one-fifth (19%) of the job growth since the end of the recession- that is 2.0 million jobs. But the average weekly compensation of these workers does not break the $400 mark. Similarly, Waste Services generated about one in seven jobs each barely making above $600 a week.
Other sectors with high growth but low earnings are Retail Trade, 10% of jobs at an average of $548 a week; and Health Services, with slightly over 19% of the new jobs although paying slightly over $800 a week. All in all, these four sectors generated 6.97 million jobs since June 2009, or 65% of the total 10.7 million jobs gained over that time.

Such Growth Does Not Lead to Prosperity
It is not only jobs, but high earning jobs that lead to prosperity. Although I do not explore here the reasons behind the fast growth of these low paying sectors, it seems that impediments set governments via regulations are stymying robust growth in some sectors that happen to generate higher earnings. Without making a judgement on the value of such regulations, we can readily see for instance that high-paying sectors such as mining or manufacturing have traditionally attracted heavy government regulations. Employment in coal mining has fallen from 90 thousand in 2012 to about 70 thousand today- efforts to move away from coal are having an impact, and the average earnings from coal mining are over $1,500 a week. Despite restrictions on off-shore oil exploration and limits on oil exports, the oil industry has moved in the opposite direction to coal's. Thanks to fracking, oil exploration employment has increased from 124 thousand in 2004 to nearly 200 thousand today; this industry generates weekly earnings of nearly $1,800.

FEWER HOMEOWNERS...MORE RENTERS

The U.S. homeownership rate has dropped sharply as a consequence of the excesses that led to the housing crash of 2004-2008. The chart to the right, taken from an earlier post in this blog ("Homeownership Rate...Back to the Future",http://econlives.blogspot.com/2015/05/homeownership-rateback-to-future.html), shows how the rate fell by almost five percentage points over the last decade, to its current level of 63.7%. A declining rate, however, does not necessarily imply that the actual number of homeowners also declines, since an increasing number of households could probably compensate for the lower rate, that has occurred in the past. But this is not the case currently, both the rate and the number of homeowner households has fallen.

House Prices Won't Fall They Said...But They Did Fall.
Back in 2004, who remembers?...Google of course, many thought it highly unlikely that prices would fall nationally. For instance, an economist at Wachovia Securities, swallowed by Wells Fargo since then and probably the quality of their forecasts was one reason, said that "housing prices could slide back somewhat...I don't think they will plummet." Also, Mark Gongloff a writer at the all-knowing, all-reliable CNN Money stated that "Home prices don't often fall nationwide. It last happened to new home prices in 1991, and things were considerably different then...the oversupply of homes, which stretched back to the late 80s helped sink prices, but no such oversupply exists today." So was the conventional thinking before the fall. An elementary understanding of economics would have told him there are other causes behind price fluctuations besides "oversupply."


It is well known that many of the houses sold in the first half of the last decade, both new and existing houses, were to consumers who couldn't afford them. Also, most consumers purchased them under the assumption that forever rising house prices would make those house purchases a solid investment. This proved to be not so. Nationally, home prices fell 25% between 2007 and 2011, with the biggest declines in 2008 and 2009.

The precipitous drop in house prices resulted, as we now know, in a huge number of homeowners who found themselves "under water" with their mortgages. Additionally, as the recession set in, many who lost their jobs couldn't meet the monthly house payments and this led to the foreclosure crisis- with the number of foreclosures reaching nearly 2.5 million in 2009. Foreclosures have declined over the last few years, although they still hover around half a million homes annually; this compares unfavorably with the figures before the recession when around 150,000 foreclosures were recorded per year.

All of these factors, falling house prices, dropping wealth, the number of foreclosures rising, etc. have impacted the dynamics of owning or renting a home.

Household Formations are Down

Last year, the total number of households in the U.S. reached 115.5 million, an increase of 792 thousand from 2013. Although this is a remarkable 51% increase over the prior year, the number of new households in 2014 is still far lower than the average maintained over the 40-year period from 1960 to 2000. Over those forty years, the number of households increased by an average of 1.3 million a year.
The chart to the left shows that, since the onset of the 2008-09 recession, the number of new households has averaged just under 600 thousand per year (shown by the red line), this is less than half the average maintained during the last four decades of the last century. And fewer new households implies, naturally, fewer new houses are needed.

More Renters, Fewer Homeowners

The net result is that since the onset of the housing crash, and the general economic recession that followed it, we have seen the actual number of homeowners fall, while the total number of renters has increased.
As the chart "Number of Homeowners & Renters" shows, we had by 2014 1.7 million fewer homeowners than in 2006. In contrast, the number of renters shot up dramatically by 6.4 million households. This, as can be surmised, is different from the pattern we were used to seeing in the past, when both the number of homeowners and renters increased.

Younger People Shying Away From Homeownership

Unlike previous generations, where young adults would try to purchase a home as soon as possible, some even before getting married, currently we see that a majority of them are opting for renting. There are many reasons why they are making that choice now. Among them must be the inability to get credit given the large education debt load they carry. Also, many of them are staying away from the labor force altogether- witness their declining participation in the labor market. Additionally, we can't dismiss the fact that the charm of owning a home may have faded, since homeowners can't accumulate as much real estate wealth as during the housing bubble years. The chart nearby shows that the number of homeowners under 55 years old has fallen, with the largest declines observed among two groups: 25 to 34 years and 35 to 44 years. It is only among those headed  by people over 55 years that we see homeowners rising more than renters. 

Moreover, the under 25 years set has fallen for both owners and renters. This is consistent, again, with the precipitous decline in labor participation among people in this age group. They are the ones who have moved back to their parents homes, and are living in the basement playing video games.

Implications of This Trend

We've been seeing already some of the effects of this new dynamic. For instance, multi-family housing construction has recovered faster and more robustly since the recession. While single family construction rebounded by 46% since its low point in 2009, building of multi-family units has shot up by 226%. Also, while prior to the recession between one quarter and one third of the multi-family units were built as condominiums, that is not for rent, that proportion has fallen precipitously over the last four years. We find that, since 2010,  only 8% of the multi-family housing units are built for sale, the vast majority are designed to be rental units. But the average size of those rental units is under 1100 square feet- pretty much the size prevalent in the early years of the century.

More importantly, these trends also mean that the home improvement market in the future will grow less than otherwise. Rental units are remodeled less frequently than homeowned properties and, since they are smaller than owned homes, the amount spent on remodeling is going to be smaller. Thus, in general we should expect fewer remodelings and fewer funds spent on those projects.