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.

HOMEOWNERSHIP RATE...BACK TO THE FUTURE

The economists Carmen Reinhart and Kenneth Rogoff pointed out in their book This Time Is Different that financial crises, unlike other economic crises, tend to have bad economic effects that linger for a long time. They examined data on financial crises that occurred over the last 600 years across many countries, and concluded that booms fueled by domestic debt eventually run their course and lead to default. But their key point is that recovery from such default is slow and painful, as we have seen recently in many European countries, the most evident of which is Greece that has remained in a moribund state for several years now.

In the U.S. we are till suffering the aftereffects of the sub-prime debt boom that drove the housing expansion through the 1990s, until the implosion in 2008 that does not seem to end. One particular area that shows clearly the deleterious effects of the financial crash is the U.S. homeownership rate.
The rise in homeownership from the mid-90s, which rose from 64% in 1994 to its peak of 69.2% by 2004, was seen as a successful example of wise economic policies. For example Ben Bernanke, then Chairman of the Federal Reserve Board, said in a speech in May 2007 that

"The increase in homeownership has been broadly based, but minority households and households in lower-income census tracts have recorded some of the largest gains in percentage terms.  Not only the new homeowners but also their communities have benefited from these trends.  Studies point to various ways in which homeownership helps strengthen neighborhoods"

But it was already evident by that time that the housing boom was over. Even at that stage of the game and despite the immense amount of data and analysis available to him, Bernanke was not aware of the potential for disaster that was inherent in the subprime market segment.

In fact, conventional thinking was that the policies of the Federal Reserve Bank and the Federal government had been beneficial to the housing market and the economy in general. But in the six years since the market crashed in 2008, we are still suffering the aftereffects. Moreover, rising homeownership since the mid 90s, that was seen as an indicator of successful economic policies, has been in a free fall for ten years now. Currently, as can be seen in the chart nearby, the U.S. homeownership rate is back at levels last seen in the 1980s.


Who's Lost the Most in the Homeownership Game?

While overall homeownership fell by 4.6 percentage points in the decade ending in 2014, the largest drop was concentrated among 35 to 44 year olds, who saw their rate drop by 9.5 percentage points to just under 60% homeownership. And relative to the 1980s, we find that the overall U.S. rate is roughly equal to today's only because of gains in homeownership among those aged 65 years and older. Households in this age group saw their homeownership rise to nearly 80%- up five percentage points from the 1980s. People in all other age groups, under 65 years, actually saw their homeownership rate decline. The largest drop, as can be seen in the chart "Change from Early 1980s," is among the key 35 to 44 years group; this is a group that is in the family formation stage.

Government Policy Failures
So the easy money policies followed by the Fed, combined with Federal government efforts to improve homeownership have had, in fact, the opposite effect. After thirty years of policies that encourage greater homeownership, particularly among minorities and less advantaged groups, we find ourselves back where we started. Actually, these policies have made things worse as shown by the graph above, which is not surprising since most government actions and policies (all?) have detrimental effects on the economy and consumers. Government policies typically, either intentionally or not, benefit a specific group while they hurt the majority of consumers. In the home owning case, the intent was to improve homeownership across all groups, but we ended up only improving that of the elderly population, those 65 years and older, while that of all other age groups fell.

Homeownership, Savings and Consumers' Wealth.
It is often said the Americans do not save enough because owning a house, while it increases in value, is a valid way of accumulating wealth. And indeed it is so, as long as the value of the asset, i.e., the house, increases in value. But the housing crash, that in reality began in 2005, showed that house values, like those of any asset, can fall as well as rise.
The net wealth of American households stands today at nearly $83 trillion; despite the lack of economic growth since the end of the recession, coupled with housing markets that continue to be dormant, total wealth has increased by 32% since 2008, more than recovering the losses of the recession. However, the bulk of the wealth gains are in financial assets that account for 84% of the gain since 2008. And, more troublesome yet is that over half of the increase in wealth is due to equities gaining value, i.e. stock market appreciation- are we in the middle of another stock market bubble induced by the Fed?. But this is a topic for a future post in this blog!