December 14, 2017
The Joint Center for Housing Studies of Harvard University has released America’s Rental Housing 2017. I was a bit surprised that the report spent so little time addressing the types of restrictive zoning that depress the supply of new rental housing. Loosening those restrictions seems like a key component of any national affordability strategy for the rental sector. Some highlights of the report include the following selections from the Executive Summary:
After a decade of broad-based growth, renter households are increasingly likely to have higher incomes, be older, and have children. The market has responded to this shift in demand with an expanded supply of high-end apartments and single-family homes, but with little new housing affordable to low- and moderate-income renters. As a result, part of the new normal emerging in the rental market is that nearly half of renter households are cost burdened. Addressing this affordability challenge thus requires not only the expansion of subsidies for the nation’s lowest-income households, but also the fostering of private development of moderately priced housing.
Renter Household Growth in a Slowdown
Rental housing markets have seen an unprecedented run-up in demand over the last decade, with growth in renter housholds averaging just under one million annually since 2010. But the surge in demand now appears to be ending, with the three major government surveys reporting a sharp slowdown in renter household growth to the 136,000–625,000 range in 2016. Early indications for 2017 suggest a further deceleration, with one survey showing essentially no increase and another posting a substantial decline (Figure 1). While these estimates are notoriously volatile from year to year, the consistent trend across surveys provides some confidence that growth in renter households is indeed cooling.
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Evolution of the Rental Supply
Soaring demand sparked a sharp expansion of the rental stock over the past decade. Initially, most of the additions to supply came from conversions of formerly owner-occupied units, particularly single-family homes, which provided housing for the increasing number of families with children in the rental market. Between 2006 and 2016, the number of single-family homes available for rent increased by nearly 4 million, lifting the total to 18.2 million. While single-family homes have always accounted for a large share of rental housing, they now make up 39 percent of the stock.
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Rental Markets at a Turning Point
Rental construction led the housing recovery, rebounding nearly four-fold from the market trough in 2009 to 400,000 units in 2015— the highest annual level since the late 1980s. But after moving sideways in 2016, the pace of multifamily starts has fallen 9 percent through October 2017. The slowdown has occurred in markets across the country, but is most evident in metros where multifamily construction had been strongest.
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Slight Easing of Affordability Pressures
With the economy continuing to improve and income growth accelerating, the share of renters with cost burdens (paying more than 30 percent of income for housing) fell in 2016 for the fourth time in five years, to 47 percent (Figure 5). The number of cost-burdened renters also fell for the second consecutive year, declining from 21.3 million in 2014 to 20.8 million in 2016, with the number of severely burdened households (paying more than 50 percent of income for housing) dipping from 11.4 million to 11.0 million. However, this progress comes only after a decade of steep increases. At the average rate of improvement from 2014 to 2016, it would take another 24 years for the number of cost-burdened renters to return to the 2001 level.
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Shortfall in Rental Assistance
Need for housing assistance continues to grow. HUD’s Worst Case Housing Needs 2017 Report to Congress shows that the number of very low-income households receiving rental assistance increased by 600,000 from 2001 to 2015. Over the same period, the number of very low-income households (making less than 50 percent of area median) grew by 4.3 million, with extremely low-income households (making less than 30 percent of area median) accounting for more than half (2.6 million) of this increase. As a result, the share of renters potentially eligible for assistance and that were able to secure this support declined from 28 percent to 25 percent (Figure 6). Meanwhile, the share of very low-income renters facing worst case needs—that is, paying more than half their incomes for housing and/or living in severely inadequate units—increased from 34 percent to 43 percent.
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Slower growth in rental housing demand could be good news if it helps to check the rapid rise in rents. But even if the homeownership rate stabilizes near current levels, the number of renter households is likely to continue to increase at a healthy clip, driving up the need for additional supply. And given that a broader array of households has turned to renting, this also means a growing need for a range of rental housing options. (1-6)
December 13, 2017
Cushman & Wakefield have posted The Great Tax Race: How the World’s Fastest Tax Reform Package Could Impact Commercial Real Estate. There is a lot of interesting insights in the report, notwithstanding the fact that ultimate fate of the Republicans’ tax reform is still a bit up in the air. Indeed, C&W estimates that there is a 1 in 5 chance that a bill will not pass this year.
Commercial Real Estate
C&W states that history
suggests that tax law changes by themselves are often not key drivers for transactions or for investment performance. However, there is likely to be a period of transition and market flux as investors restructure to optimize tax outcomes with implications for the underlying asset classes. Corporations are likely to separate the real estate aspects of their businesses. (2)
The commercial real estate industry is largely exempt from the biggest changes contained in the House and Senate bills. 1031 exchanges, for instance, have not been touched. C&W sees corporations being big beneficiaries, with a net tax cut of $400 billion over the next 10 years; however, they “anticipate that the tax cut will be preferentially used to return capital to shareholders or reduce debt, rather than to increase corporate spending.” (2)
Residential Real Estate
C&W sees a different effect in the residential real estate sector, with a short-term drag on home values in areas with high SALT (state and local tax) deductions, including California, NY and NJ:
The drag on home values is likely to be largest in areas with high property taxes and medium-to-high home values. There is also likely to be a larger impact in parts of the country where incomes are higher and where a disproportionate proportion of taxpayers itemize. Both versions of the tax reform limit property tax deductibility to $10,000. While only 9.2% of households nationally report property taxes above this threshold, this figure rises to as high as 46% in Long Island, 34% in Newark and 20% in San Francisco according to Trulia data.
The Mortgage Bankers Association (MBA) estimates that 22% of mortgages in the U.S. have balances over $500,000, with most of these concentrated in high costs areas such as Washington, DC and Hawaii—where more than 40% of home purchase loans originated last year exceeded $500,000. This is followed by California at 27%, and New York and Massachusetts at 16%. (6)
C&W also evaluated tax reform’s impact on housing market liquidity and buy v. rent economics:
The median length of time people had owned their homes was 8.7 years in 2016—more than double what it had been 10 years earlier. Now that interest rates have begun to tick upward from their historic lows, the housing market may face a problem called the “lock-in” effect, where homeowners are reluctant to move, since moving might entail taking out a new mortgage at a higher rate. This leads to the possibility of decreasing housing market liquidity in high-priced markets.
All things considered, the doubling of the standard deduction and the cap on the property tax deduction is likely to have the largest impact on the buy vs. rent incentive, especially as it seems likely that there will be minimal changes to the mortgage interest deduction in any final tax reform bill. (7-8)
December 11, 2017
I will be speaking in a free American Bar Association webinar tomorrow, Challenges for Modern Housing Markets:
Our current housing system is not sustainable in terms of the market, residential tenure, cost stability, and neighborhood inequality. Our panelists will discuss some key areas in which housing must be stabilized in order to strengthen our economy and society. Our panelists will address ways to lessen the volatility of housing prices and home mortgage lending, the importance of and ways to improve stability of residency, ways to improve the sustainability of affordable housing, and recent lawsuits that have reframed the problem of distressed and inequitable communities.
The other speakers are
- Professor Kristen Barnes, University of Akron School of Law
- Professor Andrea J. Boyack, Washburn University School of Law
The program will be moderated by Professor Wilson R. Freyermuth, University of Missouri School of Law.
My remarks will be drawn in part from my work on the Federal Housing Administration.
The webinar is free and open to all. It will take place Tuesday, December 12, 2017 at 12:30 p.m. Eastern/11:30 a.m. Central/9:30 a.m. Pacific.
Register for the webinar at http://ambar.org/ProfessorsCorner.
The webinar is sponsored by the ABA Real Property, Trust and Estate Law Section Legal Education and Uniform Laws Group. It is part of a series of webinars that features a panel of law professors who address topics of interest to practitioners of real estate and trusts/estates.
- The United States Department of Housing and Urban Development released its 2017 Annual Homeless Assessment Report. The report noted more than half a million individuals were displaced on one single night in 2017. Though the half a million is a large sum, the number of families displaced from homes decreased by over 5%. While this decline is great, the number of homeless veterans increased. Further large cities on the West Coast account for the increase in individual homelessness.
- The U.S. Government Accountability Office released a report entitled, Financial Audit: Federal Housing Finance Agency’s (FHFA) Fiscal Years 2017 and 2016 Financial Statements. The report noted the FHFA complied with the nation’s acceptable accounting principles. Further, for the 2017 fiscal year, there were no reports of non-compliance with applicable laws.
December 7, 2017
Greg Kaplan et al. posted The Housing Boom and Bust: Model Meets Evidence to SSRN. The abstract reads,
We build a model of the U.S. economy with multiple aggregate shocks (income, housing ﬁnance conditions, and beliefs about future housing demand) that generate ﬂuctuations in equilibrium house prices. Through a series of counterfactual experiments, we study the housing boom and bust around the Great Recession and obtain three main results. First, we ﬁnd that the main driver of movements in house prices and rents was a shift in beliefs. Shifts in credit conditions do not move house prices but are important for the dynamics of home ownership, leverage, and foreclosures. The role of housing rental markets and long-term mortgages in alleviating credit constraints is central to these ﬁndings. Second, our model suggests that the boom-bust in house prices explains half of the corresponding swings in non-durable expenditures and that the transmission mechanism is a wealth eﬀect through household balance sheets. Third, we ﬁnd that a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures, but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.
I think the last sentence is worth pondering a bit: “a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures, but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.” During the Great Depression, the federal government took steps that relieved the debt burden of over a million households by extending the terms of their mortgages and lowering the interest rates on them.
While this was no panacea, it did let millions stay in their homes during a period of great financial stress. The steps taken to help struggling homeowners during the recent Great Recession were much more timid than those taken during the Great Depression. This paper adds to a body of literature that suggests we should not be so timid the next time we are hit by an economic tsunami.