State of the Nation’s Housing 2017

photo by woodleywonderworks

Harvard’s Joint Center for Housing Studies has released its excellent State of the Nation’s Housing for 2017, with many important insights. The executive summary reads, in part,

A decade after the onset of the Great Recession, the national housing market is finally returning to normal. With incomes rising and household growth strengthening, the housing sector is poised to become an important engine of economic growth. But not all households and not all markets are thriving, and affordability pressures remain near record levels. Addressing the scale and complexity of need requires a renewed national commitment to expand the range of housing options available for an increasingly diverse society.

National Home Prices Regain Previous Peak

US house prices rose 5.6 percent in 2016, finally surpassing the high reached nearly a decade earlier. Achieving this milestone reduced the number of homeowners underwater on their mortgages to 3.2 million by year’s end, a remarkable drop from the 12.1 million peak in 2011. In inflation-adjusted terms, however, national home prices remained nearly 15 percent below their previous high. As a result, the typical homeowner has yet to fully regain the housing wealth lost during the downturn.

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Pickup In Household Growth

The sluggish rebound in construction also reflects the striking slowdown in household growth after the housing bust. Depending on the government survey, household formations averaged just 540,000 to 720,000 annually in 2007–2012 before reviving to 960,000 to 1.2 million in 2013–2015.

Much of the falloff in household growth can be explained by low household formation rates among the millennial generation (born between 1985 and 2004). Indeed, the share of adults aged 18–34 still living with parents or grandparents was at an all-time high of 35.6 percent in 2015. But through the simple fact of aging, the oldest members of this generation have now reached their early 30s, when most adults live independently. As a result, members of the millennial generation formed 7.6 million new households between 2010 and 2015.

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Homeownership Declines Moderating, While Rental Demand Still Strong

After 12 years of decline, there are signs that the national homeownership rate may be nearing bottom. As of the first quarter of 2017, the homeownership rate stood at 63.6 percent—little changed from the first quarter two years earlier. In addition, the number of homeowner households grew by 280,000 in 2016, the strongest showing since 2006. Early indications in 2017 suggest that the upturn is continuing. Still, growth in renters continued to outpace that in owners, with their numbers up by 600,000 last year.

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Affordability Pressures Remain Widespread

Based on the 30-percent-of-income affordability standard, the number of cost-burdened households fell from 39.8 million in 2014 to 38.9 million in 2015. As a result, the share of households with cost burdens fell 1.0 percentage point, to 32.9 percent. This was the fifth straight year of declines, led by a considerable drop in the owner share from 30.4 percent in 2010 to 23.9 percent in 2015. The renter share, however, only edged down from 50.2 percent to 48.3 percent over this period.

With such large shares of households exceeding the traditional affordability standard, policymakers have increasingly focused their attention on the severely burdened (paying more than 50 percent of their incomes for housing). Although the total number of households with severe burdens also fell somewhat from 19.3 million in 2014 to 18.8 million in 2015, the improvement was again on the owner side. Indeed, 11.1 million renter households were severely cost burdened in 2015, a 3.7 million increase from 2001. By comparison, 7.6 million owners were severely burdened in 2015, up 1.1 million from 2001.

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Segregation By Income on The Rise

A growing body of social science research has documented the long-term damage to the health and well-being of individuals living in high-poverty neighborhoods. Recent increases in segregation by income in the United States are therefore highly troubling. Between 2000 and 2015, the share of the poor population living in high-poverty neighborhoods rose from 43 percent to 54 percent. Meanwhile, the number of high-poverty neighborhoods rose from 13,400 to more than 21,300. Although most high-poverty neighborhoods are still concentrated in high-density urban cores, their recent growth has been fastest in low-density areas at the metropolitan fringe and in rural communities.

At the same time, the growing demand for urban living has led to an influx of high-income households into city neighborhoods. While this revival of urban areas creates the opportunity for more economically and racially diverse communities, it also drives up housing costs for low-income and minority residents. (1-6, references omitted)

One comment, a repetition from my past discussions of Joint Center reports. The State of the Nation’s Housing acknowledges sources of funding for the report but does not directly identify the members of its Policy Advisory Board, which provides “principal funding” for it, along with the Ford Foundation. (front matter) The Board includes companies such as Fannie Mae, Freddie Mac and Zillow which are directly discussed in the report. In the spirit of transparency, the Joint Center should identify all of its funders in the State of the Nation’s Housing report itself. Other academic centers and think tanks would undoubtedly do this. The Joint Center for Housing Studies should follow suit.

 

Gen Z Eying Real Estate Trends

photo by Thomas Tolkien

The Washington Post along with its content partner National Association of Realtors quoted me in Eye on the Future. It reads, in part,

The suburbs as we know them are in flux. Many of the country’s bedroom communities have traditionally been known for their single-family homes and a lack of walkable public spaces. That’s changing as condos, sprawling townhome complexes and apartment buildings now dot areas where single-family homes would have been built.  Developers are building walkable public spaces to accommodate young families leaving cities but still seeking urban-like amenities.

 Another wave of change is expected in the next five to 10 years. That’s when members of Generation Z-those born on the heels of millennials-will become homeowners. Experts say they’ll transform areas that are sandwiched between major cities and suburbs into districts with an urban feel and amenities, without the hefty price tags major metros demand.

That transformation is already starting to happen. “Many of our ‘suburbs’ are actually neighborhoods in Los Angeles, particularly the San Fernando Valley,” said Kathryn Bishop, a real estate agent with Keller Williams Realty in Studio City, Calif. and member of the National Association of Realtors. “In the Valley, many neighborhoods have become mini ‘cores.’ Sherman Oaks, Encino and Woodland Hills have office towers, good restaurants and night-life business creating their own city areas.”

It’s no surprise that the younger generation needs to find an alternative to the sky-high costs of urban living. The Economic Policy Institute noted in 2016 that folks who live in San Francisco face a cost of living that’s 52.9 percent above the national average. For New Yorkers, living costs were 49.4 percent higher. The country’s least-affordable place to live was Washington D.C., where residents faced costs 63.5 percent higher than the national average.

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“Since the financial crisis there has been an increase in multigenerational households, driven in large part by financial limitations and insecurity as well as by marital status and educational attainment,” said David Reiss, professor of law and research director at he Center for Urban Business Entrepreneurship at Brooklyn Law School.  “Young adults are more likely to live at their parent’s home in recent years than they have been for more than a century.”

How to Break a Lease Early

photo by Marcel Oosterwijk

Realtor.com quoted me in How to Break a Lease Early. It reads,

It’s Murphy’s Law, rental edition: You find the perfect apartment, sign the lease, move in, start to get settled in, then something happens. Maybe you get transferred to another state for work, maybe you meet the love of your life and decide to shack up together (congrats!), or perhaps your parents fall ill and you need to move closer to them.

Unfortunately life and rental laws don’t always coincide, all of which might mean you may have to entertain the idea of breaking a lease. What would happen if you do? Answers are ahead, along with some advice on how to handle this sticky scenario.

First things first: Read your lease

If you find yourself needing to break your lease, your first step should be to read it again—carefully. You could get lucky: Some leases have an “opt out” clause, meaning that you can terminate early for an agreed-upon fee. Depending on that financial amount, it might make sense for you to just pay the penalty and make a clean break, says David Reiss, academic program director for the Center for Urban Business Entrepreneurship.

Then again, some leases will say that you’re responsible for the rent due for the remainder of the term of your lease. Still, even in this worse-case scenario, you may have some wiggle room based on how benevolent your landlord is.

Talk to your landlord

If there is no opting out or the fees are too steep for you to financially absorb, it would probably behoove you to speak directly with your landlord or rental company.

“Your landlord may be willing to let you out of the lease early,” says Reiss. “You could also try to negotiate a lower amount for early termination than the lease calls for by forfeiting your security deposit.”

All in all, it never hurts to ask (and pray you catch your landlord in a good mood). It’s possible he may not mind your moving out since this means he could raise the rent sooner.You won’t know until you ask.

Find a new tenant

Another option is to offer to help your landlord find a new tenant for your apartment.

“It generally is not allowed without landlord consent, but you can discuss it with your management to see if they would consent to a sublease and under what terms,” says Reiss. You may also need to check local laws that may be applicable to subleases. If it is allowable, you might try a site like Flip, where renters can post leases they need to break in search of qualified renters who are looking for someplace to live.

Don’t just walk out

The one thing you absolutely cannot do without legal ramifications is just walk out and stop paying your rent. You won’t be trading your apartment for a cell with bars (it’s a civil, not criminal, matter), but Reiss warns you can get in a lot of financial hot water if you handle this incorrectly.

“You cannot be arrested for nonpayment of rent—unless you live in 19th-century London—but you can be sued in court; have a judgment against you; have your wages garnished; and [have] liens placed on your property to satisfy the judgment,” says Reiss.

Did we mention that this will mess up your credit scores? It will mess up your credit scores.

That said, there are a couple of cases where you could break your lease without consequences, but they are extenuating circumstances.

“If the apartment becomes unlivable—for instance, no heat in the winter—you could argue that you have been constructively evicted from the unit,” says Reiss. “Also, some states allow domestic violence survivors to break a lease in order to ensure their safety.”

Financially Capable Young’uns

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The Consumer Financial Protection Bureau has issued a new model and recommendations, Building Blocks To Help Youth Achieve Financial Capability (link to report at bottom of page). It opens,

To navigate the financial marketplace effectively, adults need financial knowledge and skills, access to resources, and the capacity to apply their money skills and habits to financial decisions. Where and when during childhood and adolescence do people acquire the foundations of financial capability? The Consumer Financial Protection Bureau (CFPB) researched the childhood origins of financial capability and well-being to identify those roots and to find promising practices and strategies to support their development.

This report, “Building blocks to help youth achieve financial capability: A new model and recommendations,” examines “how,” “when,” and “where” youth typically acquire critical attributes, abilities, and opportunities that support the development of adult financial capability and financial well-being. CFPB’s research led to the creation of a developmentally informed, skills-based model. The many organizations and policy leaders working to help the next generation become capable of achieving financial capability can use this new model to shape priorities and strategies. (3, footnotes omitted)

I have been somewhat skeptical of CFPB’s financial literacy initiatives because there is not a lot of evidence about what approaches actually improve financial literacy outcomes. Unfortunately, this report does not reduce my skepticism. While it claims that it is evidence-based, the evidence cited seems scant, as far as I can tell from reviewing the footnotes and appendices.

The report concludes,

Understanding how consumers navigate their financial lives is essential to helping people grow their financial capability over the life cycle. The financial capability developmental model described in this report provides new evidence-based insights and promising strategies for those who are seeking to create and deliver financial education policies and programs.

This research reaffirms that financial capability is not defined solely by one’s command of financial facts but by a broader set of developmental building blocks acquired and honed over time as youth gain experience and encounter new environments. This developmental model points to the importance of policy initiatives and programs that support executive functioning, healthy financial habits and norms, familiarity and comfort with financial facts and concepts, and strong financial research and decision-making skills.

The recommendations provided are intended to suggest actions for a range of entities, including financial education program developers, schools, parents, and policy and community leaders, toward a set of common strategies so that no one practitioner needs to tackle them all.

The CFPB is deeply committed to a vision of an America where everyone has the opportunity to build financial capability. This starts by recognizing that our programs and policies must provide opportunities that help youth acquire all of the building blocks of financial capability: executive function, financial habits and norms, and financial knowledge and decision-making skills. (52)

What the conclusion does not do is identify interventions that actually help people make better financial decisions. I am afraid that this report puts the cart before the horse — we should have a sense of what works before devoting resources to particular courses of action. To be crystal clear, I think teaching financial literacy is great — so long as we know that it works. Until we do, we should not be devoting a lot of resources to the field.

Millennial Homeowners Following ‘Rents

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TheStreet.com quoted me in Potential Homeowners Follow in Footsteps of Parents. It opens,

Consumers tend to follow the strategies of their parents when they are faced with whether they should stick with renting or buying their first home.

Potential homeowners, including both Gen X-ers and Millennials, are influenced by the decisions made by their parents. As homeownership rates in the U.S. have fallen to a 51-year low, one reason Gen Y-ers tend to skip homeownership is due to the choice made by their parents while others are faced with mounting student loans and higher costs to purchase a house.

Consumers are nearly three times as likely to purchase a house if their parents were homeowners compared to parents who rented, said Felipe Chacon, a housing data analyst at Trulia, a San Francisco-based real estate website, which analyzed over four decades of data from the University of Michigan in Ann Arbor.

 “What the analysis in the report suggests is that people who grew up in rented homes are less likely to own their own home, even after you exclude those who have gotten financial help from their folks or their spouse’s folks,” he said.
As Millennials are heading toward their 30s, the impact of their childhood is taking effect as ones which grew up in homes the parents owned were 2.8 times more likely to seek the same goal, the researchers found. The trend of home ownership has declined among Millennials and part of the reason could be that people who are 19 to 34 years are less likely to have been raised in homes where their parents owned the homes compared to Gen X-ers or those who are 35 to 45 years old.
“It could simply be an issue of values, where those from owned homes make homeownership a more urgent priority and strive to reach it sooner simply because it is familiar and comfortable to them,” Chacon said.
Consumers are probably more likely to buy a house if their extended family can explain how the process works and what criteria should be prioritized from improving their credit score to saving for a down payment.
“It probably helps to have parents and relatives around who can help you navigate the system as a first time homebuyer,” he said. “Since Millennials, especially younger ones seem to be slightly less likely to be raised in owned homes, there could be a long term cooling effect on the ownership rate among this group.”
The attitude of Americans owning their homes and pursuing the traditional “American Dream” has remained pretty steady over the past five years. In fact, more Millennials are eager to purchase a home and 80% expressed this sentiment in 2015 compared to 71% in 2010, according to a Trulia survey. The overall population mirrors this belief with 75 % who agree in 2015 from 72% in 2010.
One of the hurdles to homeownership is accruing enough money for the down payment. Millennials who grew up with parents who owned a home received more help financially with 11.4% who were given money compared with 2.6% of those who grew up in mostly rented homes.
“The American homeownership rate carries a lot of political and social significance with it and for many, it is seen as a marker of the health of American society,” said David Reiss, a law professor at Brooklyn Law School in New York. “The significant dip in the homeownership rate that has occurred since the financial crisis has shaken the confidence of many that the nation’s households are on solid footing.”

 

Student Debt And Homeownership

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The National Association of Realtors, along with SALT, a consumer literacy program provided by American Student Assistance, released the results from a joint survey about student debt and homeownership. They found that “Seventy-one percent of non-homeowners repaying their student loans on time believe their debt is stymieing their ability to purchase a home . . ..” They have also produced a cool infographic to illustrate their main points:

  • Nearly a third of current homeowners (31 percent) in the survey said student debt is postponing plans to sell their home and purchase a new one.
  • A little over a majority of those polled (52 percent) expect to be delayed by more than five years from purchasing a home because of repaying their student debt. One in five anticipates being held back three to five years as well as over 60 percent of baby boomers. Not surprisingly, those with higher amounts of student loan debt and those with lower incomes expect to be delayed the longest.
  • Mirroring other recent data on young Americans being more likely to live with their parents than in any other living situations, almost half (46 percent) of young millennials polled currently live with family (both paying and not paying rent).
  • 42 percent of respondents indicated student debt delayed their decision to move out of their family member’s home after college.

I am not convinced that SALT President John Zurick is right when he says, “It is imperative to the nation’s economy that we find immediate and practical solutions to financially empower the 43 million Americans with student debt.” I think SALT and NAR are also overselling their findings somewhat in their press release headline, New Evidence Links Student Debt with Inability to Purchase a Home, because the survey reports subjective beliefs and does not offer any kind of baseline from which we can measure this current snapshot of consumer sentiment.

That being said, there has been a lot of concern about the relationship between student debt and household composition recently. It is certainly worth trying to understand the relationship between all different forms of debt and how they expand and limit choices available to households. And whatever the limitations of this NAR/SALT study, I have no doubt that the system for financing higher education needs an overhaul for its own sake as well as for the impacts it has on other choices that households make.

 

The Rental Crisis and Household Formation

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The Mortgage Bankers Association has posted a Special Report: Diverted Homeowners, the Rental Crisis and Foregone Household Formation. The report’s bottom line is that people who should have been homeowners have displaced people who should have been renters. Those displaced people have been left in their original households, typically those headed by their parents.

The Report’s Executive Summary states that among the long term impacts of the Great Recession

have been the emergence of a rental housing shortage and an intensified affordability crisis in the rental market. In this report, we analyze various supply and demand factors that have led to this crisis.

In so doing, we provide detailed analysis of the shifts in homeowner and rental demand. As we note, these shifts cannot be analyzed without understanding the shifts in household formation that have occurred. We utilize data from the U.S. Census and focus the analysis on 3 distinct time periods (2000, 2006, 2012) to highlight housing epochs that are relatively normal, at the peak, and near the bottom of the market. Special attention is also placed on those younger than age 45 because they represent the households most commonly making first time decisions to form a household and to own a house.

Our primary findings:

• A sharp downturn in homeowner growth since 2006 suggests that 6.0 million would-be homeowners (the expected number compared to actual) have been shifted to renting or have left the housing market.

• These diverted homeowners triggered a cascade of adjustments throughout the rental housing sector that are measurable in different ways.

• A sizable portion (roughly a third) of the diverted homeowners likely have been absorbed into single-family rentals, especially among households aged 25 to 54.

• Although larger than expected, growth in the rental sector was too small to account for both the expected rental growth and also the large number of diverted homeowners. Before disruptions to the owner-occupied market, the rental sector had been expected to grow by 4.4 million occupied units after 2006, due to the arrival of the large Millennial generation. While diverted homeowners resulted in demand for nearly 6 million additional rental units, rental housing only grew by 5.2 million.

• New construction was crippled during the financial crisis and aftermath, slowing its response to the swelling rental demand, although multifamily construction volume nearly doubled in 2012 compared to 2010, and increased another third in 2014 compared to 2012.

• The clear inference is that slightly more than 5 million otherwise-expected renters left or never entered the housing market, their growth displaced by the diverted homeowners, and diminishing overall household growth far below expectations. (1)

• A further consequence of the resulting increase in demand and shortfall in supply in the rental market was an increase in rents, with rental affordability problems surging to record heights in 2010 and 2012. This dynamic created an increased incidence of high rental cost burdens that was remarkable for its relative uniformity across the nation.

There has been a fair amount written recently about household formation (here and here, for instance), but this Report is notable for its description of the cascading effect that the financial crisis has had on today’s housing market. We are around the fifty-year low for the homeownership rate.  If that rate has hit bottom, perhaps the trends identified in the MBA report are about to reverse course.