The Housing Market Since the Great Recession

photo by Robert J Heath

CoreLogic has posted a special report on Evaluating the Housing Market Since the Great Recession. It opens,

From December 2007 to June 2009, the U.S. economy lost over 8.7 million jobs. In the months after the recession began, the unemployment rate peaked at 10 percent, reaching double digits for the first time since September 1982, and American households lost over $16 trillion in net worth.

After a number of economic stimulus measures, the economy began to grow in 2010. GDP grew 19 percent from 2010 to 2017; the economy added jobs for 88 consecutive months – the longest period on record – and as of December 2017, unemployment was down to 4 percent.

The economy has widely recovered and so, too, has the housing market. After falling 33 percent during the recession, housing prices have returned to peak levels, growing 51 percent since hitting the bottom of the market. The average house price is now 1 percent higher than it was at the peak in 2006, and the average annual equity gain was $14,888 in the third quarter of 2017.

However, in some states – including Illinois, Nevada, Arizona, and Florida – housing prices have failed to reach pre-recession levels, and today nearly 2.5 million residential properties with a mortgage are still in negative equity. (4, footnotes omitted)

By the end of 2017, ” the most populated metro areas in the U.S. remained at an almost even split between markets that are undervalued, overvalued and at value, indicating that while housing markets have recovered, many homes have surpassed the at-value [supported by local market fundamentals] price.” (10) This even split between undervalued and overvalued metro areas is hiding all sorts of ups and downs in what looks like a stable national average.  You can get a sense of this by comparing the current situation to what existing at the beginning of 2000, when 87% of metro areas were at-value.

And what does this all mean for housing finance reform? I think it means that we should not get complacent about the state of our housing markets just because the national average looks okay. Congress should continue working on a bipartisan fix for a broken system.


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.

*     *     *

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.

*     *     *

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.

*     *     *

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.

*     *     *

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.


How Are First-Time Homebuyers Doing?

photo by designmilk

Genworth Mortgage Insurance Corporation released a a First-Time Home Market Report.  The big news from the report is that first-time homebuyers purchased fifteen percent more single-family homes in 2016 than in 2015.  The 2 million homes purchased in 2016 was the most since 2006, before the financial crisis. This is a positive sign for the housing market and for the homeownership rate which has fallen to long-time lows since the financial crisis. The Executive Summary reads,

First-time homebuyers represent an important segment of the housing market, generating significant revenue to real estate agents, homebuilders, and the mortgage finance industry. In this report, we adopt the Department of Housing and Urban Development (HUD) definition of first-time homebuyers as homebuyers who did not own a home in any of the prior three years  . . . Compared to repeat homebuyers, first-time homebuyers play a more pivotal role in influencing housing inventory and home prices because they represent the shift of housing demand from rental to owner occupancy. Despite this well-recognized dynamic, there has been limited data available on the first-time homebuyer market, starting with market size. In this report, we estimate the size of the first-time homebuyer market going back to 1994 using a combination of government and mortgage industry data—20.1 million actual first-time homebuyers were identified. This data provides a historical perspective on the first-time homebuyer market as well as important recent trends. (2)

The report’s key findings include,

1. Between 1994 and 2016, first-time homebuyers purchased on average 1.8 million single-family homes each year, accounting for over one in three of all single-family homes sold, and 45 percent of the purchase mortgages originated.

2. First-time homebuyers have led the housing recovery, contributing over 60 percent of the sales growth in the housing market over the past five years and 85 percent of the growth in the past two years. The resurgence of the first-time homebuyer market has contributed to very tight housing supplies and accelerating home prices, especially at the “low” end of the housing market.

3. During the Housing Crisis, the number of single-family homes sold to first-time homebuyers saw a peak to trough decline of 900,000 units (43 percent) – reaching a trough of just 1.2 million units in 2011. Over the last 10 years, the housing market has seen 3 million fewer first-time homebuyers in aggregate compared to the historical average.

4. The first-time homebuyer market stagnated during the historic housing expansion of the 1990s and early 2000s, leading to a decline in first-time homebuyer mix. Instead, it was repeat homebuyers, including second-home buyers and investors, who led the surge in housing activity.

5. The expansion of government lending programs and the implementation of the first-time homebuyer tax credit provided temporary support to first-time homebuyers. Between 2008 and 2010, first-time homebuyers represented 35 percent of all single-family home sales, which is close to its historical average. However, the percentage of single-family home sales to first-time homebuyers declined once the tax credit expired, and stayed below 30 percent for these three years.

6. First-time homebuyers have always demonstrated a greater need for low down payment mortgage products. Between 1994 and 2016, 73 percent of first-time homebuyers chose such products compared to 30-50 percent for repeat homebuyers. Mortgage products with a lower down payment will likely have a higher first-time homebuyer mix.

7. Private mortgage insurance and FHA (government-backed mortgage insurance) are the two leading products for first-time homebuyers and have together accounted for close to 1 million first-time homebuyers a year since 1994. They have played a key role in reviving the first-time homebuyer market in the current recovery, accounting for approximately 80 percent of its growth in the past two years.

8. First-time homebuyers purchased 2 million single-family homes in 2016, 15 percent more than 2015 – and the most since 2006. During the first quarter of 2017, there were more first-time homebuyers than any other year since 2005. A total of 424,000 single-family homes were sold to first-time homebuyers, up 11 percent from a year ago, and accounting for 38 percent of all single-family home sales. (3)

The Rental Crisis and Household Formation


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.

Homeowner Nation or Renter Nation?

Andreas Praefcke

Arthur Acolin, Laurie Goodman and Susan Wachter have posted a forthcoming Cityscape article to SSRN, A Renter or Homeowner Nation? The abstract reads,

This article performs an exercise in which we identify the potential impact of key drivers of home ownership rates on home ownership outcomes by 2050. We take no position on whether these key determinants in fact will come about. Rather we perform an exercise in which we test for their impact. We demonstrate the result of shifts in three key drivers for home ownership forecasts: demographics (projected from the census), credit conditions (reflected in the fast and slow scenarios), and rents and housing cost increases (based on California). Our base case average scenario forecasts a decrease in home ownership to 57.9 percent by 2050, but alternate simulations show that it is possible for the home ownership rate to decline from current levels of around 64 percent to around 50 percent by 2050, 20 percentage points less than at its peak in 2004. Projected declines in home ownership are about equally due to demographic shifts, continuation of recent credit conditions, and potential rent and house price increases over the long term. The current and post WW II normal of two out of three households owning may also be in our future: if credit conditions improve, if (as we move to a majority-minority nation) minorities’ economic endowments move toward replicating those of majority households, and if recent rent growth relative to income stabilizes.

This article performs a very helpful exercise to help understand the importance of the homeownership rate.  This article continues some of the earlier work of the authors (here, for instance). I had thought that that earlier paper should have given give more consideration to how we should think about the socially optimal homeownership rate. Clearly, a higher rate, like the all-time high of 69% that we had right before the financial crisis, is not always better. But just as clearly, the projected low of 50% seems way too low, given long term trends. But that leaves a lot of room in between.

This article presents a model which can help us think about the socially optimal rate instead of just bemoaning a drop from the all-time high. It states that

Equilibrium in the housing market is reached when the marginal household is indifferent between owning and renting, requiring the cost of obtaining housing services through either tenure to be equal. In addition, for households, the decision to own or rent is affected by household characteristics and, importantly, expected mobility, because moving and transaction costs are higher for owners than for renters.  Borrowing constraints also affect tenure outcomes if they delay or prevent access to homeownership. (4-5)

This short article does not answer all of the questions we have about the homeownership rate, but it does answer some of them. For those of us trying to understand how federal homeownership policy should be designed, it undertakes a very useful exercise indeed.

The State of the Foreclosure Crisis

Rob Pitingolo of the Urban Institute issued State of the Foreclosure Crisis: Past the Peak but Not Recovered. It opens,

Much attention has been given to statistics that show new foreclosure activity nationally has slowed over the past few years. When it comes to metropolitan area markets, however, some have gotten worse, while others have stagnated. It is not simple enough to declare an end to the foreclosure and delinquency crisis when there are as many as a quarter (25%) of metro areas that have not yet begun their recovery. (1)

It continues,

the rate of 90 day or more delinquency steadily fell in 2010 and 2011, ending at 3.1% in September 2013. In contrast, the foreclosure inventory only turned the corner in mid -2012, and is still higher than the March 2009 level at 4.5%, around seven times the pre-crisis level. Historically, a foreclosure inventory under 1% is what we would expect in “normal” market conditions.” (1, footnote omitted)

It concludes, “attention must be paid to individual metropolitan housing markets. Some are in much better shape than others; and some have made great strides since the peak of serious delinquency in December 2009. However, it may be premature to declare the problem is “ending” until all metro area markets show signs of recovery.” (2) The report identifies the starkest differences in metro areas:

Three geographic regions were hard hit at the beginning of the foreclosure crisis: California metros, Florida metros, and “Rust Belt” metros (those in Midwest states like Ohio, Michigan and Indiana). All three of those regions have seen solid improvements since December 2009.

On the other hand, the Northeast has generally performed poorly in the past several years. Serious delinquency rates in major metropolitan markets like New York City, Philadelphia and Baltimore have all worsened since December 2009. Other metro areas in New York like Buffalo, Rochester and Syracuse have similarly struggled, as have metro areas surrounding New York like New Jersey and Connecticut. (5)

The report concludes with a call for a nuanced response to the current state of the foreclosure crisis:  “communities need strong examples to build upon, rigorous data and analysis, and a commitment to evidence-based policymaking that strives toward the best fit between policy solutions and policy problems.” (6) This seems like the right call and the appropriate response to headlines that report the national trend without mentioning the variations among metro areas.