Despite lagging job growth, demographic trends point to an increase in housing demand and the long-awaited beginning of a recovery, researchers with the Joint Center for Housing Studies of Harvard University concluded in their latest annual "State of the Nation’s Housing" report.
"With demand reviving and inventories of homes for sale depleted, home prices may well find a bottom this year. Moreover, stronger sales should pave the way for a pickup in single-family construction over the course of 2012," the report said.
"Nevertheless, a number of conditions may keep the recovery in the owner-occupied market relatively subdued. The backlog of roughly two million loans in foreclosure means that distressed sales will remain elevated, keeping prices under pressure.
"Another 11.1 million homeowners owe more on their mortgages than their homes are worth, which dampens both sales of new homes and investment in existing units. And despite recent declines, the number of vacant homes is still well above normal, limiting demand for new construction in many markets."
The number of new homes built between 2002 and 2011 was at its lowest level in any decade-long period since the early 1970s, researchers said. Therefore, excess housing supply is not due to overbuilding, they said, but rather to an imbalance on the demand side: average annual household growth between 2007 and 2011 was 568,000 — less than half the rate in the first half of the 2000s.
The researchers attributed the drop to a decline household formation, particularly among those under age 35, and a sharp decrease in immigration — both largely due to the latest recession. Though the U.S. has seen 19 straight months of employment gains, to 3.7 million jobs, when compared to the 8 million or so jobs lost in the recession, jobs growth remains weak.
"As 2012 began, the ingredients needed to spark more normal household growth were still not in place. In particular, the unemployment rate remained elevated, and in fact would have been even higher if so many discouraged workers had not exited the labor market," the report said.
But in the long run, the size and age structure of the adult population are the most important drivers of household growth, researchers said.
"Assuming the economic recovery is sustained in the next few years, the growth and aging of the current population alone — including the entrance of the echo boomers into adulthood — should support the addition of about 1 million new households per year over the next decade," the report said.
"The biggest unknown is the contribution of immigration to overall population growth. But even assuming net inflows are roughly half the level in the Census Bureau’s 2008 projection, the Joint Center for Housing Studies projects household growth should still average 1.18 million a year in 2010-20."
According to Gary Painter, director of research with the University of Southern California Lusk Center for Real Estate, the aging of the nation’s immigrant population will drive long-term housing recovery, even if unemployment remains high.
Though immigrants tend to produce fewer households per person due to a higher rate of household sharing, over time household formation rates historically return to normal levels regardless of job growth, according to Painter’s analysis of national and regional economic data from 1965-2011.
"Due to these demographic shifts, housing demand will come back, even if the job market remains weak. While there’s little evidence that national homeownership rates will rise in the short term, the maturing of the immigrant population supports a much better long-term outlook," Painter told attendees of the 2012 PCBC homebuilders conference last week.
Baby boomers — the oldest of whom turned 65 last year — will play a smaller role in boosting housing demand in the coming years than their children, the echo-boom generation, researchers said. Though definitions of this generation vary, the report considered those under age 25 in 2010 to be echo boomers.
"Over the next 20 years, the echo boomers have the potential to spur new home demand to an even greater extent than their parents did beginning in the 1970s," the report said.
"The good news for housing production is that this new generation already outnumbers that of the baby boomers at the same ages. With even a modest lift from immigration, the echo-boom generation will grow even larger as its members move into the prime household formation years."
Echo boomers are the most racially and ethically diverse generation the country has ever seen. Researchers project minorities will make up more than 70 percent of net household growth between 2010 and 2020.
"Both the housing industry and the mortgage market will need to find ways to adapt to this impending shift in housing demand," the report said.
While the for-sale market will likely remain temperate in the coming years, demographic trends are expected to keep the rental market robust. Between 2000 and 2010, the number of renters nationwide rose by 5.1 million — the largest 10-year increase in at least six decades.
"In part, this growth reflects disproportionate shares of young, minority, and lower-income households, who are traditionally more likely to rent," researchers said.
"But the foreclosure crisis and the aging of the population have also spurred increases in renting among the middle-aged, as well as households that are white, married, and have moderate incomes."
Because the recession depressed the rate at which echo boomers formed their own households, the economic recovery is likely to further lift the rental market as members of this generation strike out on their own, the report said. According to an apartment price index, rent prices rose 10 percent year over year in fourth-quarter 2011, researchers said, and an increase in multifamily starts is boosting the construction industry.
"Rapidly rising demand has pushed rental vacancy rates down across the country, sparking widespread rent increases," the report said.
The national homeowership rate dipped to 66.1 percent in 2011, down 2.9 percentage points from its 2004 peak, though still above rates seen in the 1980s and first half of the 1990s. The decline was concentrated in age groups under 65 who either chose to rent instead of own or were forced to by foreclosure, researchers said.
"Indeed, the national rate remains relatively strong both because the ranks of households with heads aged 65 and over are growing and because homeownership rates among this age group are near record highs, the report said.
"While rates for younger households may fall further in the next few years, the aging baby boomers will help to mitigate the impact on the national homeownership rate."
The latest figures concerning sales and prices of new and existing homes as well as an increase in housing starts have signaled a somewhat tepid housing recovery underway with a bottom in home prices likely this year — a view that economists have largely embraced.
"Despite the many factors restraining the recovery, other trends — including steady employment growth, depleted inventories of for-sale homes, and a surge in sales and construction activity — make the housing market outlook significantly brighter than a year ago," the report said.
"Sharply lower home prices and interest rates, along with improving labor markets, are raising hopes that new and existing home sales will continue to gain momentum. With inventories of for-sale homes so low, a sharp increase in demand could help prices firm."
Obstacles remain, however. "The overhang of excess units held off market, elevated vacancies within the for-sale stock, and the long pipeline of foreclosures will limit the need for new single-family construction," the report said.
"And three years after the official end of the Great Recession, there are still more than 20 million US workers either unemployed or underemployed, millions of households with negative equity in their homes, and millions more seriously delinquent on their loans or already in the foreclosure process.
"On balance, then, the sheer depth of the downturn and scale of the mortgage debt overhang mean that it will be some time before a robust housing market recovery is at hand."
The share of seriously delinquent loans — those 90 days or more overdue — fell to 3.1 percent nationally in the first quarter from 5.1 percent at the end of 2009, researchers said.
"At the same time, though, the backlog of loans in the foreclosure process has only edged down from 4.6 percent to 4.4 percent. Since nearly three-quarters of these borrowers have not made a mortgage payment in more than a year (and 42 percent have not done so in two years), most will ultimately forfeit their homes," the report said.
"Even if younger households pick up the pace of homebuying, working off the backlog of foreclosures is likely to keep homeownership rates on the decline in 2012," the report added.
Low demand for new construction has contributed to widespread weakness in hiring — the key to sustained household growth and therefore to the for-sale market, the report said. Between 2006 and 2010, declines in home construction and improvement spending have pulled down gross domestic product (GDP) in all but three quarters, researchers said.
"Since 2011 began, however, home construction and improvement spending have made a positive contribution to GDP in four out of five quarters," the report said.
"With multifamily construction already on the rise, even modest increases in the number of single-family starts — together with stronger sales of existing homes and associated investment in improvements — will bolster economic growth and, in turn, the housing sector."
Both new-home and existing-home for-sale inventory has declined recently, helping to stabilize home prices. In March, new-home inventory was down to the lowest level in nearly five decades at just 143,000 units — a less than six-month supply. Inventory of existing homes in first-quarter 2012 was 6.2 months — down to its lowest level since 2006.
Despite these for-sale inventory drops, the increasing supply of vacant units held off the market is a "potential drag on the housing recovery," researchers said. They estimated there are now more than 1.2 million such units.
"When these units come on the market, they could exert even more downward pressure on home prices," the report said.
"For now, though, the decline in vacant units for sale is helping to put a bottom under prices, while the decline in vacant units for rent has begun to spark rent increases in many markets."
Citing nearly-flat year-over-year home price figures from CoreLogic in March, researchers said, "While too soon to tell with confidence, the worst may be over."
Nevertheless, researchers stressed that overly restrictive credit standards are preventing many would-be homebuyers from benefiting from historical affordability and record-low mortgage interest rates. Citing results from the Federal Reserve’s survey of senior loan officers, researchers noted that banks "have tightened underwriting standards every quarter from late 2006 through mid-2010, with very little easing since then."
While the overall denial rate for conventional home purchase loan applications rose from 15 percent to 17 percent between 2004 and 2010, that increase does not reflect varying denial rates by type of borrower, researchers said.
"In fact, loan application denial rates for Hispanics were up eight percentage points (from 19 percent to 27 percent) over this period, while those for blacks jumped 15 percentage points (from 23 percent to 38 percent)," the report said.
"In contrast, rates for white borrowers climbed just three percentage points (from 12 percent to 15 percent). The small increase in the overall denial rate reflects the fact that whites made up 52 percent of applicants in 2004 but 67 percent in 2010."
Furthermore, many households with tarnished credit may not even apply for mortgages for fear of higher borrowing costs or of not qualifying at all. Citing figures from CoreLogic, researchers noted that home purchase loans to borrowers with credit scores below 620 had fallen 93 percent between 2008 and 2011 compared to a 30 percent decline to borrowers above that score in that time period.
"The availability of mortgage financing for young buyers with limited cash, other debts, and less than stellar credit is far from certain. Since the market meltdown, underwriting has become much more restrictive," the report said.
"So far, (the Federal Housing Administration) and state housing finance agencies have served a vital role in supporting low-down payment loans for homebuyers with all but the lowest credit scores. But even FHA is now raising its premiums to shore up its financial position and to encourage the return of private capital to the market.
"With key mortgage lending regulations still undefined, it remains to be seen to what extent and under what terms lenders will make credit available to lower-income and lower-wealth borrowers."
Lending has also dropped at the neighborhood level, particularly in areas hardest-hit by foreclosures. Citing data from Lender Processing Services (LPS), researchers noted that mortgage lending fell 26 percent in "minimally distressed" neighborhoods between 2004 and 2010, compared to 56 percent in "moderately distressed" neighborhoods, and 74 percent in the "most distressed" neighborhoods.
"The blight in these neighborhoods is likely to linger for years to come. Moreover, without access to credit, many current owners in these communities are unable to fund home improvements or refinance into more affordable mortgages, while potential buyers are locked out of ownership," the report said.
