Household Formation a Function of Immigration & Employment

The Joint Center for Housing Studies at Harvard University has issuedrnits annual report on the State of the Nation’s Housing.  The 2010 version focuses on housing up to thernend of the first quarter of 2010 which, in today’s volatile market makes muchrnof what it says not only old news, but largely irrelevant.  </p

The report charts the on-off,  up-down nature of the recovery as it relatesrnto home sales, home prices, and delinquencies and foreclosures as well as publicrnefforts to assist the markets. What has not received as much attention fromrnother sources is the report’s conclusions on household formation (headshiprnrates,) and income.</p

The report notes that, “after at least three decades of progress,rnreal median household incomes will almost certainly end the 2000s lower thanrnthey started.”  The median incomernfor all households, which was $52,400 in 2000, had dropped to $49,800 by 2008.  “Even at their last cyclical peak inrn2007, real median incomes were 1.2 percent below 2000 levels.”</p

At the same time, household wealth which ballooned during the middle ofrnthe decade ended about where it had started, approximately $54 trillion.  On a per household basis, however, realrnwealth dropped from $503,500 to $486,600 over the decade.  This was due both to a drop in stock values,rnwhich is recovering and to housing wealth which will be slower to bounce back. Inrnspite of what the report calls “painful foreclosure-drivenrndeleveraging,” mortgage debt is higher than it has ever been in relationrnto home equity.  “After an $8.2rntrillion plunge in housing wealth since the end of 2005, mortgage debt enteredrn2010 at 163 percent of home equity.”</p

While three major federal surveys, the American Community Survey,rnCurrent Population Survey, and Housing Vacancy Survey indicate that householdrngrowth, impacted by the recession, has slowed substantially in the second halfrnof the decade.  The JointrnCenter, however, says that the reality could be even worse because householdrngrowth estimates depend heavily on net immigration which is difficult to assessrnin a recession.  The cause of the growthrnslowdown is also hard to determine; is it due to reduced immigration or tornlower headship rates because families are doubling up.</p

The depressed headship rates, however, may not remain so for long givenrnthe increased affordability of both homes for first-time buyers and rents, andrnthe report states an expectation that household growth will return to long-termrntrend levels when employment also regains its footing. Even if immigrationrnfalls to half the rate projected by the Census Bureau, household growth willrnaverage about 1.25 units annually which would put growth over the next 10 yearsrnon a par with 1995-2005.  At the higherrnend of immigration estimates there could be an annual increase of 1.9 millionrnhouseholds.</p

But, even if immigration ground to a halt today, the report says, pastrninflows and higher fertility rates ensure that minorities and the foreign bornrnwill increasingly drive growth in housing demand.  In 2009, minorities accounted for 37 percentrnof householders aged 25-44 and 39 percent of those under 25.  Even in a zero-immigration scenario, thernminority share of the working age population will rise from 29 percent at the beginningrnof the century to almost 35 percent in 2020. rnMinority households, however, have lower median incomes than whiternhouseholds – in the 35-44 year age group the differential is $45,000 vs.rn$72,900.  If these disparities persistrnand overall income growth among younger people remains flat, the socialrnsecurity system will come under increasing pressure as baby boomers enterrnretirement age.</p

From a policy standpoint, the Center expects that, as housing recoversrnhomeowners and renters alike will suffer stress.  While some lost wealth will return, risingrnprices will put additional strain on households already experiencingrnaffordability challenges.  40.4 millionrnhouseholds spent more than 30 percent of their incomes on housing in 2008 andrnfor 18.6 million that figure was more than 50 percent.  Of those with the most severe housing costsrnburdens, nearly half are renters in the bottom income quartile.  Many householders with incomes one to threerntimes minimum wage are still spending at least half their income on housing</band, despite federal support for rental assistance of about $45 billion perrnyear, only about one-quarter of eligible renter households report receiving anyrnhousing assistance.</p