Housing Improving but Rental Crisis Looms

The U.S. housing recovery should regain itsrnfooting, but also faces a number of challenges. rnTight credit, still elevated unemployment, and mounting student loanrndebt among young Americans are responsible for moderating growth and keepingrnmillennials and other first-time homebuyers out of the market according to thernlatest edition of The State of the Nation’srnHousing released today by the Harvard Joint Center for Housing Studies.</p

 “The housing recovery is following thernpath of the broader economy,” says Chris Herbert, the Center’s researchrndirector. “As long as the economy remains on the path of slow, but steadyrnimprovement, housing should follow suit.”</p

The report takes an in depth look at the housingrnmarkets and their demographic drivers, homeownership, rental housing, andrnfinally the challenges facing housing.    We will briefly summarize the report’srnfindings here then report on each of the above categories in greater detailrnover the next few days.  </p

The report notes that even though housingrnstarted out 2013 with a bang the market slowed noticeably in the second half ofrnthe year as home starts and sales of both new and existing homes slowed.  Higher interest rates following the FederalrnReserve announcement that it was considering tapering its purchases of long-term andrnmortgage-backed securities was partially to blame as were the retreat ofrninvestors from the market, limited inventories of homes for sale and affordabilityrnissues following rapid home price increases. rnBut the report says the slow recovery of single-family housing largelyrnreflects the steady but unspectacular return of jobs. </p

Household growth has remained subdued both as arnresult of a slowdown in immigration and lower headship rates among thernmillennial generation, many of whom continue to live in their parents homes.  It was hoped that many of the latter grouprnwould move out and form their own households once the labor marked revived butrnit has not yet happened.  Still it isrnlikely that the current generation will follow historic patterns and formrnhouseholds by their early 30s, providing a strong lift to the rental andrnstarter home markets.</p

Homeownership rates declined for the ninthrnstraight year in 2013 and are at their s lowest levels since 1995, but therndecrease last year was the smallest since before the housing crash.  The Joint Center sees many of the conditionsrnholding homeownership down as improving; steady employment growth, rising homernvalues creating a sense of urgency, and a lower share of distressed homeowners.</p

Still the homebuying market faces headwinds;rnhigher home prices and interest rates making a purchase more of a stretch forrnmany families as is falling income.  Inrnaddition, many would-be homebuyers are burdened with huge levels of studentrndebt.  Adding to these financialrnpressures, qualifying for mortgage loans is still a challenge-especially for those with lower credit scores.</p

Rental markets continue to be strong.   Thernnumber of renter households rose last year, and while the rate of the growth isrnslowing it still remains above long-term averages.  With this demand vacancy rates continued tornfall and rents to rise  Nationwide rentsrnrose 3 percent in 2012 but in some markets, generally the ones that have also seenrnrapid rises in home prices like Denver and the San Francisco Bay area, thernincrease has averaged twice that. </p

The ramp-up in multifamily construction also continued inrn2013; starts increased 25 percent, surpassing the 300,000 mark the first timernsince 2007.  The number of these unitsrnintended as rentals was at the highest level since 1998.  While multifamily construction in almost halfrnof the 100 largest metros is back to average 2000s levels and has set new peaksrnin some markets those areas that experienced the sharpest booms and bustsrnremain depressed.</p

From 2010 through early 2012 apartments in investment gradernproperties seemed to be renting faster than new units were added, bringing downrnvacancies and lifting rests. Supply and demand appear to have returned tornbalance in the last quarter of 2013.  </p

The report says however there is a crisis of affordability.  The share of cost-burdened renters (thosernpaying housing costs in excess of 30 percent of their income) rose every yearrnbut one between 2001 and 2011 and now is over 50 percent.  More than a quarter of households are severelyrncost burdened with half or more of their income spent on shelter. On thernhomeowner side the situation has improved as owners have refinanced at lowerrnrates and many have existed homeownership because of foreclosures. However thernshare of cost-burdened homeowners it still higher than at the beginning of thernlast decade.  </p

Looking ahead, the Center says the future course ofrnhomeownership will depend largely on the cost and availability of mortgagernfinancing.  Looser underwriting standardsrnmay help bolster the housing market recovery and the government appears to berntaking steps to buoy the market with newly announced programs to lower FHArnpremiums, provide homebuyer counseling, and encourage lending to properlyrndocumented lower credit score buyers</p

The Center, however, views the prospectsrnfor improving rental housing affordability as bleak.  Absent income growth or an easing of rents, rental assistance is the only option.rnWithout expanded federalrnfunding to aid the neediest households, millions  of  US  familiesrn andrn individualsrnwill continue to live in housing that they cannot afford or that is inadequate, or both.

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