Rental Demand Brightens Dark Housing Outlook

The gloomy picture painted by The State of the Nation’s Housing reportrnreleased yesterday by Harvard’s Joint Center on Housing Studies has but onernbright spot – the improving rental housing market. </p

On virtually every other level it appears thatrna housing recovery is still months if not years away. Rather than leadingrnthe country out of the recession as it has done in prior downturns, the housingrnindustry is holding back economic growth. The report details a number of housingrnareas where, rather than the outlook improving as the economy began to pick up,rnthings actually got worse.</p

First of all,rnhousehold growth has dropped precipitously since 2007.  In the four years since, an average ofrn500,000 new households have formed each year compared to the 1.2 million annualrnpace averaged between 2000 and 2007. rnThis is even more disheartening as the “echo boomer” generation, thosernborn after 1986, is the largest generation in our history to reach its 20s,rnpeak household formation years.   Instead of forming households, many in thisrnage group have stayed in or returned to their parents’ homes.  At the same time, for the first time inrndecade the rate of immigration as slowed. <bFrom 2004 to 2007 the number of new households headed by foreign born citizensrnincreased by 200,000 per year but since 2007 the number foreign-bornrnnon-citizen households have declined by the same amount.  </p

The rental and the homeowner market haverndiverged.  There has been a net shift ofrn1.4 single family homes from owned to rental property between 2-007 and 2009,rnalmost twice as many as in the previous two year period.  Still, rental vacancies are down, droppingrnfrom about 3.5 million to less than 2 million between 2009 and 2010, and rentsrnhave begun to move up.  At the same time homeowner vacancies, which dropped from over 9.5 million in 2008 tornabout 7.8 million in 2009 has declined only fractionally since even though newrnhome construction has slowed considerably and banks appear to be holding largernnumbers of foreclosed homes off of the market. rnStill, housing prices, unlike rents, have resumed their decline. Unusually large numbers of householdsrnare switching from owner to renter and the ownership rate has fallen from 69rnpercent in 2004 to 67 percent in 2010.  Thernreport says that the continuing foreclosures and reluctance on the part ofrnowners to buy as long as prices are unstable will cause home ownership torncontinue its decline through 2011.  </p

The Harvard report cites a Fannie Maernstudy showing that while attitudes toward homeownership have become morernnegative over the last few years, 74 percent of renters and 87 percent of therngeneral population still view homeownership as safe investment.</p

While many households aspire tornhomeownership, tightened underwriting standards may stand in their way and thernreport speculates that the proposed 20 percent down payment requirement forrnqualified residential mortgages could sharply curtail homeownership unless thernborrower obtains a government guarantee. rn”Over the longer term, it is unclear how the impending reform of thernhousing finance system, (…) will influence the cost and availability ofrnmortgage loans.</p

The number of rental householdsrnaccelerated in the second half of the last decade, swelling by an estimated 3.9rnmillion between 2004 and 2010 but rental vacancy rates increased and rents fellrnduring the same period as new units were added and homes were converted fromrnownership to rentals.  In 2010, however,rnthe rental market moved into high gear and the vacancy rate dropped from 10.6rnpercent to 9.4 percent over the course of the year.  MPF Research reported vacancy rates below 5rnpercent in almost one third of the 64 markets it studied and more than half hadrnrates below 6 percent.   As vacanciesrndeclined, rents rose.  Rents inrnprofessional managed apartments were up 2.3 percent last year with most of therngrowth in metropolitan areas.  As employmentrngrows, especially among younger persons, and homeownership continues to declinernthere will be pressure on the rental market, pushing rents up and encouragingrnmulti-family construction.   Given therntime line for new construction, however, rents are likely to remain tight inrnthe short term and will present increased affordability challenges forrnlow-income renters.</p

There is much uncertainty in the marketrnregarding access to mortgage credit, home buying attitudes, immigration trendsrnand laws, and household formation, but there is certainty about some factorsrnrelated to demographics.  It is knownrnthat the aging baby boomers will drive up the number of older households byrnsome 8.7 million by 2020.  This tends notrnto be a mobile population and will provide “ballast” for the owner market,rnoffsetting in part the lower homeownership rates among younger households.</p

While the senior population is likely tornage in place, if boomers follow the pattern of the preceding generation somern3.8 million will downsize their homes over the next ten years, lifting demandrnfor smaller housing units and having a major impact on the housing markets inrnpreferred retirement destinations.  Thernlarge pre-boomer population will create a similar demand for assisted andrnindependent living developments. </p

The echo-boomer generation will have arnless predictable impact on housing markets. rnThere are questions involving their homeownership attitudes and the netrnimpact of immigration.  There is reasonrnto believe that this generation will be large enough to boost householdrnformation and the demand for starter homes and apartments.  The report states that if household formationrn(headship) rates return to their pre-recession average and if immigration isrnjust half of what the Census Bureau projects, the number of households underrnage 35 will grow to nearly 26.5 million in the next decade.</p

Affordability is another challengernfacing the housing market.  In 2009 10.1rnmillion renters and 9.3 million owners paid more than half their income forrnhousing.  While this hits low-income householdsrnthe hardest, households with incomes under $15,000 pay over 80 percent of theirrnincomes for shelter, the cost pressures have been moving up the incomernscale.  Households earning $30 to $45rnthousand increased the proportion of their incomes spent on housing from 30rnpercent to 40 percent over the ten year period ending in 2010.</p

The recent crash has wiped out householdrnwealth, ruined credit ratings and devastated communities with foreclosures andrnhas left nearly 15 percent of homeowners in homes that are “under water”.  This has reduced the amount that owners canrncash out of their homes by selling or refinancing.</p

The report concludes by saying that thernstrength of the housing recovery, when it does finally occur, will depend on howrnfully employment bounces back, and then local markets will revive in proportionrnto the increase in jobs, the depths housing fell during the recession, and the amountrnof overbuilding that occurred before the downturn.  But the most critical factor for housingrnrecovery in the resumption of household growth and it may be that thernunemployment rates on top of the long-term housing affordability issues mayrnhave lowered the baseline trend of household growth itself.  “To match the 1.12 million annual raternaverage in the 2000s, household formation rates must return to their 2007-2009rnaverage and net immigration must reach at least half of Census Bureaurnprojections,” the report says.</p

In the near term it will be rentalrnmarkets that are likely to lead the housing recovery, but once consumers decidernthat a floor has formed under house prices, their reentry into the market couldrnquickly burn through the lean inventory of unsold new homes and reduce thernexcess supply of existing homes on the market. rnThere is also the danger that government programs to address rent affordabilityrnand assisting distressed neighborhoods will feel the budget axe just asrnaffordability problems are escalating. </p

Related MND comments….</p

From: HUD Focused on Rebuilding America’s Dilapidated Housing Inventory</p

“Take note of HUD-sponsored initiatives aimed at rebuilding America’s dilapidated housing stock.” says MND’s Managing Editor Adam Quinones. “This is where housing professionals will find the most opportunity in years ahead.  The FHA should reopen the 203(k) program to investors if they want to encourage private investment in the U.S. housing market.”</p

From: Home Remodeling a Forward Indicator of Housing Bottom?</p

“With so many foreclosed properties sitting empty on the market we can expect remodeling and rehabbing to be a leading indicator of a bottom inrn the housing market”, says MND’s Managing Editor Adam Quinones. “We already know there is dearth of affordable rental housing</a available to low income renters. From that perspective, FHA should open its 203(k) program to investors if they want to accomplish their affordable housing goals."</p

READ MORE: Affordable Housing Units Needed for Low Income Renters</b