Concerns about rising mortgage rates may be overblown. “We’ve seen so much elasticity, over the past few years; rates go up but then they just come down.” Mollie Carmichael, Meyers Research
TOP STORY: Logjam
Freddie Mac says there are three phases of homeownership. The first-time buyer who is saving up and shopping for a small two, or three-bedroom home. Their main concerns are budget, lifestyle, and proximity to amenities. Next is the move-up purchaser. They are driven by the needs of a growing family, career considerations, or the financial ability to afford a better location or more amenities.
Last is the downsizer, typically an empty nester or someone settling into retirement? These buyers are often motivated by climate, the desire to move closer to adult children, better community resources, or issues around aging.
These are phases, but they are also symbiotic. First-time buyers must buy from those who are ready to move up or move on and those in turn must have somewhere to go – a larger existing home, a newly constructed one offering more amenities, or one in a different location. Both the mover and the downsizer also need someone to bail them out once they decide to sell.
If large numbers of persons in each phase of homeownership don’t play their part, the system flounders, and right now that is the case for all three. There are logjams at each stage, although there are also a few hopeful initiatives to clear them.
Bars to Entry
Homeownership among those who traditionally would be buying their first homes is at historic lows, partly because their generation has faced unusual hurdles, the Great Recession put many of them back under their parents’ roof, living with roommates or remaining in school. The economy improved, but many were left with a load of student loan debt.
A Federal Reserve study found a 9-point difference in the homeownership rate among household heads aged 24 to 32 in 2005 and this same age group in 2014. Over that same time frame, per capita student debt levels doubled from $5,000 to $10,000.
Because it can be difficult to separate out the benefits gained from postsecondary education from the disadvantage of student debt, the Fed researchers modeled the effects of giving the earlier group today’s generation’s debt. They concluded that 400,000 additional individuals would have purchased a home in 2014 without that burden. They also found that every $1,000 increase in debt caused a 1 -to-2- point drop in an individual’s likelihood of homeownership. The debt reduces the ability to qualify for a mortgage but also diminishes the ability to save for a downpayment.
Other factors facing the entry-level buyer have not improved as much post-recession, as might be expected. Even though the nation has been at pretty much full employment for several years, and specific skills are in high demand, many young people earn wages that, when adjusted for inflation, are not much higher than their parents earned at the onset of adulthood. Perhaps this is why The Urban Institute (Ul) found that a lot of this generation is still living with their parents. The share of those aged 25 to 34 who are still living “at home” has increased from 11.9% in 2000 to 22.0% in 2017, representing an additional 5.6 million young adults who have not “launched.” This trend matches the 13% decline (to 40.0%) of those who have married, one of the trigger events for home buying. Metropolitan statistical areas (MSAs) with higher unemployment rates had even a greater increase in young adults living with parents.
Additionally, most consumer studies identify a segment of young adults who, at least at this stage of life, have little interest in owning a home. They indicate a preference for renting because of their lifestyle, the perceived cost of home- ownership, or because it isn’t the right time to become a homeowner.
Movin’ On Up
The second phase of homeownership, existing homeowners, are probably in their middle years. They have a variety of reasons for changing their address and a slew of things that may hold them back.
While the headline the last few years has been skyrocketing home prices, there are a lot of neighborhoods or whole communities where homes lost value during the housing crisis and appreciation since has been relatively flat. Thus, quite a few homeowners remain in negative equity and many others lack the equity to swing purchasing a new home. Even those with equity to leverage may find they can’t improve on their current situation with a mortgage payment they can afford. Also, while demand is strong in most areas, some existing homeowners may find few entry level buyers interested in their homes.
Many existing homeowners refinanced, some did so serially, and have interest rates in the 3-4% range. For some, giving up a low rate they can no longer replicate, is a psychological barrier to moving on. Other people are rooted in place by family or community ties; unable to find a more appropriate home without changing school districts or within an acceptable commute to family, friends, or their job. The National Association of Realtors (NAR) in fact says owners are staying in their homes an average of 10 years. That is tied for the longest tenure since NAR first tracked it in 1985.
Today’s senior homeowners are better educated, healthier, and more active than earlier generations. A 2017 Freddie Mac survey found that two – thirds of homeowners over age 55 planned to “age in place.” Remodeling statistics show that many are finding ways of doing so; altering their homes to make it possible.
Grandma would be pleased; her design choice, with a lot of modifications, is back. Wallpaper is popular again.
But not the dainty floral or striped patterns of her day. Some are funky patterns ala Andy Warhol and oversized, bold geometries and florals are popular. A rainbow of saturated hues is over pale neutrals Designers caution discretion. They say too much wallpaper makes a house dizzying. It is used best in entryways, powder or dining rooms, and master bedrooms. One says, “Wallpaper is an expensive, highly individual decorative treatment.” The choice may not be a good fit for every buyer, she says, and advises that if selling is in a homeowner’s immediate future, they should have a game plan for removing it. Barbara Ballinger, Realtor magazine
Seniors have other reasons for staying put. They may own their current homes outright and, on fixed incomes, lack the ability to afford and/or qualify for a new mortgage or manage rents for suitable housing. The Great Recession disrupted the retirement plans of some, others have close ties to their community.
Regardless of their reasons, older Americans are clearly staying put. Freddie Mac recently looked at seniors born between 1931 and 1941 and compared their rates of homeownership with those born prior to 1931 at the same age. For both groups the rates began to trend down at age 67 but by age 87, while it had dropped by 11.6 points for the older group, it was down only 3.6 points for today’s crop. Freddie Mac estimates that, had todays seniors followed the pattern of the generations immediately ahead of them, there would have been another 1.1 million homes for sale.
Taken one by one, trends in homeownership in each of Freddie Mac’s “phases” are interesting. As a mirror of the housing industry, they are creating a problem. Inventories of existing homes are historically low and there are indications it will only get worse. It isn’t just a shortage of sellers that is disrupting the market, the overall housing stock is declining. This is impacting affordability and raising the hurdles to mobility even higher.
The Census Bureau estimates that the housing market needs to add approximately 350,000 units per year in order to replace housing lost to age, lack of maintenance, and disasters. Demographers say young adults will create about 20 million households over the next decade, and there is also a steady demand for second homes. Overall it is estimated that the current need is 1.62 million new housing units per year.
The Department of Housing and Urban Development says during the 40-year span from 1968 to 2008, there was only one year in which fewer new houses were built than in 2017. And 2017 (and 2018) are just the most recent years in a decline that began in 2007. Freddie Mac says the current shortfall of housing production versus demand is 370,000 units per year. At least some of that number becomes cumulative.
Builders are confronting multiple problems. Buildable land is virtually nonexistent in some places, extremely expensive in others. There are rigid building and environmental requirements in some localities, and the “not in my backyard” syndrome can hinder construction, especially of more affordable housing. A shortage of construction workers (and now a resulting escalation in wages) has existed since the Great Recession as many laid-off tradespeople relocated for jobs or found other careers. There is also a mismatch of where it is easy and inexpensive to build (or where abundant existing homes are available for sale) and where the demand exists. This largely relates to underlying economic factors, especially employment opportunities.
DESIGN PLOTS FOR SMALL LOTS
New York City has identified 1,023 acres and 1,367 lots of vacantor underutilized city-owned space and has teamed up with The American Institute of Architects to hold a competition to design homes for urban infill housing. Participants in Big Ideas for Small Lots NYC are invited to design a prototype housing unit for one of them, a 17-foot-wide, 100 – foot – deep space. The two-stage competition is intended to find housing solutions for these lots, and to explore their potential to contribute to citywide affordable housing options. Architect magazine
Breaking Up the Logjam
In the last few months there has been a growing chorus of housing stakeholders calling the situation “a crisis,” “impending disaster,” and other ominous terms. That is probably good news; someone is finally paying attention. While there are no wide-ranging solutions on the board, there are a lot of small and sometimes creative remedies being tried to break up the logjams.
Lenders and regulators are testing new ways of calculating student debt and counting wages from the “gig” economy for loan underwriting. They are also developing new models for credit scoring taking into account rent and utility payments. Lower downpayment programs have been in effect for several years. The 2017 tax bill created opportunity zones where developers can receive tax breaks for creating jobs and businesses in depressed areas. These may bring jobs into areas where low cost housing is plentiful.
IN LIEU OF LINENS
Young Americans are waiting longer to marry so, after living on their own or with their intended, they may not need silverware or towels, but could use a place to put their stuff. Some couples are now turning to a new type of “bridal registry” asking wedding guests to help crowd-source the down payment on their first home.
Unlike sites like GoFundMe, these sites don’t require that the goal is reached before they release funds, but there are caveats. Administrative fees can be expensive, some sites tie the couple to a specific lender and may require mortgage preapprovals. Also, underwriters may consider the source of funds (which are trackable) to increase the borrower’s risk profile. Allie Volpe, CityLab
However, the real solution is growing the housing stock. Again, innovations are scattered. Several lenders have expanded loan programs to assist buyers to buy and rehab distressed properties. Infill housing is one solution in urban areas – a New York City contest addressing such projects is described in the sidebar to the left.
Some localities are reassessing some of their building requirements. Miami-Dade just revamped zoning in six areas near transit corridors to permit residential densities of up to 60 units per acre. Builders are relying more and more on modular construction to cut costs and speed up production. They are also, in the words of one housing researcher, “figuring out how to get 1,500 square feet to feel like 2,000 square feet, and 2,500 square feet to feel like 3,000 square feet,” to bring in entry-level buyers.
Growing the Labor Poo!
One idea that has gone national is the attempt to bring more workers into the trades. Community colleges are offering intensive training programs and NAHB and the Chamber of Commerce have talked about pre-release training for non-violent offenders.
Coming full cycle, a recruitment program of the National Center for Construction Education and Research, is reaching out to Gen Z (up to 23 yrs. old) including women, encouraging them to enter training and apprenticeship programs. One of their selling points is the ability to earn a solid wage, maybe even own a business, without incurring the student debt that may have kept their older siblings from buying their own homes.
It will probably take all of these programs and a lot of other efforts to get the housing cycle spinning again. But when it does, a lot more Americans will be able to move in, move up, and wish the country’s seniors a long time to age in place.