Wednesday, February 27, 2013

The Return of Substandard Housing

by Kermit Baker
Director, Remodeling
Futures Program
The magnitude of the housing bust that began in the middle of the past decade is well documented, with a 75 percent plunge in housing starts, 45 percent decline in existing home sales, and 30–35 percent slide in house prices. Less well known is how the housing bust and the ensuing cutbacks in residential investment have eroded the condition of existing homes.

Reasons for concern over the potential for underinvestment in the housing stock are numerous, from the aging of the rental stock to the rising share of homeowners with underwater mortgages to the surge in foreclosures and short sales. In fact, there has been a significant decline in spending on homes during the housing bust. Average annual improvement spending by owners declined 28 percent between 2007 and 2011 after adjusting for inflation, totally erasing the run-up in spending during the boom years. Rental units never saw a run-up last decade, so per unit spending was down 23 percent between 2001 and 2011.

Figure 1

Sources: JCHS tabulations  of 2001-07 C-50; 2001-11 AHS; and Estimating National Levels of Home Improvement and Repair Spending by Rental Property Owners by Abbe Will, JCHS Research Note N10-2, October 2010.

There has been surprisingly little concern in policy circles that this significant reduction in housing investment might be producing deterioration in our housing stock. Thanks largely to the success of government housing programs and the increasing affluence of our population, the condition of the housing stock has largely dropped from policy makers’ radar screens in recent decades.

The first Census of housing in 1940 labeled 45.4 percent of owner-occupied units as substandard, which was defined as housing which lacked complete plumbing facilities or was dilapidated. This share dropped sharply over the next several decades, falling all the way to 6.1 percent in 1970 according to Clemmer and Simonson’s analysis in a 1983 article in the AREUEA Journal. Because measures of housing quality were dropped after the 1970 Census due to unreliability of data and the subjective measurement of structural quality, more recent statistics on the number of substandard units are not available from the Census.

However, beginning in the early 1970s, information from the American Housing Survey (AHS) points to the structural condition of the housing stock continuing to show slow but continuous improvement.  As of the 2007 AHS, just 2.27 million owner-occupied homes, or 3.0 percent of the total, were characterized as moderately (with fairly minor structural problems) or severely inadequate (with more major structural problems), down from 3.24 million or 5.1 percent of the total in 1995.

Figure 2


Notes: A housing unit is defined as inadequate through a combination of gross unit attributes such as lacking complete kitchen or bathroom facilities or running water, as well as signs of disrepair such as leaks, holes, cracks, peeling paint, and broken systems. For a complete definition, see the US Department of Housing and Urban Development’s Codebookfor the American Housing Survey, Public Use File: 1997 and Later.  Source: JCHS tabulations of the 1995-2011 AHS.

Since the housing market bust, however, this trend has reversed. By 2011, more than 2.4 million owner-occupied homes were classified as inadequate, an increase of 160,000 from the 2007 AHS. While this increase seems fairly minor in the big picture, the importance of it is not. Given available data, this appears to be the first significant increase in the share of homes with structural problems since the government was able to track them beginning with the 1940 census.

Now that the housing market is recovering and residential investment is increasing, this dip in the quality of the housing stock may well reverse as these homes are improved. However, recent Joint Center analysis concludes that once a downward cycle in housing quality is underway, for many homes it doesn’t get reversed. This analysis focused on owner-occupied homes that were characterized as inadequate in 1997, looking at their experience over the following decade but before the dramatic rise in distressed properties.

According to the 1997 AHS, 4.4 percent of owner-occupied homes were considered inadequate. By 2007, these units accounted for almost 8 percent of homes in this 1997 cohort that were no longer owner-occupied (vacant, or converted to rental or nonresidential uses), suggesting that they were less in demand. Even more telling is that these inadequate units accounted for almost 17 percent of all 1997 owner-occupied homes that were demolished within the decade.

The longer-term fate of the current slightly larger number of inadequate homes is unknown. Many of these homes likely will be renovated to provide affordable housing opportunities. However, many may not recover without extra help. Given the extraordinary circumstances that many homes have gone through in recent years, particularly foreclosed homes that often were vacant and undermaintained for extended periods of time as they worked their way through the foreclosure process, they may be more at risk than their inadequate predecessors. It’s probably time to put the structural condition of the housing stock back on the housing policy agenda.

Wednesday, February 20, 2013

Different Data Sources Tell Different Stories About Declining Geographic Mobility

by George Masnick
Fellow
The Census Bureau recently released its usual extensive Current Population Survey (CPS)-based package of tables on geographic mobility for 2011-12.  A new feature of this release is a series of historical charts, one of which is reproduced below. Examining just the last decade, mobility rates took a sharp turn downward in 2007-08, with most of the decline occurring in moves between states (Figure 1).  This sharp decline has been the impetus for many stories about the decline in the geographic mobility rate and its implications for housing (see this example).  Most have assumed that the mobility decline was caused by the Great Recession: with reduced job opportunities across the country, there was less inducement to change residence in search of employment, particularly among young adults who were unable to leave the parental nest. Some have asserted that the loss in housing values and tight mortgage lending have “locked in” owners who otherwise would like to move, especially those owners who are now under water on their mortgages.

Figure 1


Source: U.S. Census Bureau, Current Population Survey, 1948-2012, select years.

Yet some recent efforts to scrutinize mobility rate trends and associations have raised doubts about the basic facts. Research at the Minneapolis Fed suggests Interstate Migration Has Fallen Less Than You Think.  Another series of papers have debated the strength of the association between negative equity and reduced mobility. Findings published in 2010 that owners with negative equity are one-third less mobile were challenged as largely a result of the authors dropping some negative-equity homeowners' moves from the data.   The challenge received a rebuttal that was lukewarm at best.

But a more fundamental question is whether there was indeed as sharp a decline in mobility in the late 2000s as the CPS data in Figure 1 suggests. Since 2006 the Census Bureau’s American Community Survey (ACS) has also provided annual estimates of mobility rates that are consistently higher than those of the CPS and suggest a different trend (Figure 2). One factor contributing to higher ACS rates could be that, starting in 2006, the ACS included in its sample the more mobile institutional population. In contrast, the CPS sample excludes most people that live in group settings such as correctional facilities, military barracks, and college dormitories.  The Census Bureau has recalculated the ACS mobility rate based only on the population living in households for 2006 through 2009.  These modified ACS rates plotted in Figure 2 are significantly lower than those with the group quarters population included, are in line with the long-term more gradual decline in the pre-2000 CPS trend, and definitely do not show as sharp a decline around 2007.

Figure 2


Source: Current Population Survey (CPS) and American Community Survey (ACS) published tables.  The Census Bureau has recalculated the ACS mobility rate based on population living in households for 2006 through 2009 (www.census.gov/prod/2011pubs/p20-565.pdf).  The ACS did not cover the entire U.S. until 2005.

The differences between the ACS and CPS mobility rates in Figure 2 are supported by additional analyses of inter-county and inter-state migration trends from these two sources. This research also shows that the ACS levels and trends are mirrored almost exactly by migration rates from IRS data, further adding credence to the ACS. Mobility rates of household heads calculated from the American Housing Survey (AHS) also closely follow the levels from both the ACS and the IRS data.  The persistently lower rates of mobility in the CPS since 2000 are not well understood, but might be explained by the CPS data being collected primarily by a telephone survey that might not fully reflect the recent growth of cell phone-only households - assuming that those households contain persons that are among the most mobile.  (The ACS is primarily a mail survey, IRS data are from filed tax returns, and the AHS follows the occupants of particular housing units over time.)

If there is a story in the ACS trend, aside from one of gradual decline over the long-term, it is that the period immediately leading up to the Great Recession was one of above-trend mobility.  More people were moving than might have been expected during the peak of the housing boom. IRS migration trends in the analysis cited above support this story as well.  The bursting of the housing bubble has mostly just returned geographic mobility rates to their long-term trend.  The long-term decline in mobility is likely due to a host of broad social, economic, and demographic trends: the aging of the population; delays in the transition to adulthood; the increase in dual-career households; the changing race/Hispanic origin of the population; more working from home; more homogenized employment opportunities across different locations; the increase in long-distance commuting patterns; etc.  Absent another housing boom, we should expect near-term mobility rates to continue to gradually decline.


Wednesday, February 13, 2013

Watch the Inventory – and the Investors

by Eric Belsky
Managing Director
As housing demand has been coming up, the inventory of homes for sale on the market has been going down.  This tightening of supply relative to demand is the bedrock of the recovery. It gives consumers confidence and a sense of urgency to buy.

Those interested in the course of home prices should watch inventory levels, especially relative to demand.  Multiple listing services (MLS) provide measures of inventories at the metropolitan level and typically even for submarkets within them.  If you start to see inventories in a market climb, the recovery in prices—and demand which is partly linked to the urgency created by rising prices—may not stay on course.

In assessing housing market recovery, then, an important question is what is in store for inventories of homes for sale.  Will demand at some point be outstripped by inventory growth as new home building ramps up again and more existing owners place their homes on the market because of rising prices?

The answer to this question of course will hinge on conditions in individual housing markets.  Broadly speaking, the dynamics will likely differ depending on the share of homeowners in a market who are underwater and the activity of investors in single-family rental properties.

In places where only a small fraction of homeowners are underwater, rebounding homes prices may be enough to spark owner interest in selling their existing homes to trade up or down.  With interest rates so low and the potential to move unfettered by negative net equity, many may start to feel that now is the time to sell.

In places where many owners are deeply underwater, however, even a strong single-digit increase in home prices may not be enough to induce many owners to place their homes on the market.  After all, they would still have to write a check at the closing table if they did. Therefore, one would expect inventories to fall more in places with negative net equity as demand picks up because homeowner interest in selling does not follow suit.

In fact this is precisely what seems to be occurring. Inventories have fallen more sharply and asking prices risen more in areas with more underwater homeowners (click figure to enlarge). 

JCHS tabulations of data from CoreLogic and www.deptofnumbers.com

However, the buyers of these homes are not necessarily individuals looking to move. In many of these places much of the demand has come from investors who snapped up homes at low prices and then rented them out. Figure 2 lists places where there has been a significant shift in the share of single-family homes that are rented. These are the markets where investors have been most active, helping to soak up the excess supply of distressed homes.


Source: JCHS tabulations of US Census Bureau, American Community Survey data.

Moving forward, it is therefore not just what homeowners in these places do that matters but also what investors will do with recently acquired single-family properties they are currently renting out. Many will look for a chance to exit their investments when prices appreciate enough to make it worthwhile.

For investors in distressed markets, the run-up in prices from the trough is pure upside. Many may head for the door at about the same time, especially if they discover that it is both more arduous and costly to manage scattered-site, single-family rentals than they had anticipated.

If enough investors in any of these markets start to head for the door to try to gain from capital appreciation, home price appreciation could slow.  So to predict where prices may be headed, keep your eyes on investors and what they are doing.  Local realtors will see the first signs of activity in homes now rented shifting back to the for-sale market.  Seek them out and find out what they are seeing.

Wednesday, February 6, 2013

Will Student Loan Debt Keep Young People from Buying Homes?

by Chris Herbert
Research Director
The sharp rise in student loan debt over the last decade has caught everyone’s attention - the numbers are truly eye-popping. Estimates from the Federal Reserve Bank of New York found that the total value of outstanding student loans nearly quadrupled between the start of 2003 and the third quarter of 2012, from $241 billion to just under $1 trillion.  Student loans now account for a greater portion of consumer debt than either credit cards or auto loans.  And as the outstanding balance has grown, so too have delinquency rates. Together these trends have raised concerns that when today’s college graduates want to buy a home, they will have a hard time making the move, as their student debt will limit their ability to save or qualify for a mortgage.  But while there is no doubt that more young people are shouldering significant student loans, it is important to look at how this rising debt is distributed across households, to assess how much of a drag on homeownership these loans are likely to become.

Reports of increases in student loan debt naturally conjure images of recent college graduates as the primary bearers of this burden. In fact, the increase in student loans has been felt across the entire age spectrum—with the largest share of the growth actually among those over age 40 (Figure 1).  As of 2012, aggregate outstanding student loan debt was more or less evenly divided between borrowers under age 30, between 30 and 39, and 40 and older.  Looking back at 2005, student loan debt was more concentrated among those under age 30. But since then, borrowing has grown more rapidly for those in their 30s and over 40.  While information is not available on the uses of these loans, it seems likely that borrowing has increased both for 30-somethings going back to graduate school as well as for parents helping to finance their children’s educations.  Whatever the explanation, it is clear that the student loan burden is not just affecting recent college graduates.


Source: Federal Reserve Bank of New York, Consumer Credit Panel/Equifax. http://www.newyorkfed.org/studentloandebt/

It’s also important to consider how the increase in borrowing is distributed across the young households who might be interested in buying a home. One reason aggregate borrowing has increased so much is that more young people are taking out student loans.  Data from the Survey of Consumer Finances indicates that among those under age 30, the share of households with a student loan increased from 30 percent to 41 percent between 2004 and 2010, while among those age 30- 39 the share jumped from 21 percent to 34 percent.  However, while the number of borrowers increased, the typical amount borrowed barely budged (Figure 2).  The median student loan debt among those under 30 was essentially unchanged in real 2010 dollars over this period, at about $11,000.  Among those age 30-39 the median was likewise fairly constant at about $15,000. So while more young people were taking on loans, for most borrowers the amount of debt was not significantly higher than in the past.

But over the same period, the average loan amount has shown more of an increase, up by nearly $4,000 among those under 30 and more than $6,000 for those aged 30-39 (Figure 2).  The divergence in trends between median and average borrowing amounts signals that there has been a jump in the share of borrowers taking on sizeable amounts of debt.  Among those under 30, the share of borrowers with outstanding debt exceeding $50,000 increased from 5 percent of borrowers to 10 percent and for those 30-39 this share jumped from 14 to 19 percent.  While these borrowers account for a minority of all those with student loans, they account for a big share of the growth of total debt outstanding, representing 70 percent of the rise among those under 30 and 79 percent among those 30-39.  So a non-trivial portion of the problem of mounting student loan debt is concentrated in a minority of households.


Source: Joint Center tabulations of Survey of Consumer Finances.

In assessing the impact of student loan debt on the ability of young adults to buy a home, it is also important to consider what share of income young renters are devoting to their monthly student loan payments. (In fact, many of those with student loans already own a home—including 30 percent of those under 30 and 61 percent of those 30-39.)  In 2010, the median renter under 30 and aged 30-39 both faced a monthly student loan payment of $150.  The range of loan payments was also identical for these two age groups, from $50 per month at the 10th percentile of the distribution up to $500 per month at the 90th percentile.  But when we sort households by the share of monthly income needed to make these student loan payments, households under 30 are found to face higher burdens because their incomes are lower at this stage of life.  The median renter under 30 devoted about 6 percent of their income to student loan payments, while those 30-39 paid a little less than 4 percent (Figure 3). (Of note, these figures only cover those actually making payments on their loans; due to deferments and defaults nearly half of borrowers under 30 and a third of those 30-39 did not have payments reported on their loans.)


Source: Joint Center tabulations of Survey of Consumer Finances.

While these amounts are not trivial, by themselves they shouldn’t be enough to put homeownership out of the running. The CFPB just released guidelines that establish a 43 percent debt to income ratio for qualified mortgages. Under this guideline, after paying their student loans, the median young renter would still have room for a sizeable housing payment (though car and consumer debt must also be figured in).  However, for borrowers at the upper end of the distribution of student debt burdens, their loan payments are likely to create a greater constraint: while renters under 30 at the 75th percentile are paying 10 percent of their monthly income for student loans, at the 90th percentile the burden rises to nearly 20 percent. 

Overall, while the rise in student loan debt is certainly a cause for concern, it may not be as significant a drag on the ability of young adults to move into homeownership as many fear, since the typical borrower has not seen a significant jump in the amount of debt incurred and seems to have a manageable monthly payment. On the other hand, with much of the increase in student debt among both those age 30-39 and even older households there may be more need for concern about the impact of these loans on the ability of existing homeowners to balance their household budgets and save for retirement.