Multiple factors behind why younger Americans may fewer homes in their lifetime

A report on the real estate market in the Chicago region hints at a possible trend to watch: Americans will buy fewer homes in their lifetime.

Many first-time buyers share the Joshis’ perspective that it’s smarter to find the right house to grow into than to get a toehold in the market with a starter house, only to see much of that early equity sapped by transaction costs a few years later when moving up to a larger house.

“When we started looking, I had in mind a starter house, but it was so exhausting to look that we thought, no, one and done,” says Vrushank Joshi.

There are numerous societal changes that contribute to this:

  1. People are getting married later and going to school longer. This means they are not buying a home in early adulthood as often and are waiting longer to purchase their first place.
  2. With more education, increasing student loans means it takes longer for potential owners to save money for a down payment.
  3. Fewer starter homes have been constructed in recent years.
  4. Mobility is down in recent years as Americans seem interested in staying in places for longer.
  5. The specter of the late 2000s housing bubble haunts possible buyers.

A system that used to rely on people starting with a smaller product and then working their way up over a lifetime may have to make some major adjustments if Americans buy fewer and different homes compared to before.

American homeowners with $5.8 billion of tappable equity

A new statistic hints at the shift of homeownership from having a piece of private property to the home as an investment: Americans have nearly $6 billion in home equity.

Homeowners now have a collective $5.8 trillion in tappable equity, the highest volume ever recorded and 16 percent above the last home price peak in 2006. The average homeowner with a mortgage gained $14,700 in tappable equity over the past year and has $113,900 available to draw. This is the amount over and above 20 percent of the value of the average home…

More borrowers are doing cash-out refinances, even at a higher interest rate, because they are leery of the variable rates on HELOCs. But overall, just 1.17 percent of available equity was tapped in the first quarter of this year, the lowest amount in four years. Why? They may not know just how rich they are.

What good is an investment if the owner is not cashing in on it? Seriously though, suggesting that Americans are sitting on a pot of gold – their own homes – is an odd proposition. Should they all sell at once? Already, some have wondered what happens when large numbers of Baby Boomers want to be out of their homes. All get home equity lines or credit or cash out refinances? This could drum up more business for lenders but may not necessarily be good for the homeowners. Or, the as the article hints at, what if housing values drop after large numbers of people tap into their equity? We have seen what can happen there by looking back at the late 2000s with many foreclosures and underwater homes.

All together, all that equity may actually be fairly hard for everyone to benefit from.

A smaller housing bubble: prices up, easier credit but homeownership down, fewer involved

Discussion of a looming housing bubble hints at similar factors to the problems of the 2000s:

The number of FHA-insured borrowers who are behind on mortgage payments has jumped, Wade wrote in her testimony. The use of down payment assistance is up. The frequency of FHA borrowers who are spending more than 50 percent of their income on debt payments has increased, too. And the number of borrowers refinancing their homes to take cash out for other uses has swelled…

After years of tight credit in the aftermath of the Great Recession, both conventional mortgage lenders and the FHA have been easing credit standards — allowing for low down payments, for example, or higher levels of borrower debt — to lure first-time and low- to moderate-income buyers back to the housing market, industry observers say. By making it easier for these groups to obtain mortgages, the observers argue, it is only natural to see a modest uptick in missed payments — especially by FHA borrowers — after almost seven years of steadily dropping delinquency rates.

Not all market observers are convinced that these changes are OK. As federally sponsored mortgage giants Fannie Mae and Freddie Mac, as well as the FHA, have introduced these easier credit requirements to promote more homeownership, some critics worry that the mortgage industry could be headed toward dangerous  territory if it continues to become easier to get a mortgage — especially amid what Edward Pinto, a fellow at the conservative think tank American Enterprise Institute, currently calls the “Housing Boom 2.0.” By allowing borrowers to take on more debt or put less money down on a house in today’s super-charged real estate market, observers such as Pinto argue, lenders could be setting themselves up for higher rates of borrower default in the event of a recession — something that Pinto believes is not too far off…

To be sure, observers such as Nothaft add, the current easing of today’s requirements is nowhere near where it was a decade ago. Leading up to the recession, lenders were allowing borrowers to provide no documentation of their finances and granting loans with no money down.

Given the fallout and long recovery time after the burst housing bubble of the late 2000s, few policymakers or lenders would want a repeat. Yet, there are some significant differences in the housing market right now:

  1. Prices may be up and demand may be high but fewer people are participating in buying and selling homes.
  2. Home construction is not at the same level as it was through the 1990s and early 2000s.
  3. Lenders are not quite providing mortgages with the same terms they had in the 2000s (as noted above).
  4. Homeownership in the United States is at relatively low levels: 64.2% in the first quarter of 2018 after even lower figures in previous years.

All together, this suggests that the scale of a new housing bubble would be smaller than the last one. Perhaps significantly smaller. Fewer buyers, sellers, and lenders got caught up in the rising housing values (and low interest rates) of recent years.

This does not mean that there would not be pain if housing prices and lending collapsed a bit. But, the consequences would simply exacerbate some of the issues various interested parties have discussed:

  1. If prices decrease, even fewer people might be willing to sell their homes. This drives supply even lower.
  2. How much lower could interest rates really go? How much profit could lenders generate?
  3. This could decrease motivation for builders and developers, particularly at the lower ends of the market where there is already significant demand.

The conditions and consequences of a housing bubble today or the next year or two could be very different than the economic crisis we now think we have some handle on from the late 2000s.

Subprime mortgages still around

Although they do not appear to be anywhere near the common product as they were in the 2000s, subprime mortgages are still available:

Financial Times reports that subprime mortgage bond issuance doubled in the first quarter of 2018 compared to a year ago, going from $666 million to $1.3 billion. Furthermore, it quotes a financial analyst predicting that issuance for the year will hit $10 billion, which is more than double the $4.1 billion issued last year. For context, the value of American subprime mortgages was estimated at $1.3 trillion in March 2007.

Since the financial crisis, mortgage-backed securities have been almost entirely issued by government-sponsored mortgage facilitators Freddie Mac, Fannie Mae, and Ginny Mae. And since the financial collapse, those organizations have refused to insure subprime mortgages. The Dodd-Frank regulation passed after the collapse put tight rules around subprime lending that for awhile effectively killed the practice.

But over the last couple years, specialty firms have jumped back into the subprime market, rebranding it as “noprime.” Investors hungry for bonds with higher yields have generated enough demand for those loans to be secularized, just as they were in the run-up to the financial collapse. The result is a rapidly expanding subprime mortgage market.

That subprime mortgages would seep back into the market right now is curious, given the current state of housing. The slow pace of new home construction and few existing homes for sale has led to an inventory shortage that has pushed home prices well out of reach for many low- and middle-income prospective homebuyers.

Subprime mortgages could be lucrative for some, even if it is now widely recognized that they are not a good idea in general for potential homeowners or the broader market and society.

I think the bigger question is whether subprime loans could once again become a mainstream product. What if the housing market continues to be sluggish or potential buyers have a difficult time securing conventional loans or the market suddenly heats up and lots of people want mortgages? Even with the fallout and the long recovery after the burst housing bubble of the 2000s, someone within the next decade will make a public plea for loosening regulations on subprime mortgages or will suggest subprimes are a necessity for serving certain portions of the market.

Thriving construction industry in 2018 will primarily build for wealthier firms/residents?

The recovery from the housing bubble and Great Recession of the late 2000s continues in the construction industry:

For all of 2017, construction added 210,000 jobs, a 35 percent increase over 2016.

Construction spending is also soaring, rising more than expected in November to a record $1.257 trillion, according to the Commerce Department. That was up 2.4 percent annually. Spending increased across all sectors of real estate, commercial and residential, with particular strength in private construction projects. The only weakness was in government construction spending.

Construction firms are clearly looking to hire more workers. Three-quarters of them said they plan to increase payrolls in 2018, according to a new survey from the Associated General Contractors of America. Industry optimism for all types of construction, measured by the ratio of those who expected the market to expand versus those who expected it to contract, hit a record high…

Contractors are most optimistic about construction in the office market, which has seen little action since the recession. Transportation, retail, warehouse and lodging were also strong in the survey. Respondents were less encouraged by the multifamily apartment sector, which is just coming off a building boom.

Although this article does not say much about this topic, it would not surprise me if most of the gains in new structures in 2018 tend to go to (1) wealthier areas and (2) wealthier occupants (whether companies/organizations or residents). A thriving construction sector could theoretically float all boats but it sounds like the bifurcated housing market (and perhaps office and commercial as well) will continue.

It is interesting to see that the office market could see some significant construction. How much of that new office space comes at the expense of older structures that are less desirable because of less popular locations or because rehab costs would be too high?

 

Suburbs in the American west still struggling to recover

In addition to the Rust Belt, suburbs of cities in the western United States are also finding it hard to come back after the housing bubble burst:

These towns are located in the suburbs of the American west, in regions hit hard by the housing crisis—Southern California, Las Vegas, and Arizona. Hemet, a suburb of Riverside, California, with a population of 84,000, ranked eighth on EIG’s most distressed small-and-mid-sized-cities list. In Hemet, according to the group’s report, employment fell 15.5 percent between 2011 and 2015, while it grew 9.4 percent nationwide. The number of businesses in Hemet dropped 4.8 percent over that time period. The median home price, at $237,000, is still 30 percent lower than it was in 2006.

Why hasn’t Hemet found surer footing? For one thing, the region where Hemet is located was decimated by the housing crisis, with among the highest foreclosure and unemployment rates in the nation; many families are still recovering. But Hemet’s problems are also the result of structural changes in the economy—changes that have been underway for decades but were masked by the heady days of the housing boom. Middle-class jobs have been disappearing while high-wage and low-wage jobs have grown—but in different geographic locations. High-wage jobs are often located in big cities, while low-wage jobs are in relatively cheap locations like suburbs and small cities. This dynamic changes the housing markets of these cities, too, with big cities getting more expensive as more high-wage workers migrate there, and low-wage workers leaving cities to seek more affordable housing in the far-away suburbs they can afford. Now that the dust of the recession has cleared, it is evident that the geography of poverty has changed in America. Hemet is emblematic of just how fast—and just how dramatically—this has happened…

Hemet problems are in some ways particular to the areas that suffered the most during the housing bust. Suburbs far away from Los Angeles, Las Vegas, and Phoenix, where people bought homes during the “drive til you qualify” housing boom, were plagued by a high number of foreclosures in the bust. After the homes went through foreclosure, they were purchased by investors and rented out, creating new, low-cost rentals. Before the recession, 63 percent of homes in Hemet were owner-occupied, today just 54 percent are, according to Census data…

In the end, Hemet is stuck. The city itself can’t convince companies to pay better wages, and it has no control over the rents in big cities that are pushing people out to the suburbs. It has tried to force absentee landlords to keep up their homes, but has limited resources to do so, and struggles to smooth over its transition from a community of homeowners to one of renters. Like many other suburbs and small cities across the country, the economic tide has turned against its residents, leaving them seemingly no path back to vitality. As Hemet and many suburbs like it are finding, growing poverty can lead to even bigger problems—lower tax revenues, fewer businesses able to stay put, worse services like schools and police. This, of course, makes them even less attractive for people who have other choices about where to live. Over time, the situation only gets worse. As nearby cities prosper, and the recession appears as just a bump in the road in the rearview mirror, distressed areas are still there, unable to move ahead.

While the fate of Hemet is tied here to the housing bubble of the late 2000s, it also represents the culmination of two older and widespread trends:

  1. The suburbanization of poverty.
  2. The economic issues facing a number of American suburbs with limited tax bases and lower-income residents.

The end of the article – the last paragraph quoted above – is depressing yet it is hard to see how many of these distressed suburbs will move ahead. They face a number of challenges, including just a lack of knowledge regarding how suburban areas can face significant economic and social issues. (In contrast, Americans tend to associate such problems with big cities.) There are a number of ways the communities could turn around but each option is fairly unlikely: a major employer with good jobs moves into town; a philanthropic organization or wealthy resident is willing to dump large sums of money into developments or changes that would benefit the whole community; state or federal governments come up with new programs or monies for suburban communities like this; or metropolitan revenue sharing is instituted and some of the money present in wealthy suburbs is made available to communities that desperately need it.

Foreclosure crisis to come in Puerto Rico

Even as the foreclosure crisis seems to have passed in recent years on the mainland, Puerto Rico is set to see foreclosures galore in the coming months:

Now Puerto Rico is bracing for another blow: a housing meltdown that could far surpass the worst of the foreclosure crisis that devastated Phoenix, Las Vegas, Southern California and South Florida in the past decade. If the current numbers hold, Puerto Rico is headed for a foreclosure epidemic that could rival what happened in Detroit, where abandoned homes became almost as plentiful as occupied ones.

About one-third of the island’s 425,000 homeowners are behind on their mortgage payments to banks and Wall Street firms that previously bought up distressed mortgages. Tens of thousands have not made payments for months. Some 90,000 borrowers became delinquent as a consequence of Hurricane Maria, according to Black Knight Inc., a data firm formerly known as Black Knight Financial Services.

Puerto Rico’s 35 percent foreclosure and delinquency rate is more than double the 14.4 percent national rate during the depths of the housing implosion in January 2010. And there is no prospect of the problem’s solving itself or quickly.

Even before the storm, Puerto Rico was mired in a severe housing slump. Home prices over the past decade have fallen by 25 percent, and lenders have foreclosed or filed to foreclose on 60,000 home loans, according to the Puerto Rico state court system. Last year, there were 7,682 court-ordered foreclosures — a roughly 33 percent increase from 2007. Some 13,000 foreclosure cases are pending, Black Knight estimates.

Without an easy fix and knowing that this is a longer-term issue that may not be solved with mild economic improvement, it will be interesting to see what happens. Some questions this raises:

  1. Will Puerto Rico and the involved parties (residents, mortgage lenders, local governments) be treated the same as mainland parties during the late-2000s housing slump?
  2. What lessons learned from the late 2000s will be applied here and can those lessons demonstrably help lessen the impact over time?
  3. Will institutional buyers of distressed properties see Puerto Rico as a potential gold mine? If so, how does this then affect Puerto Rico in the next few decades?
  4. What is a long-term plan to help boost the economic prospects of the island?

There are many ways this could play out but one would hope that since we have seen some of this before, the effects do not have to be so bad.