2016 State of Housing report: not so good

The State of the Nation’s Housing 2016 was released last week and there are a number of unfortunate historic points highlighted in the executive summary:

But at 1.1. million units, new home construction was still running near historic lows last year. A key factor holding back housing starts is the sustained falloff in household growth…

The US homeownership rate has tumbled to its lowest level in nearly a half-century. The decade-long declines are especially large among the age groups in the prime first-time homebuying years…

Just as exits from homeownership have been high, transitions to owning have been low. Tight mortgage credit is one explanation…And given that the homeownership rate tends to move in tandem with incomes, the 18 percent drop in real incomes among 25-34 year olds and the 9 percent decline among 35-44 year olds between 2000 and 2014 no doubt played a part as well…

On the renter side, the number of cost-burdened households rose by 3.6 million from 2008 to 2014, to 21.3 million. Even more troubling, the number with severe burdens (paying more than 50 percent of income for housing) jumped by 2.1 million to a record 11.4 million…While nearly universal among lowest-income households, cost burdens are rapidly spreading among moderate-income households as well, especially in higher cost coastal markets.

The conclusion suggests stability – homeownership should stabilize with increased household formation – as the effects of the housing bubble continue to fade. However, the glory years of housing seem to be far off as housing costs plague many Americans and the housing industry concentrates on higher end units.

As the economic crisis slowly fades into history, the question remains: is American housing transformed for decades (lower rates of homeownership, more high-cost renting, fewer housing starts)?

American homeownership was originally not about an investment

One writer suggests Americans have bought into the lie that houses are good investments:

Would it surprise you to know that if there are two equally expensive houses—one for rent, one to buy—the person who buys will pay 40 percent to 50 percent more each month? That’s what happens when you factor in property taxes, insurance, maintenance fees and assorted fees like repairs—which almost nobody does…

The truth is, most of what we’ve been raised to believe about owning a house simply isn’t true…

Run the numbers. Yale economist Robert Shiller found that from 1890 to 1990, the return on residential real estate was just about zero after inflation.

ZERO.

This trend toward seeing homes as a good return on investment is a recent development. Perhaps it hints at the commodification – and a need to see a potential return on investment – of everything.

But, if owning a home is not a great investment, why do Americans still privilege homeownership? Here are some historic reasons:

  1. Land is valuable. In the past, people needed land to some degree to survive. Think of all those tenant farmers in the Middle Ages who always had to pay someone else. Or think of sharecroppers in the United States. Land equaled food or the ability to run a business on your property. Additionally, having your own piece of property meant that you could get away from others as well as the government. It is that the home is your castle thing.
  2. Owning a home is a sign of material prosperity. When you are a homeowner, you have made it enough to be able to own and maintain your own property. In other words, you have the resources to waste it. This is the realization of the American Dream as George W. Bush once put it.
  3. Additionally, homeownership is a sign of dedication to your local community. Renters are assumed to be lower-income, transient, and not committed to civic organizations. Homeowners have a stake in their community because they (1) will be there for an extended time and (2) want to protect their property values (though this is also a more recent development).
  4. Combining #2 and #3, homeownership was assumed to keep people invested in capitalism as opposed to socialism. Again, if you own your own property, you want to see it do well rather than hand it over to an outside manager (the state or a landlord).

29% of suburban residents are renters

A new study of the 11 biggest American cities finds that an increasing number of suburbanites rent:

About 29 percent of suburbanites living outside the nation’s 11 most populous cities were renters in 2014, up from 23 percent in 2006, according to a report released Tuesday by New York University’s Furman Center real estate think tank and the bank Capital One.

The finances of home ownership since the mortgage meltdown might be a lead reason for the change, but the cost of renting also is rising in most of the biggest metropolitan areas, the study found…

Renters

 

 

 

 

 

 

 

 

Traditionally, suburbs have not been very open to renters, particularly when it comes to apartments. The stereotypes of renters are that they care less about the community, they are more transient, and that their dwellings drive down housing values. But, two major things changed that could contribute to the effects of the economic crisis:

  1. What if more new renters are renting single-family homes rather than apartments? The same stereotypes regarding renters might still apply but these renters are not as easy to spot and look like they are living the suburban dream of homeownership. Plus, isn’t having renters in single-family home preferable to all the vacant homes due to foreclosures?
  2. There are more suburbs than people often think that don’t look like wealthy bedroom communities. In other words, these renters might be clustered in particular communities where housing is cheaper and apartments are more plentiful but renting in wealthier suburbs may not have changed much.

It will be interesting to see how suburban communities respond to the uptick in renters. New regulations? Reconsideration of how renters should be viewed?

Declining American homeownership illustrated in Las Vegas

That city that may have been the exemplar of the early 2000s housing boom may now provide good evidence of a shift from owning to renting in the United States:

The shift to rental in single-family homes is visible on streets like Recktenwall. Between 2005 and 2009, about 80% of such houses in greater Las Vegas were owner-occupied; by 2013, that had dropped to 71%, a 12,000-unit shift…

But the homeownership decline is not entirely tragic. For the footloose, the empty-nested, the risk-averse and assorted others (contract workers, military servicemembers) renting makes sense…

The housing crash’s ground zero was Las Vegas. People who thought you couldn’t lose money on a house lost everything. At one point, an astonishing three quarters of Las Vegas mortgage holders owed more on their homes than they were worth, a percentage that still hovers around 25%.

That’s one of many factors suppressing home sales. Another is the fact that millions of houses have been flipped to rentals by investors who snapped them up at rock-bottom prices years ago.

This long article that covers presidential support of homeownership in recent decades to the perks of some newer apartment complexes presents an interesting conundrum: Americans – including young adults – tend to say that they would prefer or aspire to own a home but for a variety of reasons – from bad credit to tight credit in the mortgage industry to uncertain jobs to college loans to better perks in rental complexes to more options like single family homes available for rent – see renting as desirable at the moment. Some of this might only be determined over time; will the housing market conditions continue to push people toward renting? And, if this happens, does the aspirations of owning a home also slowly decline?

What would be helpful to see with this article that uses Las Vegas: where has the population increased or declined in the metropolitan region over the last ten years or so? While the single-family home market was hit hard, does that mean the suburbs lost people and residents moved closer to the region’s center?

Renting or buying housing difficult for young adults

The housing market is such that either renting or buying a housing unit is difficult for those under 35:

If you’re an American man or woman under the age of 35, there’s a historically large chance that you’re living with your parents. And if not, you’re very likely to be renting, and paying too much for the privilege. Only 34.8 percent of young adult households actually own their home, the smallest fraction since at least 1994, and among those who are forking over cash to a landlord, nearly half are considered “rent burdened”—meaning housing eats up around a third or more of their income.

And what about those who’d at least like to buy? Well, there’s a pretty good probability they’re getting boxed out of the market. On top of the challenges posed by tough post-crash mortgage standards, Bloomberg reports Thursday that prices for typical starter homes have been on a tear due to a lack of supply, and are now actually above their past bubbly heights.

As others have pointed out, high housing costs for those trying to start their adult lives or in their careers can have some large consequences. How to pay off college debt? How to easily move to the next new job opportunity? How to build wealth? How to start family life? This has been a problem for a few years now and doesn’t look like it will get much better soon.

“Landlords have the advantage”

A new report based on feedback from 500 property managers sums up the rental market:

Vacancy rates are at a low not seen in the last 20 years. According to the U.S. Census, national vacancy rates in the second quarter of 2015 were 6.8 percent for rental housing, down nearly a full percentage point (from 7.5 percent) from the same time in 2014. The last time vacancy rates dipped below 6.8 percent was the fourth quarter of 1985 (6.7 percent)…

As the rental market continues to become more saturated, property managers are having to do even less in order to fill apartment openings. In 2015, 55 percent of property managers said that they are less likely to offer concessions in order to fill vacancies than they have been in years past. In fact, 64 percent reported that they are not doing anything different from one year ago, in order to fill vacancies…

88 percent of property managers raised their rent in the last 12 months, which is likely to continue 68 percent of property managers predict that rental rates will continue to rise in the next year by an average of 8 percent, which is a two percent increase over the estimated 6 percent rent hike predicted by property managers back in 2014…

Millennials face limited job prospects, lower incomes and high student loan debts, making it harder to buy and easier to rent. 45 percent of property managers have noticed an increase in the number of millennials renters. (Maybe some were living at home, and have moved out into the rental market).

Renters are staying in their apartments longer. According to property managers, 34 percent found that renters are holding on tight to their apartments and renewing their leases (up from 29 percent in 2014), rather than moving somewhere new.

This fits with other evidence showing a expensive and tight rental market. So when are communities – from big cities that have tended to emphasize luxury units (like Chicago, New York, and Miami) to suburbs that have tended to approve nicer single-family units to protect property values and keep certain people out – going to have more reasonably priced rental units?

The American rental market continues to get more expensive

A report shows the rental market continued to tighten in the United States in recent years:

And it’s probably getting rougher. “Rental markets tightened again in 2014 as the national vacancy rate fell by nearly a full percentage point to 7.6 percent—its lowest point in two decades,” Harvard’s researchers tell us. Meanwhile, rents rose at twice the rate of inflation, and faster than wages. However bad 2013 was when it comes to the country’s collective rent burden, it seems likely last year will look worse when the final numbers are in.

Rents are rising for the simple reason that, thanks to the never-ending hangover of the housing bust, a larger share of Americans are renting their living places now than they have in 20 years. And while developers have responded by building apartment buildings like mad—last year, there were the most multifamily housing starts for rent since 1987—it hasn’t quite been enough to keep up with demand. (Moreover, new construction is largely catering to wealthier buyers, while the families most burdened by rent tend to be lower-income.) Old, unwanted single-family homes from the boom days of the 1990s and early 2000s are relieving some of the pressure on the market, but not quite enough to keep prices from jumping.

Meanwhile, demand for rentals is probably going to keep rising. First, the Federal Reserve would really, really like to raise interest rates in the near future, which will make mortgages less affordable. But more importantly, millennials are getting older. Thus far, most of the growth in renting has been driven by middle-aged and older Americans. But even if young adults continue living with their parents at the same rate as today, there are simply so many twenty- and thirtysomethings that the rate of new household formation is bound to jump in the coming years, which is going to create much more appetite for rentals.

If expensive renting becomes the new normal, it would have widespread effects. Spending more money on rent means that people have less money to spend elsewhere, a problem in an economy driven by consumer spending. It could change how Americans view renters, which has negative connotations in a lot of wealthier suburban communities. Developers could continue to pursue different building options if they see a lot of money in multifamily housing. Lower-class residents may have a harder and harder time finding affordable housing, already a problem in many major housing markets. Denser development could shift ideas about homeownership and suburban life.

All that said, it remains to be seen whether this an economic stage or blip or whether the housing market will turn away from rental units and back toward single-family homes. Housing prices may be close to their 2006 peak but clearly fewer homes are being built and demand is down.

 

 

Forbes offers 6 investing tips for buying suburban McMansions

A contributor to Forbes offers “6 Investing Tips For Buying That McMansion In The Suburbs Now.”

Buy like a landlord.

Check your price-rent ratio.

Look at inventory.

Consider an ARM.

Know when to buy new.

Consider realty stocks instead.

Renting McMansions has been suggested as a possible opportunity but I don’t know of anyone doing this on a large scale. The real estate dip in recent years boosted demand for rental units yet the construction of larger homes has been one of the healthier parts of the housing market.

If critics are right, how much demand would there be to rent McMansions in sprawling neighborhoods? Even this investor notes:

Both renters and buyers will pay a premium for close-in or “new urbanist” suburbs with short commutes to offices, high walkability and nearby stores and restaurants.

This doesn’t describe the typical McMansion. The price point for purchasing a McMansion to make a decent rental income must be pretty low.

Selling smaller yet posh apartments plus an urban lifestyle to younger renters in Tampa Bay

The Tampa Bay real estate market may have picked up again but it includes some new options: stylish, small, urban apartments for millennials.

So last month, the 28-year-old dietitian moved into a stylish flat in downtown’s newest apartment tower, Modera Prime 235. The trade-off? It cost $1,330, double her last rent, for a one-bedroom matchbox spanning 700 square feet.

“I knew I wasn’t going to be in a McMansion. . . . but it’s definitely enough space for me,” she said. “That price was a lot, like, ‘Oh my goodness, I’m going to have to watch my budget.’ But I’ve enjoyed every penny I’ve paid for it so far.”

Developers are racing to build more than 8,000 new apartments across Tampa Bay, sparking one of the biggest building surges since the housing bust. But to win big rents from millennials, the biggest generation in American history, they’re building in a way that looks nothing like the suburban booms of years past.

The emerging apartment complexes are more closely connected to city centers and packed with metropolitan perks, but they’re also surprisingly pricey and getting smaller. While the median new American home swelled last year to a record-breaking 2,384 square feet, Census data show, the nation’s median new rentals have narrowed to 1,043 square feet, the smallest since 2002.

“The younger generation, under 35, they don’t want to own homes. They don’t want a yard. … They watched what happened (during the recession), watched their parents lose their houses,” said John Stone, a managing director of multifamily housing for Colliers International, a real estate brokerage. “They have a different taste, a different value system. . . . These kids are more than happy to pay $1,200 in rent to walk out their door and immediately go to their favorite bar, their favorite restaurant.”

This has been a trend predicted for a while now by a number of people ranging from Richard Florida to James Howard Kunstler. Because of a variety of pressures from the increase in gas prices, the limited possibilities and decentralization of suburban sprawl, a changed job market, and new technologies, younger Americans may just want desire more exciting urban neighborhoods (though these don’t necessarily have to be in the city center or even in large cities) and smaller homes and private spaces. This is happening many metro areas throughout the United States but it is unclear how big the phenomenon might grow or how much other groups of Americans want to join millennials/the Creative Class.

Yet, as the article notes, this is all tending to lead to a segmented housing market with large suburban McMansions (or something like them), trendy yet small urban apartments for those who can afford them, and the lower end of the housing market that is still struggling.

Changes in foreclosures, single-family rental market

One housing expert discusses the state of the housing market in regards to foreclosures and single-family rentals. First, foreclosures:

Yes, the pig has finally made it almost through the python. At the peak of the crisis, we were looking at about 14.5 percent of all loans being either delinquent or in the process of foreclosure. In a “normal market” that number is between 4 and 5 percent.

Right now, we’re roughly at 7.5 percent of all loans, so we’re down by half from the peak but almost twice as high as normal. In the next two to three years, that number should work its way down to the norm…

We’re seeing pretty much historically unprecedented loan performance — historically speaking, about 1percent of loans will be in foreclosure in a given year, and now we’re looking at about half of that…

And this suggests that we probably have over-tightened credit. Not that we want more people in default, but we know that people are having a hard time getting loans. Loan standards are just too tight.

Second, changes to the rental market:

Before the Blackstones of the world, 95 percent of single-family rentals were owned by people who owned five or fewer properties. It was a cottage industry, literally.

What I’ve seen happening is, these little guys are becoming the property scouts for the big investors…

They’ll buy the houses, do the repair work and flip them to the Blackstones. They’ve moved from being landlords to being flippers.

Some interesting changes with continued fallout from the bursting of the housing bubble. And it is still hard to know whether these changes are “the new normal” or the market could overheat again as we are eight years or so from the peak of the bubble.