Every year, Harvard's Joint Center for Housing Studies (JCHS) examines the state of United States housing. In its 2015 report, the authors look at what happened to the housing market in 2014 and the key factors that will impact housing in the future.
Let's start by looking at homeownership rates. Here is a graph showing the homeownership rate since 1989:
Homeownership rates have dropped to 1993 levels, falling to 64.5 percent at the end of 2014 and appears to be continuing its drop, reaching 63.7 percent in the first quarter of 2015.
Homeownership rates vary greatly by age group but have one thing in common, the rate has dropped for all age groups except those 65 years and older as shown on this graph:
The authors note that the national average homeownership rate remains as high as it is largely because owners aged 65 and older and those who are baby boomers have sustained high homeownership rates. You will also observe that homeownership rates for Generation X that are mostly in the 35 to 44 and 45 to 54 years of age have fallen further than any other age group, dropping 4 to 5 percentage points below the same-aged households two decades ago. This will have an extremely significant impact on the housing market of the future, even with the slow transition of the millennial generation (born between 1985 and 2004) into the housing market.
One of the big problems facing the U.S. housing market is the rate of household growth as shown on this graph:
As the housing market bubble burst in 2006 - 2007, household growth fell from an annual rate of just over 2 million annually to under 500,000 annually in 2008. Since then, household growth rates have fluctuated between 500,000 and 800,000 annually, well below the long-term average, rising only during 2014 but to a level that is still below historical norms. Here is a graph from a Harvard JCHS study showing the average annual projected household growth rates out to 2030:
Baby boomers are moving into their retirement years, a move that will have an impact on the housing market. It is anticipated that a significant number of baby boomers will stay in their existing homes, spending more on renovations of their current dwellings rather than moving. By 2025, the growing number of older seniors will impact the market for alternative housing which is more accessible (i.e. single story), affordable and offers support services (i.e. nursing care).
Now, let's look at the market for new homes. Here is a graph showing the number of construction starts for both single and multifamily homes since 1970:
As you can see, it is quite obvious that the market for both new single and multifamily homes has improved since it fell to multi-decade lows during and after the Great Recession, however, with just over one million new homes started last year, the level is still the lowest in the past 44 years, something that we rarely hear about in the mainstream media.
Now, let's take a brief look at the challenges currently facing the housing market:
1.) Cost burden of home ownership: While the number of households that are paying more than 30 percent of their home income for housing has declined for three consecutive years, there are still 39.6 million or 34.1 percent of households that are cost-burdened by their homes. Ten percent of homeowners paid more than 50 percent of their household income for housing.
2.) Cost burden of home renting: The number of cost-burdened renters set a new record at 20.8 million households or just under half of all renter households. Three-quarters of renters with incomes between $15,000 and $29,999 and 45 percent of renters with incomes between $30,000 and $44,999 were cost-burdened.
Here are two graphs showing the percentage of home owners and renters that are cost-burdened by housing costs by level of household income:
One of the greatest problems associated with high levels of housing cost burdens is the fact that, on average, severely cost-burdened households spend much less on other necessities; these households spend 70 percent less on healthcare and 40 percent less on food than their counterparts who live in housing that is affordable.
3.) Supply and demand for affordable housing: Extremely low income households (those that earn up to 30 percent of the median income in their area) have increasingly few housing choices; in 2013, 11.2 million renters in this income group competed for 7.3 million affordable units, leaving a shortfall of 3.9 million units. What is of even greater concern is the fact that the stock of affordable housing is set to decline by 2.2 million assisted units over the next 10 years since developers cannot afford to make necessary improvements and upgrades.
4.) Growth in the number of homeless Americans: The lack of affordable housing has left nearly 600,000 people homeless including 130,000 children under the age of 18 years. The rate of homelessness varies greatly by location; homelessness jumped by 29 percent in New York, 40 percent in Massachusetts and 46 percent in the District of Columbia between 2007 and 2014. The major cities are of particularly concern, for example, New York City has 41,600 homeless people in families or 20 percent of the national total.
5.) Wide variations in the recovery of the housing market: While national home prices have risen to within 10.4 percent of their 2006 peak and only 16.9 percent of homeowners have negative equity in their homes, down from 31.4 percent in early 2012, some markets are still suffering. House prices in the bottom ten percent of neighbourhoods are still 34 percent below their 2006 pearls and the share of underwater homeowners remains at 26 percent. Here is a graphic showing how negative and little equity situations have left the housing market extremely vulnerable:
It is interesting to note that half of the neighbourhoods that have home price and home equity issues have a majority of minorities making up their populations.
While it is clear that the national housing market has improved from the dark days during and just after the Great Recession, the Harvard housing study shows us that there are significant issues including demographics and affordability still lurking well after the last recession, issues that will impact the housing market in the future. This is concerning because the current period of ultra-low interest rates on mortgages has likely lulled many consumers into taking on more housing debt than they can afford, a situation that could well be setting the U.S. housing market up for another fall when the Federal Reserve returns to a normal interest rate environment.