A new normal will prevail when the housing market recovers, according to a report released by the Urban Land Institute.

A new normal will prevail when the housing market recovers, according to a report released by the Urban Land Institute.

"As the economy recovers, markets will stabilize but the old ‘normal’ will not return. Once nascent trends will emerge as major drivers, creating new markets in new places. Those who fail to understand these new trends will miss opportunities or find themselves building what is no longer in demand," said John K. McIlwain, a senior resident fellow at the institute, in his new research paper, "Housing in America: The Next Decade."

McIlwain predicts that, even if unemployment begins to decline, home prices will fall an additional 10 percent this year before stabilizing, foreclosures will rise, and more homeowners will walk away from "underwater" mortgages — owing more than the house is worth.

Consumers will begin to severely question the idea of homeownership as part of the American Dream, as more than 15 percent of households with mortgages are forced out of their homes, impacting 12 million to 15 million people.

"The emotional impact on the children and parents and disillusion about the ‘joys’ of homeownership will be intense; new attitudes to homeownership and the American Dream will emerge," McIlwain wrote.

The paper predicts 40 percent of mortgages will be underwater this year, putting even homes with prime mortgages at risk. If even one in five homeowners elects to walk away from their home, the number of mortgage defaults will be double those in 2009, the report said.

Underwater homes also affect other markets, impeding relocation to a new job, for example, or forcing families and seniors who might otherwise move to stay in their old home.

In the next decade, the report predicts that annual home appreciation will slow significantly, between 1 and 2 percent. At the housing boom’s peak, the homeownership rate was 69 percent. Today, that number is 67 percent and is expected to fall to about 62 percent at the end of the decade.

In order for the housing market to recover, private investment must return, the report said. The federal government is currently buying or securing nine out 10 new mortgages through Fannie Mae, Freddie Mac and the Federal Housing Administration.

Reducing the market’s dependence on these entities "will entail revamping or replacing (them), and tightening risk requirements for mortgage issuers to restore investor confidence in mortgage-backed securities," the report said.

The report pointed out four groups to watch for their impact on the housing market in the next decade: older baby boomers (55-64), younger baby boomers (46-54 years old), Generation Y (late teens to early 30s, and immigrants.

The older boomers will reach retirement age this decade, though many will continue to work, both because they are healthier  than their parents and because they need to rebuild their retirement savings.

When they do retire, they will not follow their predecessors to Sun Belt retirement communities, but, once they can sell their homes again, will prefer to move to urban, mixed-use, mixed-age centers closer to their children and grandchildren. This phenomenon will transform suburban town centers to appeal to this age group, the report said.

The younger boomers, who make up two-thirds of the boomer population of 78 million, will face much tougher challenges at a time when they should be entering their prime earning years.

"The younger boomers are facing flat incomes, lost equity in their homes and a smaller group of move-up buyers. The market for large suburban homes will be weak over the coming decade and there are already enough large suburban homes to meet the market demand for the coming decade despite the growing U.S. population," the report said.

Generation Y, people currently in their late teens to early thirties, are 83 million strong, surpassing the boomers in population. Still, the report predicts their impact on the housing market will not be as great.

Terming them "credit card kids," the report said Generation Y will feel the difference between their credit-infused childhoods and the current housing downturn keenly, and will rent for longer periods than their parents by choice or necessity as their incomes fail to rise and they have large student loans to pay off.

Unemployment will impede household formation in this group, further delaying home purchases, the report said.

When jobs do pick up, that will create new demand for large numbers of starter homes at low prices on small lots. While most in this generation say they want to live in urban areas, their limited incomes and school quality considerations will mean that once they have children they will look to older, less expensive suburbs or compact suburban town centers. They may contribute to the creation of outer-edge suburbs that are affordable, compact and walkable, the report said.

Immigrants, legal and illegal, will also greatly impact the housing market. At an estimated 40 million, they make up about 13 percent of the population. Between 2005-50, immigration will have added 117 million people to the population: 67 million immigrants and 50 million U.S.-born children and grandchildren of immigrants, according to the report. The Latino population, in particular, will triple in size by 2050 to make up 29 percent of the total population, from 14 percent in 2005.

Immigrants are 50 percent more likely than the native-born population to live in poverty. Their education levels are also lower and their populations are younger, slowing rates of homeownership.

While immigrant groups have moved from the central cities to inner suburbs in the past two decades, "they also like living closer together, not isolated from one another and with a greater sense of community than most people experience in the suburbs. This suggests that the established cul-de-sac suburbs may be not be attractive to them," the report said.


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