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Harvard’s annual housing report tells ‘tale of 2 markets’

Homeownership is at 20-year low, but ongoing recovery efforts are driving a more positive outlook

Although the real estate industry has enjoyed about two decades of housing market growth, the national homeownership rate decreased to just 64.5 percent last year, falling back to levels not seen since 1993 and taking 20 years of momentum with it.

That’s according to “The State of the Nation’s Housing,” a report issued this week by the Joint Center for Housing Studies (JCHS) of Harvard University.

The annual report provides a periodic assessment of the nation’s housing outlook and summarizes important trends in the economics and demographics of housing.

This year’s report finds that the national homeownership rate fell for the eighth straight year — and that trend is likely to continue, with the rate falling even further to 63.7 percent in the first quarter.

It cites a number of contributing factors, such as:

  • Plummeting prices and home equity
  • Steady erosion of household incomes since the start of the recession
  • Tightening credit standards
  • Low levels of single-family construction
  • A surge in demand for rental housing

However, the report’s outlook was more positive, concluding that despite the slowdown in 2014, the housing market recovery could regain steam in 2015 if continued employment growth helps to lift household incomes, and if millions of millennials are able to find their footing in the job market and become first-time homeowners.

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At a press conference that JCHS held Wednesday at the Ford Foundation to discuss the report, a panel of experts summarized the report as “a tale of two markets.”

There is a whole other set of reasons about why it is we’re not buying homes, and why we’re choosing to rent." - Chris Herbert, JCHS’ managing director

national-homeownership-rate

“The homeownership market has recovered quite a bit in the past five years or so, but the rebound has been less rigorous than we would expect given the improvements in the economy,” said Jim Zarroli, a reporter for National Public Radio and moderator of the panel. “At the same time, the market for rental housing is booming right now. The nation’s vacancy rate is low.”

About 650,000 single-family homes were started last year, which is a significant increase from the recession years. But it’s still surprisingly low by historical standards, and Chris Herbert, JCHS’ managing director, attributed this trend to changes in household formation. Declines in headship rates among young adults and in net immigration have impacted the formation of households, and growth ran at about 500,000 for much of 2014.

“When you look at the primary driver of household growth, it is the adult population,” Herbert said. “What has happened is we’ve seen a lot less downturn in household formation, particularly among young adults.”

national-homeownership-age-group

However, the report noted that the most recent data suggests that the share of young adults moving into independent households — especially millennials — as well as immigration is resuming, and this could result in household growth returning to its longer-run average of just under 1.2 million annually in 2015 and 2016.

“There is a whole other set of reasons about why it is we’re not buying homes, and why we’re choosing to rent,” Herbert said.

According to the report, last year was the 10th year of consecutive growth for rental housing. Herbert attributed this trend to weaknesses on the demand side and challenges on the supply side.

“On the demand side, household incomes have been falling sharply through the recession,” Herbert said. “On the supply side, we really do have to look at what’s happening in the mortgage market and access to credit.”

changing-age-distribution

Paul Weech, president and CEO of NeighborWorks America, said that prospective borrowers and lenders alike may be suffering from post-traumatic stress disorder following the foreclosure crisis.

“There are an awful lot of consumers who could be part of our demand equation out there who have been damaged by the foreclosure crisis,” Weech said. “Their credit has been bad from prolonged delinquencies or from a foreclosure. Their houses are worth less than what they owe on those houses.”

Typical first-time homebuyers may be under different kinds of financial stress right now, Weech added.

“Their incomes are lower on average than they have been in the past. For many of them, student loan debt is higher and more pronounced than it has been in the past,” he said.

At the same time, lending communities are also suffering from PTSD, Weech said.

“Banks lost a lot of money, and their risk officers were embarrassed,” he said.

But Weech also pointed out that “there have been many changes in the rules governing servicing and lending. This is going to change the way people access credit going forward.”

However, Don Chen, director of metropolitan opportunity at the Ford Foundation, said he is concerned about the wealth gap between African-Americans and Latinos and Caucasians. The report noted that distressed neighborhoods have disproportionately large shares of minority and low-income residents.

In more than half of the areas where house prices were still depressed by more than 35 percent, minorities make up the majority of households. The median poverty rate is also close to 19 percent, or about twice that of all neighborhoods.

Email Amy Swinderman.


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