Harvard's State of Housing Report Says Home Construction Now Adding to GDP

Steadier job growth and improvingrnconsumer confidence are now boosting home sales and home prices may finallyrnfind a bottom this year according to the latest State of the Nation’s Housing report released this morning.  The report, produced by the Joint Center forrnHousing Studies of Harvard University, says further that stronger home salesrnshould pave the way for a pick-up in single-family construction over the restrnof 2012.</p

Conditions, however, will keep thisrnrecovery “subdued.”  The backlog ofrnnearly 2 million loans in foreclosure means that distressed sales will remainrnelevated and will keep a downward pressure on prices and another 11.1 millionrnhomeowners are underwater on their mortgages, dampening both sales of new homesrnand investment in existing units.  Whilernvacancies have been declining the report notes, they still remain well abovernnormal, holding down demand for new construction in many markets.</p

What the for-sale market needs most, thernauthors say is a sustained increase in employment.  This might in turn bring household formationrnback to normal levels.  The depressedrnpace of homebuilding has been a major factor in hiring and pulled down growthrnin the gross domestic product (GDP) from 2006 to 2010.  Since the beginning of 2011, however, both homernconstruction and home improvement spending have made a positive contribution tornGDP in four out of five quarters.</p

Another bright spot is the rental market;rnthe number of renters surged by 5.1 million over the decade of the 2000s, thernlargest decade-long increase in the postwar era.  This reflects not only growth in thosernpopulations which are historically prone to rent – the young, minority, and lowrnincome households, but foreclosures have driven others into the rental market.</p

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Still the rental market has not fullyrnbenefited from the large echo-boom generation because the recession has forcedrna lot of young people to put off leaving home which usually means a move intornrental housing.  Once the economyrnimproves the echo-boomers should give the market a significant lift.</p

The rising demand for rentals hasrnsparked rent increases in many parts of the country; 38 of the 64 marketsrntracked by MPF research had rent increases that outstripped inflation and allrnbut one of the remainder (Las Vegas) had at least a nominal increase inrn2011.  Even in some cities hard hit byrnforeclosures and the economy in general (Detroit, Cleveland) rents are rising.</p

The increase in rents has, in turn,rnhelped to stabilize the multifamily property market where prices are werernreported up by 10 percent in the fourth quarter of 2011 from one year earlierrnand multifamily construction starts more than doubled from its trough to arn225,000 unit annual rate, providing a welcome boost to construction.</p

Homeownership continues to slide,rndipping to 66.1 percent in 2011 from 66.8 percent a year earlier and 69 percentrnat its peak in 2004, but it is still higher than in the period from 1980 intornthe early 1990s.  Rates for olderrnhouseholds continue to climb as the population ages, but the homeownership raternfor younger households will probably continue to decline over the next fewrnyears.</p

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The number of new homes added to thernhousing stock in the 2002-2011 period was lower than in any other ten year spanrnsince the early 1970s so it is hard to argue that overbuilding is dragging downrnthe market.  The excess housing supply isrnlargely a reflection of the slowdown in housing growth which resulted from therndecline in the rate at which younger people are forming households as noted abovernand also because of a sharp drop in immigration.  But over the longer run, the growth and agingrnof the current population should support the addition of about 1.0 million newrnhouseholds per year for the next ten years. rnImmigration remains an unknown in this calculation, but even assumingrnnet inflows are half what was predicted by the U.S. Census in 2008, householdrngrowth should average 1.18 million per year in 2010-2020.</p

The recession took a toll on householdrnincome but did little to lessen the burden of housing costs.  Between 2007 and 2010 the number ofrnhouseholds paying more than half of their income for housing rose by 2.3rnmillion to 20.2 million.  While rentersrnaccounted for the vast majority of the increase, the number of severelyrncost-burdened owners also rose more than 350,000 as many households took onrnexpensive mortgages they were later unable to refinance.  In addition, this recent increase is on toprnof an increase in cost burdened households of 4.1 million in 2001-2007.</p

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These cost burdened families face a big challenge.  Among families with children in the bottomrnexpenditure quartile of income and with the most severe housing cost burden,rnonly about three-fifths of the amount is spent on food, half as much onrnclothes, and two-fifth on healthcare as is spent by families living inrnaffordable housing.</p

The Joint Center said there are fewrnprospects for a meaningful reduction in this cost burden.  Funding for the federal Housing Choice VoucherrnProgram has increased only modestly since the recession and the onlyrnsignificant growth in subsidized rental housing is through the Low IncomernHousing Tax Credit which continues to add about 100,000 affordable units eachrnyear.  If the current calls for reducingrndomestic spending are realized “the nation would move even further away fromrnits longstanding goal of ensuring decent, affordable housing for allrnAmericans.”</p

On the road ahead, with moderate gainsrnin multifamily and single family construction and improving sales of existingrnhomes, housing should be a stronger contributor to economic growth than it has beenrnin years.  The rental market is back onrntrack, but the owner occupied market still faces the same pressures it has forrnyears; distressed properties which hold down prices and owners who are unablernto sell because they are underwater.  </p

Actions such as changes in the HomernAffordable Modification Program, the servicing settlement, and more rapidrndisposition of properties where homeownership cannot be maintained are helpingrnthe market.  However, the greatestrnpotential for recovery of the for-sale market is its historicrnaffordability.  The dive in home pricesrnand record low mortgages rates make homebuying more attractive than it has beenrnin years but the limited availability of financing that meets the needs of manyrnborrowers, strict underwriting guidelines, and rising fees are inhibitingrnsales. “With key mortgage lending regulations still undefined, it remains to bernseen to what extent and under what terms lenders will make credit available tornlower income and lower-wealth borrowers.”

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