Wednesday, July 1, 2015

Homebuying Affordability Strong in Many Metros but First-Time Buyers Face Financial Hurdles

by Rocio Sanchez-Moyano
Research Analyst
Stagnant incomes and tight credit since the recession have worked in tandem to keep many renters from becoming homeowners in recent years, even as prices plummeted. Now, as the housing market continues to recover, questions about homebuying affordability are beginning to creep back into the public discussion. But nationally, the affordability outlook remains favorable. The ratio of the mortgage payment on a median priced home to median incomes remains near all-time lows, buoying the National Association of Realtors® affordability index. Median home prices have yet to fully rebound from their mid-2000s peaks in two-thirds of the metros for which we have data, and interest rates have kept borrower costs historically low (Figure 1).


Note: Prices adjusted to constant 2014 dollars using CPI-U for All Items.
Source: JCHS tabulations of NAR Affordability Index and Single-Family Median House Price, annualized by Moody’s Analytics; US Census Bureau, Current Population Surveys; Freddie Mac Primary Mortgage Market Survey.

But house prices have been rising faster than incomes. Home prices increased in 83 percent of metros for which NAR data was available from 2013-14. Approximately 50 percent of metros experienced annual appreciation of between 0 and 5 percent, and another 33 percent of metros had appreciation above 5 percent. Incomes, on the other hand, generally grew more slowly, with only 6 percent of metros experiencing nominal income growth of more than 5 percent. In fact, in 73 percent of metros analyzed, median incomes grew more slowly than the monthly mortgage payment on the median home.

The growing disparity between incomes and home prices can make it difficult for renters to transition into homeownership. So, how many renters in metro areas across the country can afford the monthly costs of owning a home? To estimate this, the Joint Center calculated the monthly mortgage payment on a 30-year, fixed-rate loan with a 5 percent downpayment for a median-priced home in each metro area, adding monthly costs for property taxes and insurance. We then determined affordability by comparing monthly costs to the incomes reported by renters in the 2013 American Community Survey, applying the Consumer Financial Protection Bureau’s qualified mortgage rule standard that all debt payments cannot exceed 43 percent of household income. We assumed that 8 percent of a household’s income services non-housing debt, like credit cards, car loans, and student loans, based on the median non-housing debt load among households in the Survey of Consumer Finance, which leaves 35 percent of household income available for monthly housing payments. To the extent that renters transitioning to homeownership buy “starter homes” priced below the median, our estimate of the number of renters able to afford monthly owner costs will be conservative.

Using this standard in the 168 metros for which data was available, 36 percent of all renters can afford the monthly costs of owning a median-priced home in their area. (See interactive map below.) Expensive and renter-heavy cities like New York, San Francisco, Miami, and Boston make up the list of nineteen metros which are affordable to 30 percent or less of the renters living in them. But despite accounting for only 11 percent of the metros for which data was available, these expensive metros house nearly a third of all the renters included in our analysis. On the other hand, in 46 metros, monthly costs for the median-priced home are affordable to at least half of renters. Many of these areas are smaller Midwestern metros like Topeka, Kansas, and Appleton, Wisconsin.

Homebuying Affordability Can Vary Greatly Metro to Metro 
(Click map to launch)


Renters aged 25-34, who are in the prime age to transition to homeownership for the first time, generally have higher incomes than the typical renter, and are actually better positioned to afford the monthly costs of owning as a result. Across all of our metros, 42 percent of renters in this age group could afford to own the median-priced home. And more than half of the metros we analyzed were affordable to the majority of 25-34 year old renters living in them. Southern and Midwestern metros account for many of the most affordable metro areas. In all, 31 percent of renters aged 25-34 lived in these highly affordable metros, while only 23 percent lived in metros where no more than 30 percent of renters of this age could afford the costs of ownership.

Favorable affordability conditions are currently present in some of the metros hardest hit by the housing crisis. On average, more than 45 percent of renters in the 30 metros with the largest declines in homeownership rates from 2006-13 can afford to own a home. Las Vegas, which saw the largest decline in homeownership, is affordable to more than half of its renters. Phoenix and many hard-hit metros in Florida are affordable to at least 40 percent of their renters. And Atlanta, which experienced a severe foreclosure crisis, is affordable to 53 percent of its renters (Figure 2).


Source: JCHS tabulations of US Census Bureau, 2013 American Community Survey; Freddie Mac, Primary Mortgage Market Survey; NAR, Median Existing Single-Family Home Sales Price.

But despite favorable cost-to-income ratios in many metro areas, aspiring homeowners may face other hurdles on their path to homeownership. Tight underwriting standards can make it difficult to obtain a mortgage, and even for renters with high credit scores, saving enough for a downpayment is often challenging. A downpayment of just 5 percent of the value of the median-priced home can range from $3,800 in Youngstown, OH to $42,800 in San Jose, CA. Meanwhile, the median net wealth of renters in 2013 was $5,000, an amount sufficient for a 5 percent downpayment in only 5 of the 168 metros for which data is available. Financial concerns like student loan debt and unaffordable rents can compound the difficulties of saving for a downpayment. Twenty percent of US households had student loan debt in 2013, and among renters aged 25-34, the rate is more than double the US total, at 41 percent. And about half of all renters are cost burdened, with housing costs that exceed 30 percent of their incomes; the share is nearly as high among renters of prime first-time buyer age. In all, rising interest rates and other financial constraints may be headwinds to a robust entry of renters into homeownership, but price appreciation is expected to slow in many parts of the country this year, potentially allowing incomes to catch up and keep many metros affordable.

Friday, June 26, 2015

WATCH THE VIDEO: The State of the Nation's Housing



In case you missed it, our State of the Nation’s Housing 2015 report was released by live webcast from the Ford Foundation in New York earlier this week, and featured a panel discussion with:
  • Jim Zarroli, Reporter, National Public Radio (moderator)
  • Chris Herbert, Managing Director, Harvard Joint Center for Housing Studies
  • Paul Weech, President and CEO, NeighborWorks America
  • Celia Smoot, Director of Housing, Local Initiatives Support Corporation (LISC)
  • Lynn Fisher, VP of Research and Economics, Mortgage Bankers Association
  • Don Chen, Director, Metropolitan Opportunity, Ford Foundation

Read the full report or try the interactive maps on the Joint Center website, and join the conversation on Twitter with #harvardhousingreport.

Wednesday, June 24, 2015

Homeownership Rates Drop to Historic Lows; Middle Class Feels the Strain of Rising Rents

The fledgling U.S. housing recovery lost momentum last year as homeownership rates continued to fall, single-family construction remained near historic lows, and existing home sales cooled, concludes The State of the Nation’s Housing report released today by the Joint Center (live webcast today @ Noon ET). In contrast, rental markets continued to grow, fueled by another large increase in the number of renter households. However, with rents rising and incomes well below pre-recession levels, the U.S. is also seeing record numbers of cost-burdened renters (view our interactive maps), including more renter households higher up the income scale.

Perhaps the most telling indicator of the state of the nation’s housing is the drop in the homeownership rate to just 64.5 percent last year. This erases nearly all of the increase from the previous two decades. In fact, the number of homeowners fell for the eighth straight year, and the trend does not appear to be abating.

The flip side of falling homeownership rates has been exceptionally strong demand for rental housing, with the 2010s on pace to be the strongest decade for renter growth in history. While soaring demand is often attributed to the millennials’ preference to rent, households aged 45–64 in fact accounted for about twice the share of renter growth as households under the age of 35. Similarly, households in the top half of the income distribution, although generally more likely to own, contributed 43 percent of the growth in renters.

The other byproduct of this surge in rental demand is that the national vacancy rate fell to its lowest point in nearly 20 years. Given the limited supply of rental units, rents rose at a 3.2 percent rate last year—twice the pace of overall inflation. To meet this demand, construction started on more multifamily units in 2014 than in any year since 1989, and if job growth continues to pick up, we could see even more demand, as young adults increasingly move out of their parents’ homes and into their own apartments.

Even before the Great Recession, the number of cost-burdened households (those paying more than 30 percent of income for housing) was on the rise. But while the cost-burdened share of homeowners began to recede in 2010 (because some homes were lost to foreclosure, and low interest rates helped other homeowners reduce their monthly costs), the cost-burdened share of renters has held near record highs. In 2013, almost half of all renters had housing cost burdens, including more than a quarter with severe burdens (paying more than 50 percent of income for housing).

But perhaps most troubling, cost burdens are climbing the income ladder, affecting growing shares of not just low-income renters but moderate- and middle-income renters as well. The cost-burdened share of renters with incomes in the $30,000–45,000 range rose to 45 percent between 2003 and 2013, while one in five renters earning $45,000–75,000 are now cost-burdened as well. While affordability for moderate income renters is hitting some cities and regions harder than others, an acute shortage of affordable housing for lowest-income renters is being felt everywhere. Between the record level of rent burdens and the plunging homeownership rate, there is a pressing need to prioritize the nation’s housing challenges in policy debates over the coming year if the country is to make progress toward the national goal of secure, decent, and affordable housing for all.

Friday, June 19, 2015

Addressing the Silent Housing Crisis

by Chris Herbert
Managing Director
Yesterday the newly-launched J. Ronald Terwilliger Foundation for Housing America’s Families released The Silent Housing Crisis, a white paper documenting the significant housing challenges facing the country and making a call to action by the nation’s political leaders. The paper presents a succinct and compelling portrait of the doleful state of housing affordability in the country, the worrisome drop in opportunities for homeownership, and the demographic forces that are likely to exacerbate these problems absent efforts to reverse these trends.

The Foundation is right to label housing affordability a national crisis, particularly among renters. At last count, nearly half of all renters were cost-burdened, spending more than 30 percent of their income on housing, and more than one in four were severely burdened, devoting more than half of their income to rent. This translates into 21 million cost-burdened households, including 11 million with severe burdens. Low-income households in this situation are forced to make painful tradeoffs between housing and other fundamental necessities of life; among households in the bottom expenditure quartile, those with severe housing cost burdens spend 40 percent less on food, 70 percent less on healthcare, and 49 percent less on retirement savings each month (Figure 1).


Notes: Low-income households are in the bottom quartile of all households ranked by total spending. Moderate (severe) burdens are defined as housing costs of 30-50% (more than 50%) of household income. Households with zero or negative income are assumed to have severe burdens, while renters paying no cash rent are assumed to be without burdens.
Source: JCHS tabulations of US Bureau of Labor Statistics, 2013 Consumer Expenditure Survey.


Housing affordability has been steadily worsening for years, but the last decade saw the situation go from bad to worse, leading to today’s crisis situation (Figure 2).  In 1960 the share of renters with cost burdens was roughly half today’s levels. Amazingly, half of the increase over the past fifty years has occurred since 2000 as falling real incomes have combined with rising real housing costs to put housing out of reach for ever more families and individuals. And there’s no prospect of meaningful improvement ahead as incomes have yet to rebound from years of declines, and surging demand for rental housing is outpacing developers’ ability to build new homes.

Notes: Moderate (severe) burdens are defined as housing costs of 30-50% (more than 50%) of household income. Households with zero or negative income are assumed to be severely burdened, while renters not paying cash rent are assumed to be unburdened. 
Sources: JCHS tabulations of US Census Bureau, Decennial Census and American Community Surveys.

Notably, as our State of the Nation’s Housing report to be released next week documents, the largest deterioration in rental affordability has occurred among those making between $30,000 and $45,000, particularly in higher cost markets. But the problem is most extreme among the lowest-income households. Among those earning less than $15,000—which is equivalent to working year-round at the federal minimum wage—roughly three-quarters of households have severe cost burdens. Households at this income level households would have to find rentals going for $375 a month or less to stay within the standard affordability guideline, so it is not surprising that so many are cost-burdened. On its own, the private sector simply cannot provide housing at such low rents. As a result, there is much less variation in the extent of cost burdens among these lowest income families across markets—those in Detroit are as likely to be severely burdened as they are in San Francisco.

If the housing affordability crisis is silent, it’s not for lack of research that documents the extent of the issue. In just the last month, analysis by the Urban Institute, the National Low Income Housing Coalition (NLIHC), and NYU’s Furman Center have all documented the astounding extent of affordability challenges across the county.  The Urban Institute’s Housing Affordability Gap report finds that, nationwide, for every 100 extremely low-income renters there are only 28 units that are affordable, in adequate condition, and not occupied by higher income households. NLIHC’s Out of Reach report finds that there is not a single state in the country where someone working year-round at the federal minimum wage can afford a moderately priced two-bedroom rental. Focusing on 11 large cities, the Furman Center’s report drives home the point that these challenges are evident in a diverse range of cities, finding that even in the most affordable cities low-income renters could afford no more than 11 percent of recently available units.

Adding to these numerous efforts to quantify the extent of the problem, the Enterprise Foundation’s Make Room campaign brings this raw data to life by telling the compelling stories of families across the country who are struggling with severe rent burdens—and the very real consequences it has for their finances and their ability to get a foothold in the middle-class.  

While the absence of affordable housing has largely been a silent crisis, there does seem to be growing public awareness. The MacArthur Foundation’s latest How Housing Matters survey finds that a majority of the public (60 percent) identifies housing affordability as a very or fairly serious problem in America today. And three quarters agree that it is very challenging for a family of four with income under $24,000 to find affordable housing. But the survey also finds that only 39 percent of the public agree that the federal government should be involved in addressing housing affordability issues.

Given the magnitude and extent of the housing affordability crisis and the growing awareness of these issues, what seems to be missing is the political leadership needed to identify the lack of affordable housing as a national challenge and to make a case for action by the public sector.  The mission of the new Terwilliger Foundation is to foster engagement with this issue among political leaders from both sides of the aisle and to jump start the policy debate by identifying practical suggestions for how reform of federal efforts can better address the country’s housing needs. It is a laudable effort and, with growing evidence of the extent and persistence of the housing crisis, hopefully one that will gain traction in the upcoming Presidential election season.

Wednesday, June 10, 2015

Homeownership and Affordable Housing a Key Part of Upward Mobility, but Hard to Come By

by Jennifer Molinsky
Senior Research Associate
Earlier this week, the MacArthur Foundation released the results of its third annual How Housing Matters survey. Conducted by Hart Research, the survey of 1401 adults identifies a strong belief in the importance of stable, affordable housing to achieving a middle class lifestyle. But affordability challenges that respondents have experienced in their own lives, and see in their communities, contribute to a sense of pessimism about Americans’ chances of social mobility, and a majority still feels that the country is in the midst of the housing crisis that began 8 years ago.

Several findings resonate with our recent work at the Joint Center. As our forthcoming State of the Nation’s Housing report will show, the persistent problem of housing affordability continues to cause households to make difficult trade-offs. Over half of survey respondents reported making sacrifices in the past three years in order to pay for housing. The most common was to take on a second job or work more hours. Worryingly, a number of other trade-offs bode ill for peoples’ futures: many respondents reported that they have stopped saving for retirement, are accumulating consumer debt, and are cutting back on food and healthcare in order to meet housing costs. These stop-gap measures, necessary to ensure the rent or mortgage is paid, may add to financial and health strains later on. Renters, cost-burdened/distressed owners, younger adults, minorities, lower-income respondents, and city-dwellers are most likely to have made at least one trade-off in the past three years.

The survey also explored beliefs about upward mobility and found that, particularly for those with lower incomes, stable, affordable housing or owning a home is seen as one of the most important factors in achieving a middle class lifestyle (Figure 1). But a majority think that finding quality, affordable housing in their own community to rent or buy is challenging. And across age, race, and income levels, respondents expressed significant pessimism about the chances of rising from a lower economic class to the middle class, and believe it is harder for younger people today to save for retirement, own a home, find stable, decent-paying employment, and have a stable, affordable housing situation. Fully 79 percent think that middle class people fall into a lower economic class more frequently than the other way around.
Source: How Housing Matters, 2015, Hart Research &  MacArthur Foundation

One of the least optimistic groups of respondents were those aged 54-64, 85 percent of whom thought that downward economic mobility is more likely in today’s world than upward mobility.  This group was the most likely age cohort to see housing affordability as a serious problem in the nation. As our own research points out, those aged 50-64 were hit particularly hard in the housing crisis; as a whole, the age cohort’s homeownership rate declined by 5 percentage points from its 2005 peak, many saw a loss of wealth and have been living with stagnating wages, and the group has higher levels of housing and consumer debt than in the past. Member of this group who are housing cost burdened (paying more than 30 percent of their income on housing) make difficult trade-offs including forgoing retirement savings – again setting up the potential for greater difficulties in the future.

Though the 50-64 year olds are most likely to view housing affordability as a serious problem, their worries are shared with the other age cohorts surveyed in How Housing Matters. Sixty percent of all respondents think that affordable housing is a serious problem in the nation today, and 61 percent believe we are still in the midst of a housing crisis – with one in five thinking the worst is still to come.

As we head into a presidential election season, skepticism about the ability of Washington to intervene effectively, as well as ideological beliefs about the government’s role in solving this problem, present some clear hurdles to making affordable housing part of the national discussion. Over half of respondents (53 percent) believe that housing affordability is not the responsibility of the federal government. Follow-up interviews revealed that many in this group who see housing affordability as a serious problem are unclear about what government can do.  They also lack confidence that federal intervention would be effective, or have ideological concerns about federal involvement. Yet the survey also identifies some opportunities. Though just over half stated that housing affordability is not a federal responsibility, 49 percent of respondents feel that housing affordability should be a very or fairly high priority in Washington and slightly more believe it should be a very/fairly high priority at the state and local levels – yet only 14 percent believe it already is (Figure 2).


Source: How Housing Matters, 2015, Hart Research &  MacArthur Foundation

Among the reasons for ensuring that housing is a higher priority on the policy agenda, respondents found that the relationship between housing and children’s health and well-being among the most compelling: the belief that living in safe neighborhoods in quality, stable housing helps children’s mental, social, and academic development and allows families to spend more on their education and enrichment. Linking housing affordability to children’s well-being – as well as highlighting the sacrifices made by millions of cost-burdened elderly and low-income households – may help make the case that housing does indeed matter.