Friday, December 20, 2013

Census Bureau Takes a Small Step in Better Describing the Structure of the Modern Family -- but More Can Be Done

by George Masnick
Fellow
On November 25 the Census Bureau released its latest package of tables describing American families and living arrangements. These tables highlight the growing complexity of living arrangements among children—and the challenges that demographers and housing analysts face in charting changing household composition.

Since 2007 these tables have included a breakdown of family groups that identify couples who were not legally married but were joint parents of at least one minor child in the household.  This change reflects the trend for families to increasingly be started by the birth of a child rather than by marriage. Over 85 percent of births to teens are out of wedlock, as are over 60 percent of births to 20-24 year olds and over 30 percent of births to 25-29 year olds. Among those in their 20s co-residence of the parents is usually the norm, but in many cases, marriage does not take place for several years, and may never take place, certainly if the couple splits up.  Prior to 2007, these particular family groups were lumped into the category of “other families” with either a male or female reference person as head.  It was impossible under this old definition to distinguish in the tabulated data when unmarried family groups contained joint parents.

Many who referred to the older data assumed (incorrectly) that if adults in such family groups were not “currently married,” then the child or children were living in a “single”-parent household.  The implication was that unmarried two-parent households would behave more like one-parent households than like married couples across a wide range of issues of importance for public policy, including housing consumption.

The magnitude of the numbers of two-parent families under the old and new definitions can be seen in Exhibit 1.  While only about 7 percent of two-parent families are not married, that number is up from 5 percent in 2007. (Click exhibits to enlarge.)
  

Source: Current Population Survey March and annual Social and Economic Supplement, 2012 and earlier, http://www.census.gov/hhes/families/data/families.html. Table FM-2; http://www.census.gov/hhes/families/data/cps2013.html

In 2013 about 76 percent of all parents of minor children were married. Among young adults with minor children, however, the share that is currently married is much lower than this average (Exhibit 2). Only 43 percent of such parents under the age of 25 are married, as are just 65 percent of parents age 25-29.  The higher shares of older parents of minor children that are married reflect both the lower share of births to unmarried women when these parents were younger as well as the tendency for people to marry later. Whether today’s younger cohorts of parents will carry forward higher percentages of unmarried two-parent and “single”-parent living arrangements when they reach middle age remains to be seen.  I have put the word “single” in parentheses because it refers to legal marital status only, and these parents may well be partnered. 



When the parents of minor children are broken down by race/ethnicity we can see quite a large amount of variability in marriage/living arrangements (Exhibit 3).  The largest discrepancy is between Blacks and Asians.  Only 51 percent of Black parents are currently married compared to 89 percent of Asian parents of minor children. The share of non-Hispanic White parents of minor children who are married is almost 82 percent. Fully 42 percent of Black parents are in “single” parent living arrangements compared to only 9 percent of Asians. We would like to be able to identify the degree to which these differences are accounted for by differences in age of parents and by nativity status, but the data in the Census Bureau’s releases do not allow us to fully do this.  The data are especially silent when attempting to determine the presence of non-parent adults in the “single” parent category.



While identifying joint-parent unmarried couples as a separate category is a step forward, especially among parents in their 20s, a further breakdown of the data is still needed to better describe the modern family.  Married couples consist of persons in their first marriage and those who have been remarried.  If we are now identifying unmarried parents that are both the biological parent of at least one minor child in the household, shouldn’t we also identify married couples where only one parent is the biological parent of any child?  Some “single” parents are living with a partner to whom they are not married, who for all intents and purposes are helping to support the family and acting like a parent.  Some “single” parents are living with non-partner adults who also might be playing parental roles.  Many children are in “joint custody” households.  These “blended” and “extended” living arrangements are all very much part of the modern family, but cannot be readily identified in the Census data, especially by age cohort.

The next steps that the Census Bureau can take to present a better picture of the modern family seem straightforward.  Marital status could include a category “remarried,” and married couples should be further broken down by marriages in which one or both partners are remarried. Unmarried parents of minor children could be broken down by those living with a partner and those not. Among those not living with a partner, the presence or absence of other adults could be identified.  Minor children in married couple living arrangements could be identified as the biological child of both parents or as a stepchild of one parent.  And minor children in the household could be identified as living exclusively in the household or regularly spending some of their time in another household.

Generational differences in living arrangements at the onset of family formation, and the extent to which these differences persist as cohorts age, are key descriptors of the modern family. Therefore, many of the CPS tables should provide the age of the reference parent as a variable that is cross tabulated against other variables.  It would also be helpful if these new tables are produced separately by race/Hispanic origin of the reference parent.  This detailed breakdown by age and race/Hispanic origin will stretch the CPS data quite thin, to be sure, but the user can always aggregate up to gain robustness.

Finally, a few comments about the sharp decline since 2007 in Exhibit 1 in the number of two-parent families with minor children. This decline is certainly related to the effects of the Great Recession.  One reason for the decline is that immigration fell sharply in 2006 and has just begun to recover. Immigrant women have higher fertility than native born and experienced the greatest fertility decline during the economic down turn. These are trends consistent with the poor economic conditions that have affected young adults most severely.  Immigrants also have a much higher share of births to married couples compared to native born (76.4 percent versus 61.2 percent), and the decline in immigration during the Great Recession thus contributed to the recent rise in the share of all births that are to unmarried women.

It is normal that during a recession, both marriages and births are postponed.  A recovery in marriages would be expected to lag the recovery in the economy to allow for some planning of the event.  Meanwhile, both the decline and the recovery in births should each lag the trend in the economy by a year or more.  Although year-to-year instability in the CPS series is often the result of simple random variability, perhaps the upturn in 2013 in the number of families with minor children is further evidence that the economic recovery has begun in earnest. 


Thursday, December 5, 2013

American Renters Face Severe Affordability Problems: Live Webcast Monday, December 9

by Kerry Donahue
Communications Manager
Affordability problems for American renters have skyrocketed over the past decade, both in number and the share of renters facing them.  The inability of so many to find housing they can afford dramatically impacts the health and well-being of renters, as lower-income households cut back on food, healthcare, and savings, just to keep up. Our new report, America’s Rental Housing: Evolving Markets and Needs, will be released next Monday December 9 in Washington, DC.  The daylong event will feature a keynote address from HUD Secretary Shaun Donovan as well as remarks by Colorado Governor John Hickenlooper, Senator Mark Warner of Virginia, and many others.  The event will be webcast live from 11:30 a.m. – 4:30 p.m. (Eastern) at www.jchs.harvard.edu.   


This new report on America's rental housing finds that half of U.S. renters pay more than 30 percent or more of their income on rent, up an astonishing 12 percentage points from a decade earlier. Much of the increase was among renters facing severe burdens (paying more than half their income on rent), boosting their share to 27 percent. These levels were unimaginable just a decade ago, when the share of Americans renters paying half their income on housing, at 19 percent, was already a cause for serious concern. Tune into the webcast on Monday for more findings from this new report.


AGENDA  (Watch the LIVE WEBCAST @ www.jchs.harvard.edu)
Monday, December 9, 2013 
(Eastern time, subject to change)
11:00 a.m.
Welcome
Eric S. Belsky, Managing Director, Harvard Joint Center for Housing Studies
Mijo Vodopic, Program Officer, John D. and Catherine T. MacArthur Foundation
11:10 a.m.
Keynote Address
The Honorable Shaun Donovan
Secretary, U.S. Department of Housing and Urban Development
11:35 a.m.
America’s Rental Housing 2013 Research Presentation
Chris Herbert
Research Director, Harvard Joint Center for Housing Studies
12:30 p.m.
Remarks
Michael Stegman
Counselor to the Treasury Secretary for Housing Finance

U.S. Department of the Treasury
1:00 p.m.
CONVERSATION: Future Directions in Assisted Housing
Chris Arnold, Correspondent, National Public Radio (moderator)
Erika 
Poethig, Fellow and Director of Urban Policy Initiatives, Urban Institute
Mark Calabria, Director of Financial Regulation Studies, CATO Institute
2:00 p.m.
Housing Finance Reform & Multifamily Lending  
The Honorable Mark Warner
U.S. Senator, Commonwealth of Virginia
2:30 p.m.
Break
2:45 p.m.
CONVERSATION: The Evolution of the Rental Housing Market
Nick Timiraos, Reporter, Wall Street Journal (moderator)
Thomas Bozzuto, Chairman and CEO, The Bozzuto Group
Sean Dobson, Chairman and CEO, Amherst Securities Group
Shekar Narasimhan, Managing Partner, Beekman Advisors
4:00 p.m.
Remarks  
The Honorable John Hickenlooper 
Governor of Colorado

This event will be WEBCAST LIVE at www.jchs.harvard.eduand you can join the conversation on Twitter with #RentalHousing

Monday, December 2, 2013

Why We Should Care About the Great Recession’s Most Unfortunate Victim: Homeownership

by Rob Couch
Guest Blogger
From time to time, Housing Perspectives features posts by guest bloggers. This post was written by Rob Couch, a member of the Banking and Financial Services, Real Estate and Governmental Affairs practice groups at the law firm Bradley Arant Boult Cummings in Birmingham, Alabama.  Rob also serves on the Housing Commission of the Bipartisan Policy Center in Washington, DC..  Previously, he served as General Counsel of the U.S. Department of Housing and Urban Development and as President of the Government National Mortgage Association (Ginnie Mae). His post reflects thoughts he shared at a Brown Bag Lecture delivered at the Harvard Kennedy School on November 14, 2013.

In my lunchtime talk at the Harvard Kennedy School, sponsored by the Joint Center for Housing Studies, I discussed why recent government efforts enacted in the wake of the financial meltdown have caused increasingly stringent underwriting standards. These efforts have resulted in fewer homeowners, particularly first time purchasers, and the widening of the homeownership gap between certain minorities and white Americans. One of the questions from the audience during my talk came from a young man who challenged the continuing validity of the “Dream of Homeownership.”

After the bubble of 2007, some might think homeownership isn’t as worthy a goal as it used to be. In particular, younger Americans who have recently witnessed homeowners suffer financial loss or foreclosure due to declining home values or job loss may be especially wary.  A sizable percentage of young people are not yet in a stable career and want the flexibility that renting offers, and many young Americans who do want to own a home cannot meet underwriting criteria or afford a down payment given the combination of student loan debt and high unemployment.

Nonetheless, as Eric Belsky explains in his paper, The Dream Lives On: The Future of Homeownership in America, most young adults surveyed say they intend to buy a home in the future.   Furthermore, the results of several surveys cited in Belsky’s paper reveal that a majority of both owners and renters believe that owning makes more sense than renting. And for good reason; numerous studies have confirmed the economic and societal benefits of owning a home.

As a homeowner makes payments against his mortgage, and as the value of the property appreciates, the borrower’s equity in the home increases. If necessary, this equity can be accessed though the sale of the home or through a “cash out” refinance or a revolving line of credit. Homeowners also enjoy tax benefits as, in most cases, the annual interest paid on a mortgage and property taxes are fully deductible. Due to the long-term fixed-rate feature of most mortgages and the lifetime cap placed on adjustable-rate mortgages, homeowners are insulated from some of the inflationary pressures on the cost of housing faced by renters.

For the past thirty years, the wealth gap between the most affluent citizens and moderate wealth families in the United States has steadily widened. Households that are able to convert their greatest monthly living expense – rent—into a tax protected asset through amortizing long-term debt have a powerful tool for accumulating wealth. The family that owned its own home in 2010 had a median net worth of $174,500, compared to families who rented and had a net worth of $5,100. Belsky’s paper provides a more detailed analysis of the financial benefits of homeownership.

The benefits of homeownership extend beyond the financial ones, though. Children who grow up in owned homes have higher academic achievement scores in both reading and math and have a 25% higher high school graduation rate than children whose parents rent. Children of homeowners are twice as likely to acquire some post-secondary education, and they are 116% more likely to graduate college. As adults, they earn more and are 59% more likely to own their own home, extending the benefits of homeownership on to the next generation.

Society as a whole also benefits from homeownership. Research has shown that homeowners are more likely to be satisfied with their neighborhoods, and thus more likely to give back to their communities. People who own their homes more often participate in civic activities and work to improve the local community, and they are 15% more likely to vote. Lastly, they tend to have greater longevity in a residence, leading to a more stable neighborhood.

Considering the benefits homeownership offers to society as a whole, young Americans aren’t the only demographic group affected by recent policies. Recent reports estimate that the African-American community, with wealth more concentrated in homeownership than any other asset, lost more than 50% of its net worth during the housing crisis. The deterioration in homeownership has been disproportionately severe on African-Americans, Hispanics, and younger people, leading to a widening of the gap in minority/white homeownership rates.

Recent government efforts to protect borrowers who fail to pay their loans, particularly settlements that have been extracted from the industry and increased servicing standards, have had the effect of compounding the losses from bad loans, thereby encouraging even more conservative lending and hurting a much larger group of potential borrowers by depriving them of the opportunity to achieve homeownership. The overarching policy goal should be to facilitate homeownership, not to shift the burden of non-performance from defaulters to aspiring borrowers. Policies need to change if we wish to continue making homeownership a reality for the broadest group of eligible borrowers in the United States.  My recent paper, The Great Recession’s Most Unfortunate Victim: Homeownership, discusses how we can address this important issue.

Thursday, November 21, 2013

Strategies for Achieving Scale in the Residential Remodeling Industry

by Abbe Will
Research Analyst
Since its inception nearly twenty years ago, the Remodeling Futures Program of the Joint Center for Housing Studies has been investigating trends in contractor size, concentration, performance, and survivorship to better understand the evolving structure of contractors serving the residential remodeling market. Unlike the national homebuilding industry, which saw significant achievements of scale and consolidation in recent decades, the professional remodeling industry continues to be highly fragmented, where the vast majority of remodeling companies are relatively small, single-location businesses that likely will not experience any significant growth over the course of the business’s life-cycle. Two thirds of remodelers are self-employed, and fully half of payroll establishments have total revenues of under $250,000. Yet our research suggests that there are significant benefits to be gained through larger scale businesses.

The evidence for the benefits of scale in the remodeling industry is compelling. Comparing the revenue growth of larger-scale remodeling companies to the industry as a whole shows that larger-scale remodelers benefit from significantly stronger revenue growth. Where the average revenue of all residential remodeling contractors increased less than 18% in inflation-adjusted terms during the last industry upturn from 2002-2007, larger-scale firms with annual revenues of approximately $1 million or more increased their average revenue by over 30% during the same period. Additionally, larger-scale remodeling contractors benefit from higher revenues per employee, which implies that they enjoy greater labor productivity (Figure 1). While an admittedly crude measure of efficiency and productivity, the trend is obvious that larger remodeling businesses are seeing a benefit of scale.

Source: Unpublished tabulations of the 2007 Economic Census of Construction, U.S. Census Bureau.

Furthermore, there is evidence that larger-scale remodeling firms suffer significantly lower failure rates across the rocky business cycle (Figure 2). Remodelers with estimated receipts of $1 million or more during the last industry upturn in 2003–04 had a failure rate of only 2.7% that year, and their failure rate remained essentially unchanged during the cyclical downturn in 2009-10. These low and stable failure rates for the largest remodelers are in stark contrast to the roughly 20% failure rates of smaller remodeling businesses. With the efficiency gains that come along with achieving scale economies, larger remodeling companies seem much better equipped to ride out the volatile business cycles in the remodeling industry.

Source: JCHS estimates using U.S. Census Bureau tabulations of the 1989-2010 Business Information Tracking Series.

Although larger-scale remodeling firms enjoy significant benefits to scale, the industry has remained fragmented over time due to the many obstacles to gaining scale such as low barriers of entry, highly customized work, and difficulty attracting capital, to name a few. Understanding how remodeling companies are overcoming these major hurdles in their pursuit of scale economies should provide insights into how the industry is likely to continue evolving over the next several decades, as well as what opportunities exist for more widespread consolidation moving forward.

To this end, the Remodeling Futures Program has been conducting in-depth interviews with several dozen remodeling industry leaders including founders, presidents, and CEOs of larger-scale remodeling companies on the topic of benefits from scale and challenges and strategies for achieving scale. Key research questions for the project focus on exploring the major approaches used for gaining scale, challenges and opportunities unique to each type of strategy, and whether certain types of remodeling specialties or niches are more or less likely to attempt to establish a larger-scale or even national presence.

A key insight gained from these interviews is that successfully achieving scale in the remodeling industry has more typically occurred using strategies outside of the traditional model of organic expansion and acquisition. Common among remodeling companies that have been successful in establishing a larger-scale presence are strategies or approaches that involve strategic partnerships or arrangements, such as:

  • Strategic Alliances: When expanding to new markets, building brand awareness and trust takes a significant investment of time and money, so securing strategic alliances or partnerships with long-standing, nationally known manufacturing and retail brands to sell, furnish, and install products and projects is very effective for gaining entry into new markets with instant name recognition and credibility with consumers, who, given the same quality and price, will choose the brand with which they are already most familiar. Strategic alliances ultimately provide a contractor with a high volume of quality leads in new markets. 
  • Franchising: Franchising is a well-established scaling strategy in many industries that allows a business to quickly expand its brand recognition and reach without the challenges of managing each independently-owned and operated franchise location. Franchising in the remodeling industry seems to be more successful with single focus or specialty businesses, such as painting and insurance restoration services that are easier to standardize and streamline. 
  • Outside Investment: Pursuing outside investment through private equity partnerships, for example, provides a company with an influx of working financial capital for expanding into new markets, developing additional lines of business or products, or restructuring operations or management to better foster growth. Though a highly effective way to scale a remodeling company toward a national presence, this strategy of securing outside investment has not been more common because investors are deterred by the relatively high-risk nature of such a volatile and fragmented industry.

Since the remodeling industry is so diverse, with business segments and market niches that cover the full spectrum from full-service and design/build firms to specialty replacements and handyman services, there is no one-size-fits-all approach to achieving scale. Companies often employ multiple business strategies and arrangements either consecutively or concurrently. Some of the biggest benefits of scale reported by industry leaders include improved buying power, lower costs, efficiency of centralized accounting and management, and improved use of technology systems, as well as geographic diversity (i.e., not being dependent on the economic strength of one market or region), greater ability to explore new business opportunities, greater consumer recognition and trust, and being able to provide growth opportunities to key team members. The many issues surrounding this topic of strategies, benefits and challenges of achieving scale in the residential remodeling industry will be explored in greater detail in an upcoming Joint Center working paper.

Thursday, October 31, 2013

Fertility Rates and Age Structures – The Underpinnings of Replacement Fertility in the U.S.

by George Masnick
Fellow
The U.S. fertility rate is at near replacement level, where a woman bears two children over her lifetime (just enough to ‘replace’ herself and her partner).  The Total Fertility Rate (TFR), which is how many children the average woman in the U.S. will have if she survives through the reproductive ages and bears children at each age at rates U.S. women are currently experiencing, is just below this level.  Replacement fertility leads to a “pillar” like age structure, where the base of the pillar (children) contains about the same number of people per five-year age group as the middle of the pillar (parents).  For the U.S., that number is currently about 20 million (Exhibit 1).


This situation can be contrasted with fertility rates and age structures in most other industrialized countries.  Below-replacement fertility in much of Europe and in a number of Asian countries has created “mushroom cloud” shaped age structures where the numbers of children are just fractions of the size of the parents’ generations.  In Germany, for example, the 0-4 and 5-9 age groups are only about half the size of the 40-44 and 45-49 age groups (Exhibit 1).  Age structures for other countries with TFRs of 1.6 or less are broadly similar to Germany’s (Table 1).  Such an imbalance in age structures has the potential to create enormous problems for these societies in areas such as institutional stability (e.g. schools), labor force succession, housing market dynamics, and old-age social security.  Shrinking class sizes, workforce shortages, declining demand for larger homes that prevent older households from downsizing, and payroll tax collections that are insufficient to pay for retirement benefits are all consequences of long periods of below-replacement fertility.


So why is the U.S. such an outlier compared to other industrialized countries in having experienced recent near replacement-level fertility and a relatively healthy age structure?  And, is the U.S. likely to retain this advantage in the future?  The answers to these questions point to the importance of immigration in shaping the present demography of the U.S., and to uncertainty about future levels of immigration and the role it will play in the future.

Decomposing the U.S. age structure into immigrants (first generation), the children of immigrants born in the U.S. (second generation), and third or higher generations (parents born in the U.S.), illustrates the importance of immigration in both backfilling the smaller baby bust cohorts born between the mid-1960s and mid-1980s and in increasing the cohort size of children born here in the past 20 years (Exhibit 2).  According to a recent Pew Research Center report, immigrant fertility rates are about 50 percent higher than native-born rates.    While in 2010, only 17 percent of women of reproductive age were immigrants, immigrant women bore a quarter of all children born in the 2000s. Replacement level fertility in the 2000s was achieved by above-replacement immigrant fertility counter balancing below-replacement native fertility.


The future stability of the age structure of the U.S. will depend on levels of immigration and on fertility trends of both the native born and of immigrants.  The Pew report cited above documents how dramatically fertility rates have fallen since the Great Recession, with the largest percentage declines occurring among immigrants.  Between 2007 and 2010 the number of births per 1,000 women age 15-44 (the General Fertility Rate) fell for native-born women by 6 percent while for foreign-born women the decline was 14 percent. Whether fertility declines have been mostly driven by high unemployment and low wages and so will rebound with an improving economy is too soon to tell.  Any rebound could still leave fertility levels below the replacement rate.  But in any case, it is unlikely that U.S. women will soon adopt the very low levels of childbearing that characterize much of the developed world.  The influence on fertility of “pro-family” fundamentalist religions in the U.S. and the not-unrelated political hostility to birth control and abortion in many parts of the country continue to support higher levels of U.S. childbearing. 

However, the size and composition of future streams of immigration are very much in question.  Immigration reform has been slow to gain traction in the U.S. Congress, and the outcome of any new legislation on future immigration levels remains uncertain.  More to the point, perhaps, is the fact that several important sending countries are undergoing fundamental transformations in both their economies and demographics that will diminish their propensities to send immigrants.  For example, Mexico accounts for about 30 percent of all foreign-born living in the U.S., and immigration from Mexico has long been a safety valve to release excess population growth in that country.  But Mexico has reduced its fertility by over one-half since 1985, with much of the reduction occurring in the past decade.  In the future, as long as Mexico’s economy continues to prosper, we can expect fewer will need to leave Mexico to find work.  Similar transformations are occurring in other sending countries such as India and China. Age structures in these countries have begun to transform from “pyramid” to “pillar” shapes.

Before closing, I want to say a few words about one industrialized country, Sweden, which has succeeded in maintaining near replacement fertility without depending on high fertility immigrants.  There are indeed immigrants to Sweden who are needed to fill certain jobs, but they mostly come from other low fertility countries in Europe, especially the Balkans, and the immigrants retain the low fertility of their countries of origin.  Sweden has a long history of low native-born fertility going back to the 1970s, and has gradually adopted strong social policies to encourage its citizens to voluntarily become parents, including generous maternity/paternity leaves, significant health care and housing benefits, and low-cost, high quality, and readily available daycare. But even with such strong pro-natalist policies, Sweden can barely keep its fertility at near-replacement levels.

We should be thankful that our recent history of high-fertility immigration has helped create an age structure that will lead to far fewer problems in the near future compared to those facing other industrialized countries.  Whether we continue to retain this advantage will depend on future levels of both immigration and fertility (of both the native-born and the newly arrived).  To avoid the U.S. moving toward a mushroom cloud like age structure, absent widespread pro-natalist programs and policies as in the case of Sweden, the depressed immigration levels and declining fertility trends of recent years will need to be reversed.  

Wednesday, October 23, 2013

The Role of Investors in Acquiring Foreclosed Properties in Boston

by Irene Lew and Rocio Sanchez-Moyano
Research Assistants
In the fall of 2011, a meeting of researchers, policy makers, and practitioners convened by the What Works Collaborative highlighted the dearth of research examining the role of private investors in purchasing foreclosed properties in lower-income neighborhoods heavily impacted by the foreclosure crisis. To address this void, the collaborative funded a series of case studies in four market areas across the US that represented a range of market conditions: Atlanta, Boston, Cleveland, and Las Vegas. The case study for Boston, which was just released, focuses on the activity of investors in the city of Boston and other communities located in Suffolk County, Massachusetts.  (Note: the Atlanta case study was published earlier this year; Cleveland and Las Vegas are not yet published.)

The Boston study entailed an examination of data from The Warren Group, a third-party-vendor, on real estate transactions in Suffolk County from 2007 to 2012, as well as interviews with government officials, non-profit organizations, lenders, real estate brokers, and investors in foreclosed properties. Excluding government and nonprofit organizations, investors were identified in the transaction data either as those who had acquired more than one foreclosed property over the period or those who had purchased a foreclosed property under a corporate or legal name. Key findings from the report include:
  • Investors accounted for a large share – 44 percent – of transactions between 2007 and 2012.
  • In all, a total of 437 unique investors were identified.  Most of these investors can be classified as “mom and pop investors” who bought only one or two properties, but 33 investors each purchased 10 or more properties and accounted for more than 50 percent of all investor purchases. (Click table to enlarge.)


Note: Percentages do not sum to 100 due to rounding.
Source: Authors’ calculations of data from the Warren Group.

  • While private investors operating on a national scale have received substantial media attention in the last year, in Suffolk County the largest investors had overwhelmingly local roots: 18 were based in Suffolk County and only two were headquartered out of state.
  • Large investors were somewhat more likely to invest in highly distressed neighborhoods (35 percent of their foreclosure acquisitions, compared to 31 percent of the acquisitions of all foreclosure investors), and the majority of purchases were small multifamily buildings (2-4 units) or condos. Alan Mallach has defined a typology of investors in homes in distressed neighborhoods, with a key distinction being between those who seek to make their profit by quickly flipping properties to other buyers and those who seek to profit by holding onto properties for rental income. The study found that in Suffolk County a buy-and-hold strategy was most often pursued by large investors, supported by the healthy demand for rental housing in Boston. Although a few investors did turn over a majority of their purchases in a fairly short time, others who held onto most of their properties also sold a portion of their acquisitions when the right opportunity arose.  Overall, 66 percent of foreclosures purchased by large investors between 2007 and 2012 were still owned by these entities as of February 2013. 
  • Cash was the most common form of financing, but hard-money loans from investor-affiliated lenders and mortgages from small community banks played an important role (Figure 1).


Note: Includes all legal variations of the same lender. Some investor-affiliated lenders have multiple iterations. Mortgages include only primary-lien purchase-money loans, as identified by the authors.
Source: Authors’ calculations of data from the Warren Group.

  • Given the significant presence of large investors in more distressed neighborhoods, this study primarily focused on the activities of these investors. However, based on anecdotal information, small investors face more challenges than large investors in distressed property acquisition, rehabilitation, and management due to more limited financial resources. 
The primary motivation for this study was to gain a better understanding of the extent and nature of investor activity in acquiring foreclosed properties in Suffolk County in order to determine the impact investors are having on the neighborhoods where foreclosures have been common.  In the end, it can be difficult to predict the long-term impacts of investor activity.  On the one hand, investors have channeled a significant amount of capital into distressed neighborhoods, which may have helped absorb the high volume of foreclosed properties and stabilized conditions in those communities.  Our research team found that predatory flipping and irresponsible rental property management in Boston was rare.

On the other hand, there is concern that investors who acquire foreclosed properties may not maintain them to the same degree as owner-occupants.  In interviews, investors reported that due to factors such as the high market values of the primarily multifamily housing stock in Boston and the increased competition to attract tenants with Housing Choice Vouchers, they routinely undertook a fair amount of investment in properties they acquired. In fact, the median time to resale among properties resold by investors is about six months, which suggests that investors are likely to make some improvements to the properties before they are resold.  However, in the view of many nonprofit advocates, these market-driven property improvements are not enough to ensure the long-term affordability and sustainability of these units. The discrepancy in these points of view reflects the motivation of many investors to undertake improvements up to the point that a decent return on these investments is likely, while community groups have broader goals of providing high-quality affordable housing and developing properties that have a positive impact on the surrounding community. Other advocates worry about investor decisions to increase rents that may displace low-income individuals and families who are no longer able to afford these units, and whether investors are crowding out potential owner-occupants looking to buy in these neighborhoods.

Nonprofits partnering with city officials and investors have been working to alleviate these concerns.  One nonprofit organization’s partnership with the City of Chelsea to track code violations in investor-owned properties has led to improved accountability and code compliance among investor owners.  Other groups have recognized the value of leveraging investors’ support networks and informational advantages, with some partnering successfully with local investors on the acquisition and rehabilitation of foreclosed properties. One example is the Coalition to Occupy Homes in Foreclosure (COHIF), a group of nonprofits working with the City of Boston, the state of Massachusetts, and others that are looking to acquire 30 foreclosed or at-risk homes over two years.

The Boston case study—along with other studies conducted by research teams in Atlanta, Cleveland, and Las Vegas—made an initial attempt to fill in the gaps of knowledge regarding investor activity in these central urban neighborhoods.  The vast majority of investors across the four case study areas operated on a rather small scale, with a sizeable share of foreclosed properties acquired by “mom and pop” investors who purchased one or two properties. For the most part, even “large” investors in these communities were defined as those buying 10 properties, over a 4 to 6 year period, with few purchasing more than 100 properties. While these studies have shed some light on the extent and nature of investor activity, there is a need for more systematic research that can address the concern of whether investors are worse stewards of foreclosed properties than owner-occupants, as well as better determine their long-term impact on the health and stability of distressed neighborhoods.

Thursday, October 17, 2013

Home Improvement Upturn Expected to Begin Tapering in 2014

by Abbe Will
Research Analyst
The home remodeling market continues to improve, with strong gains expected for the remainder of 2013 and the beginning of 2014, according to our latest Leading Indicator of Remodeling Activity (LIRA).  While the LIRA continues to project annual improvement spending increasing at a double-digit pace in the near term, a slowdown of this growth can be expected by the middle of 2014.

The soft patch that homebuilding has seen in recent months, coupled with rising financing costs, is expected to be reflected as slower growth in home improvement spending beginning around the middle of next year. However, even with this projected tapering, remodeling activity should remain at healthy levels.

In the near term, homeowner spending on improvements is expected to see its strongest growth since the height of the housing boom.  Existing home sales are still growing at a double-digit pace, and rising house prices are helping homeowners rebuild equity lost during the housing crash. (Click chart to enlarge.)


For more information about the LIRA, including how it is calculated, visit the Joint Center website.

Tuesday, October 8, 2013

Terwilliger: "Feds Should Focus Less on Subsidizing Homeowners; More on Helping Low-Income Renters and Low-Wealth Owners"

by Kerry Donahue
Communications
Manager
There are few people with more experience in housing than J. Ronald Terwilliger, chairman emeritus of Trammell Crow Residential and this year’s presenter of the John T. Dunlop Lecture.

A graduate of the Harvard Business School, Mr. Terwilliger returned to Cambridge last week to present his vision of a more balanced federal housing policy.

Before a standing-room-only audience at the Harvard Graduate School of Design, Mr. Terwilliger urged Washington policymakers to abandon “prevailing orthodoxies” and re-direct the $200 billion the federal government spends annually on housing to support those families with the greatest needs.  As Mr. Terwilliger explained, we are at an inflection point in our nation’s history that requires federal housing policy to “focus less on subsidizing higher-income homeowners and more on helping lower-income renters as well as low-wealth homeowners.”  He specifically cited the mortgage interest deduction as in need of reform because it disproportionately benefits the wealthiest Americans. 

Mr. Terwilliger’s remarks were entitled Housing America’s Increasingly Diverse Population.  Central to his call for a more balanced housing policy is the fact that America’s demographics are dramatically changing:  Our nation is becoming older and more racially and ethnically diverse.  At the same time, many of our nation’s young adults, the 62 million echo boomers, are beginning to form households for the first time. As Mr. Terwilliger argued, these trends will challenge housing policymakers to develop new, more effective strategies, including ways to increase the supply of affordable rental housing to meet the rising demand in the marketplace.

It was wonderful to hear Mr. Terwilliger’s evocation of John Dunlop, a man who served presidents of both political parties and spent a lifetime bridging differences.  At a time when our nation’s politics seem so broken, we can no doubt use more men and women like Professor Dunlop in Washington. 




We thank the National Housing Endowment for supporting the Dunlop Lecture.  Click the video below to watch Ron Terwilliger's speech. We welcome your comments and responses.



Thursday, September 26, 2013

How Helpful is the Price-to-Income Ratio in Flagging Bubbles?

by Rocio Sanchez-Moyano
Research Assistant
With the continued growth of house prices across the country, talk of a housing bubble is beginning to reappear in the headlines. House price-to-income ratios are often used to indicate a bubble, as prices have historically had a relatively stable relationship with incomes (both mean and median).  In the US, nationally, the price-to-income ratio remained relatively stable throughout the 1990s.  It began to increase around 2000 and surpassed its long-run average of 3.65 by 2002 (Figure 1).  The national price-to-income ratio continued to increase in the mid-2000s, reaching a high of 4.63 in 2006 before rapidly declining in 2007 and 2008 and eventually hitting a low of 3.26 in 2011.  The classic bubble shape is clearly visible in this trend.  Recent price gains, viewed in this context, do not seem to indicate the return of a bubble; price-to-income ratios today match their early 1990s rates and still have some room for growth before reaching their long-run average.  (Click chart to enlarge.)


Notes: Prices are 1991 National Association of Realtors® Median Existing Single-Family Home Prices, indexed by the FHFA Expanded-Data House Price Index.  Incomes are median household incomes.
Sources: JCHS tabulations of FHFA Expanded-Data House Price Index;  US Census Bureau, Moody’s Analytics Estimates.

However, despite the seemingly straightforward relationship between house prices and incomes in Figure 1, this indicator can be difficult to interpret.  To start, many data sources are available for measuring prices.  One used frequently is the National Association of Realtors ® (NAR) Single-Family Median Home Price as it is widely available for many metros and provides an actual house price (rather than an index showing change in values) that can be compared to income levels.  The disadvantage to this measure is that NAR house prices also capture changes in the types of units that are being sold over time and so does not reflect how the value of the same home changes.  Repeat sales indices, like the Federal Housing Finance Authority’s (FHFA) Expanded-Data House Price Index, which was used to produce the figures in this post, are designed to take into account changes in the values of homes themselves by tracking sales of the same homes over time.  However, the FHFA index can be more difficult to interpret since, as an index, it does not provide information about current prices.  Price-to-income ratios using this data must peg the index to a starting or ending house price.

Furthermore, identifying bubbles or other price anomalies from price-to-income ratios can be difficult because it is not clear what is an appropriate baseline value of the measure for comparison.  Even in the aggregate US case, where the ratio did not fluctuate more than one percent in either direction for much of the 1990s, the linear trend is not flat and the long run average is above the 1990s levels.  This becomes even murkier when observing trends at the metro level.  Some metros, like Dallas, had stable price-to-income ratios over the last two decades (Figure 2).  Dallas did not experience a significant bubble in the mid-2000s and its long-run average mirrors the linear trend.  In other metros, like Phoenix, the boom-bust period led to significant fluctuations in the price-to-income ratio after having been relatively stable in the 1990s.  If the 1990s levels are to be considered normal for Phoenix, then current price-to-income ratios remain below average and recent growth in prices can be considered a return to normal after an overcorrection.

For other metros, the price-to-income trend is more difficult to interpret.  Ratios in Cleveland are well below their long-run average, but the historical trend has been drifting downwards, so ratios in recent years could be indicating a reset of the ratio in Cleveland to lower levels.  At another end, San Francisco has experienced a wide range of price-to-income ratios in recent history.  Price-to-income ratios boomed in the late 1980s, decreased throughout much of the 1990s, and then surged through the mid-2000s.  Compared to its long-run average, ratios in San Francisco are above historical norms, but, when the historical trend is considered, prices can continue to increase before they appear “too high.”  Finally, if a fundamental relationship exists between prices and incomes, it is unclear why the ratio can vary significantly from metro to metro.  The national average is around 3.6.  In the metros observed here, Cleveland and Dallas both have historic averages below 3.0 while San Francisco’s is double the national average. (Click chart to enlarge.)


Notes: Prices are 1991 National Association of Realtors® Median Existing Single-Family Home Prices, indexed by the FHFA Expanded-Data House Price Index.  Incomes are median household incomes.
Sources: JCHS tabulations of FHFA Expanded-Data House Price Index;  US Census Bureau, Moody’s Analytics Estimates

Given this variation, what can we make of the price-to-income ratio?  On a national level, this ratio does a relatively good job of identifying substantive shifts in the market.  In the aggregate, there appears to be a “normal” price-to-income ratio and prolonged deviation from this trend can signal an underlying shift.  However, on a metro-by-metro level, where it can be difficult to identify an appropriate baseline value, long-run historical context is necessary to interpret point-in-time estimates.  In markets like Dallas and Phoenix, historical trends are consistent enough that it can be useful to compare the current ratio to past ones.  In others, like Cleveland and San Francisco, the price-to-income ratio on its own is not especially helpful since there is no clear way to identify a “normal” price-to-income ratio.

Monday, September 23, 2013

Boston's Housing Challenge: Affordability, Availability


Housing availability in Boston has been a particular passion for outgoing Mayor Thomas Menino, who recently unveiled an ambitious plan to build 30,000 homes in Boston by allowing taller structures with smaller units, selling public land to developers at a discount, and using subsidies to spur development of more affordable housing.  Last week, Joint Center managing director Eric Belsky, who served on the Housing Advisory Panel for the plan, joined other housing experts on the local NPR program Radio Boston, to discuss the mayor's plan and Boston's challenges.

Wednesday, September 18, 2013

The Metropolitan Revolution

by Bruce Katz
Guest Blogger
Next Wednesday, September 25, I will be coming to Harvard to share a message: there is a Metropolitan Revolution underway in this country.

While the national economy continues to suffer the lingering effects of the Great Recession—with nearly 10 million jobs needed to make up the jobs lost during the downturn and keep pace with labor market dynamics and more than 107 million people living in poverty or near poverty—the federal government is mired in partisan gridlock and ideological polarization, leaving local and metropolitan leaders to pick up the slack.

In many ways, this transfer of responsibility is not only a cyclical event but also a structural change, given the harsh realities of the shifting federal budget. With a rapidly aging national population, mandatory federal spending on health care and retirement benefits is projected to rise by $1.6 trillion annually by 2023.  This will inevitably squeeze federal spending on critical investments around education, infrastructure, housing and innovation. The result will be a U.S. governance structure that looks very different in a decade: Washington will do less; local governments and metropolitan networks will do more.

To make it through this fiscal resort, we need to rethink power in America. Metros will lead on policy innovation; the federal government (and even state governments) will follow.

The good news is that smart city and metropolitan leaders aren’t waiting for national solutions to local problems. Across the nation, in metros as diverse as New York, Houston and Denver, Portland and Detroit, Los Angeles and Cleveland, leaders are doing the hard work to grow jobs and make their economies more prosperous: investing in infrastructure, making manufacturing a priority again, linking small businesses to new investors and global markets, giving workers the skills they need to compete.

A new metropolitan playbook defines the Metropolitan Revolution:

First, cities and metros are forming broad based networks to co-design and co-produce solutions. The unique advantage that metropolitan areas have over states and the national government is that they are networks of leaders, rather than hierarchies of government officials. Successful metro-level initiatives incorporate broad input and support—from business and civic leaders, heads of universities and philanthropies, as well as elected officials. 

Second, city and metropolitan leaders are taking the time to understand the starting points of their disparate economies and set distinctive visions based on their analysis. The Great Recession reminded us that metro areas perform different functions in the global economy depending on what they make, the advanced services they provide, what they trade and which cities and metros they trade with. What makes Denver a powerful metropolis on the global stage is different from what propels Detroit; the same for Portland, Pittsburgh and Phoenix. 

Finally, city and metropolitan leaders are “finding their game changers” -- designing, financing and delivering transformative economy-shaping solutions that build on their distinctive assets and advantages. The Applied Science Districts in New York City. State-of-the-art transit in Los Angeles and Denver. A new export strategy in Portland; smart manufacturing initiatives in Northeast Ohio; successful efforts to integrate immigrants in Houston.  Even a burgeoning Innovation District in Detroit.

Cities and metropolitan areas will do more because they can. 

The United States is the world’s quintessential Metropolitan Nation.  All 388 metropolitan areas house 84 percent of the nation’s population and generate 91 percent of the national GDP. The top 100 metropolitan areas in the United States alone sit on only 12 percent of the land mass of the country but house 65 percent of the population, generate 75 percent of the GDP. They also concentrate and congregate disproportionate shares of the assets that the nation needs to compete globally: modern infrastructure, skilled workers, advanced industry firms and advanced research institutions.

The United States also devolves more fiscal responsibilities to cities and metropolitan areas (and their states) than other countries. Despite the attention given federal efforts like No Child Left Behind and Race to the Top, local and state governments already account for over 90% of total government spending. Despite the focus on still unrealized proposals like a National Infrastructure Bank, states and localities already account for over 70 percent of transportation infrastructure spending and are the driving force behind such investments in such asset categories as roads, transit, rail, ports, airports, water and sewer and, of course, urban regeneration and basic municipal services.   

Make no mistake: cities and metropolitan areas (and a mixed group of states) will drive strategic investments in education and infrastructure going forward, and they already are. San Antonio’s recent passage of a ballot initiative—Pre-K for SA and Detroit’s corporate and civic support for the M1Rail along Woodward Corridor—are only the latest examples of communities (broadly defined) stepping up to get stuff done.

Yet it is also likely that cities and metropolitan areas will lead in areas traditionally left to the federal government, like investments in basic and applied science and affordable housing. The recent sequestration of federal funding for such traditional federal responsibilities as the National Institutes of Health and public housing sent a strong signal about how unreliable our national government has become. The response will be growing state and metropolitan support via the ballot box for basic and applied research (e.g., California’s $3 billion Stem Cell Research and Cures Initiative) and growing local and metropolitan innovation on the affordable housing front via inclusionary zoning, public private partnerships and local housing trusts capitalized through real estate transfer taxes.

The bottom line is this: the health of the United States should never be defined by what happens in Washington, D.C. Our metropolitan areas are the engines of our economy, the centers of global trade and investment and the driving forces of national competitiveness and prosperity.  In the coming decade -- in this century -- they will be the vanguard of policy innovation and national progress.

Bruce Katz is a Vice President at the Brookings Institution, co-director of the Metropolitan Policy Program, and the co-author of The Metropolitan Revolution (Brookings Institution Press, 2013).  He will speak at the Harvard Kennedy School on Wednesday, September 25 at 7pm (Belfer Building, 79 JFK Street, Cambridge, MA, Starr Auditorium). The event is free & open to the public.


Thursday, September 5, 2013

Keeping an Eye on Trends in Household Growth

by Chris Herbert
Research Director
While home prices and construction levels are on the rise, the most recent estimates suggest that the rate of household growth slowed during the first half of 2013 from what had been promising indications of a rising trend through 2012 (Figure 1).  The rise in household growth last year had been a key source of optimism that the housing recovery was being built on the solid ground of expanding demand for additional housing.  The latest indication of a possible slowdown in household growth raises a cautionary flag that we have not fully turned a corner on the slowdown in household formation that began during the Great Recession. It also raises questions about how long a recovery in the single-family for-sale market can be sustained absent greater growth in homeowner households.


Note: Annualized growth is change in trailing 4-quarter average household estimate from  previous year; year-over-year growth is change in quarterly household estimate from previous year.  Source: JCHS tabulations of US Census Bureau, Housing Vacancy Surveys.

The source of the recent estimates is the quarterly Housing Vacancy Survey (HVS) conducted by the Census Bureau, which in addition to providing data on vacancies and homeownership rates also provides the timeliest available estimates of the number of owner and renter households.  The HVS quarterly estimates are somewhat volatile, but this volatility can be dampened by examining averages of the previous four quarters, which is how the annual HVS estimates are produced. There are also non-trivial differences in the count of households from this survey compared to the decennial census for reasons that are not well understood. Over the course of the past decade household growth estimates from the HVS were on the order of 15 percent below what the decennial censuses indicated, suggesting there is a downward bias in household growth from this survey. But while there are questions about the accuracy of the overall count of households from the HVS over time, there is still reason to believe that the survey is useful as an indicator of the latest trends in the direction of household growth.

The HVS data for the second quarter (Q2) of 2013 suggest that not only was the acceleration of household growth reported for 2012 less than originally reported, but also that growth has slowed in the first half of 2013.  Back in 2012, HVS data were showing that annual household growth in the US had rebounded significantly, to a level of 980,000 for the year after averaging less than 600,000 over the previous five years.  With the Q2 2013 data release, however, the HVS also revised its 2012 annual household growth estimate down by over 100,000 households to a less robust level of 857,000. 

On top of the downward revisions to 2012 growth, HVS data now also show that in the first quarter of 2013, the year-over-year pace of household growth plummeted back to the lowest rate since mid-2010, down to 403,000. While the Q1 number could have been a statistical blip, the Q2 number shows household growth still just 746,000 - well below last year’s annual pace.  Taking these two quarters into account, the most recent annualized household growth rate is just 751,000. Given this pace household growth will have to average nearly 1.2 million in the second half of the year just to match last year’s reported growth.

The Q2 HVS data also show that the homeownership rate failed to reverse its downward course in the second quarter of 2013.  While the Q2 rate of 65.0 percent is unchanged from Q1, it is still 0.5 percentage point below the homeownership rate from a year ago.  Of particular concern is that behind the homeownership rate decline is a contraction in the number of homeowners (Figure 2).  Based on a 4-quarter moving average estimate of households, the number of homeowners was down by 178,000 in the second quarter of 2013.  This contraction is on top of newly released revisions to historical HVS data that show fewer homeowners in 2012 than originally reported. In all, the number of homeowners in HVS is 1.5 million below its peak at the start of 2007.

Note: Household estimate is 4-quarter trailing average.
Source: JCHS tabulations of US Census Bureau, Housing Vacancy Surveys.

These trends suggest that recent gains in home prices and single family home construction have been driven more by a restricted supply of homes for sale amid demand from existing owners rather than by growth in first-time homebuyers adding to the number of owners.  With continued weakness in household growth and declines in the outright number of homeowners, the latest HVS data suggest that for-sale housing markets may face challenges to a sustained recovery if the inventory of homes for sale expands but the number of households looking for homes does not.