Spending on Distressed Properties Boosts Remodeling

by Elizabeth
La Jeunesse
Research Assistant

In recent years, a sizable inventory of distressed residential properties in the U.S. housing market has begun to drive up spending on home improvements and repairs. According to a new Joint Center research note, the market for home improvement and repair spending to distressed properties in 2011 was approximately $9.8 billion. Around four-fifths of this estimate ($8.1 billion) was spent by households and investors on homes purchased after short sale, homeowner default, or bank foreclosure. One fifth of this estimate ($1.7 billion) was spent by banks and institutions to prepare REO (real estate owned) homes for sale.

Note: Bank-owned distressed properties include those sold by Fannie Mae, Freddie Mac, FHA or private banks.  Source: JCHS, N13-1, Home Improvement Spending on Distressed Properties

According to our estimates, from 2007 to 2011, annual spending to distressed properties saw an increase of nearly $6.7 billion. As a share of all home improvements and repairs by owners, spending on distressed properties grew from just 1% in 2007 to 4% in 2011. While much of this spending follows a period of under-investment as properties sat vacant through the foreclosure process, more recently additional funds are being spent to get these homes back into active stock.

According to a 2012 Federal Reserve White Paper, the flow of new REO homes should remain high in 2012 and 2013. If this prediction bears out, then the level of repair and improvement spending to distressed properties in the next two years should remain roughly similar to the nearly $10 billion levels reached in 2011.

U.S. Housing Stock Ready for Improvement

After languishing for several years, the U.S. remodeling industry appears to be pulling out of its downturn, and a renewal of the nation’s housing stock is underway, according to the Joint Center's new remodeling report, The U.S. Housing Stock: Ready for Renewal.  Foreclosed properties are being rehabilitated, sustainable home improvements are gaining popularity, older homeowners are retrofitting their homes to accommodate their evolving needs, and the future market potential is immense, as the emerging echo boom  generation is projected to be the largest in our nation’s history.

As baby boomers move into retirement, they are increasing demand for aging-in-place retrofits.  A decade ago, homeowners over 55 accounted for less than one third of all home improvement spending. By 2011, this share had already grown to over 45 percent. And generations behind the baby boomers will help fuel future spending growth since echo boomers are projected to outnumber baby boomers by more than twelve million as they begin to enter their peak remodeling years over the next decade.

Additionally, the surge in distressed properties coming back onto the market is contributing to an increase in U.S. remodeling spending. After limited spending during the housing bust, renovating the more than one million distressed properties that were sold in 2011  contributed nearly $10 billion to home improvement spending.  With about three million more foreclosures and short sales in the pipeline, there is even more such spending ahead of us.

Average homeowner spending on remodeling was 20 percent higher in the Northeast and 10 percent lower in the South, compared to the national average in 2011. Since the 1990s,  however, the Sunbelt metro areas have generally seen stronger growth in home  improvement spending. As of 2011, metro areas with the highest per owner improvement spending included the rapidly growing Sunbelt metros of Austin, Las Vegas, and Phoenix, as well as traditionally stronger markets such as Boston, New York, San Francisco, and  Washington, D.C.

Spending on energy-efficiency upgrades, in particular, continued to expand through the remodeling downturn.  The share of total market spending on energy-related projects rose sharply from 23 percent in 2007 to 33 percent in 2011.  About a quarter of households undertaking home improvement projects in 2011 did so for energy efficiency purposes.

Read the full report on the JCHS website.

Remodeling Recovery Underway and Picking Up Steam

by Abbe Will
Research Analyst

All signs point to a strong rebound for home improvement activity in 2013, according to our latest Leading Indicator of Remodeling Activity (LIRA).  Robust spending in the second half of 2012 suggests the remodeling recovery is already underway, and the LIRA projects annual homeowner improvement spending will see accelerating double-digit growth through the third quarter of 2013. This news comes just ahead of the release of our biennial remodeling report, The U.S. Housing Stock: Ready for Renewal, coming out next Wednesday, January 23.

It’s encouraging to see the residential sector finally contribute to growth in our economy. Through the first three quarters of 2012, investment in the residential sector was responsible for one out of every six dollars added to our GDP.  Moving forward, home improvement spending is expected to make an even larger contribution to GDP growth.

There are many external economic and political risks that could derail this remodeling recovery, but the solid momentum behind home building activity, existing home sales, low financing costs, and remodeling contractor sentiment all point to a solid start to the new year for home improvement spending. (Click chart to enlarge.)

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

Completing the Housing Market Reform Agenda

by William Apgar
Senior Scholar

End of year festivities and Congressional budget deliberations in 2012 unfortunately diverted attention away from the critical task of ensuring that all Americans have access to decent and affordable housing in the year ahead.  The Joint Center’s recently-released report, Getting on the Right Track: Improving Low-Income and Minority Access to Mortgage Credit after the Housing Bust, discusses what policies and programs will be needed to promote fair, affordable, and sustainable homeownership opportunities for these market segments. At the most basic level, mortgage markets rest on the ability of individual borrowers to repay their loans. Current efforts of the Consumer Financial Protection Bureau (CFPB) have set in motion a comprehensive reform of loan origination and loan servicing, including definitions as to what constitutes a good loan product with the ability to repay.  

Meanwhile, left undecided are the fates of Fannie Mae and Freddie Mac (the GSEs) as well as the future of the Federal Housing Administration (FHA) and the broader government role in meeting mortgage credit needs of historically underserved borrowers and communities. These elements are perhaps even more contentious than the rules and regulations now being implemented by the CFPB, but it is important to complete the task of rebuilding the new mortgage finance system to ensure that the near catastrophic events of the past five are not repeated.  Getting on the Right Track makes several recommendations to this end, including the following:

FHA must be retooled to meet its historic role as lender of last resort.  FHA has emerged as a vital lending source to lower-income households and households with less than pristine credit records and limited ability to accumulate the downpayment needed to purchase a home.  To be more effective in its role as lender of last resort, FHA needs to be retooled to be more than a first responder in a financial market emergency. As such, it should have the flexibility and capacity to experiment with mortgage features and adjust pricing as conditions warrant. In particular, FHA must be freed from those congressionally-imposed restrictions that limit its ability to rebuild its financial capacity to be able respond to any future mortgage market turmoil. 

Deciding on the future of the GSEs is the most complex of the remaining items on the reform agenda.  GSE reform is of course intricately entwined with current rulemaking about a borrower’s ability to repay and what constitutes a good mortgage product.   There is little doubt that without a government-backed secondary market, private capital would not be widely available in difficult-to-serve markets. It is also questionable whether, in a world with more limited government guarantees, the private sector would even serve the broader market for longer-term fixed-rate mortgage products.  Various proposals suggest that rather than eliminate government support for the secondary market entirely, a reformed set of secondary market entities should maintain a minimal presence in the market during normal times, but should be ready to scale up when private capital withdraws in times of financial stress.  Such an effort would present the operational challenge of designing and pricing a steady flow of guarantees in normal times, yet maintaining capacity to take on business quickly in stressful times.

Completing the reform agenda is important.  It took years to create today’s housing finance –system—both the good components and the bad. Completing the reform agenda, including reform of FHA and the GSEs, will take time, but it is important to push forward and complete the job in order to place the newly emerging mortgage finance system on solid footing and to ensure continued access to housing opportunities for low-wealth and low-income people and communities.

Update on Joint Center Household Projections

by Dan McCue
Research Manager

In December 2012, the Census Bureau released a new set of national population projections that both incorporates data from the 2010 decennial US Census and updates the projection methodology.  These new projections are lower than those issued in 2008 due to reduced assumptions for both net immigration levels and fertility rates – the effects of which are only partially offset by lower assumptions used for mortality rates.  In the near term, the lower immigration assumptions account for over 80 percent of the population growth adjustment.  For example, in years 2015-2025, net annual immigration levels in the new projections average 898,000 (nearly 40 percent lower than in the 2008 series) and net additions from natural increases average 1.7 million (lower by about 6.5 percent).  Overall, total population growth projected for this period is now 6.8 million less than that which was called for in the 2008 projections.

What does such a large downward adjustment to projected population growth imply about expectations for future household growth?  According to the methodology used in the JCHS’s2010 household growth projections, the new 2012 Census Bureau population projections lead to a new projected baseline household growth trend that is directly between the low- and high- scenarios projected in 2010.

Figure 1: How the New 2012 Census Bureau Population Projections Impact the 2010 JCHS Household Growth Projections

This is because the 2010 JCHS household growth projections considered the 2008 Census Bureau population projections as its high-growth scenario, while the 2010 JCHS low-growth scenario cut immigration levels to half of those in the 2008 Census series resulting in population growth even more modest than the new 2012 population projections. Figure 2 shows the differences in adult population and growth between the three different scenarios.

Figure 2: Population Growth in the 2012 Census Population Projections is within the High- and Low- Assumptions used in the 2010 JCHS Household Growth Projections

Immigration remains the greatest source of volatility in population growth projections and population growth volatility is still a major driver of household growth volatility. Therefore, future household growth projections will require a range of sensitivity for potential future immigration levels. 

In addition to the new Census population projections, another major consideration within the household growth projection is the rate at which people form independent households (or the headship rate).  The 2010 JCHS household growth projections were based on headship rates that prevailed during 2007-09. Since then there has been some falloff in these rates as the weak economic recovery has been associated with increases in families doubling up and fewer young adults living on their own.  However, assuming headship rates don’t experience a substantial additional falloff, projected household growth levels over the next decade under the 2010 JCHS methodology are not nearly as sensitive to differences in headship rates as they are to differences in population growth projections as shown above.  Applying the rates from 2007-9, as used in the 2010 JCHS household growth projections, results in an estimate of 12.8 million additional households over the 2012-2022 period.  When the more recent 2011 ACS household counts are used instead for headship rates, the estimate falls 3.8 percent to 12.4 million households, which amounts to 40,000 fewer households per year.  A very similar estimate of 12.5 million results from using headship rates based on household counts in the 2010-2012 CPS.  In short, depending on the headship rate assumption used, the updated Census population projections suggest that household growth over the next ten years should fall in the range of between 12.4 and 12.8 million, which represents an increase of between 6 and 9 percent over our previous low series estimate.

It’s Not Just the Economy, Stupid!

by George Masnick
Fellow

Just as James Carville reminded Governor Bill Clinton and his staff to stay focused in his campaign for the Presidency with his now-famous 1992 posting of the words “The Economy, Stupid” on the wall of Clinton’s Little Rock headquarters, it is sometimes the title of this blog post that I need to be reminded of when dissecting household trends impacted by the Great Recession. Aside from the economic, other longer-term demographic trends, such as in the race/Hispanic origin composition of the population, or in life-course transitions of young adults (such as age at marriage, childbearing patterns, and labor force participation), often play a significant role.  Sometimes, short-term trends that are hard-wired into the time frame under consideration, such as the changing age composition of the population, also need to be considered.  These demographic trends do not necessarily trump the economic, but they must be considered. 

A case in point is the trend in the number and share of young adults who are still living with their parents. While there has been much discussion of the effects of the poor economy on preventing young adults from leaving the parental nest and forming independent households, Figure 1 shows that this trend predates the Great Recession that began in December 2007.  Among men, there does appear to be a slight acceleration of the trend since 2007, at least until this past year. But for women, the upward trend that started in 2004 flattens out starting in 2008, early in the Recession.  It has been argued that perhaps this is simply evidence that the Great Recession primarily affected men’s employment and income because of the big decline in construction and manufacturing jobs. 

Figure 1

Source: http://www.census.gov/hhes/families/data/historical.html (Table AD-1)

However, no one argues that the increase in men living at home that started in the early 2000s was due to the 2 million increase in construction jobs that took place between 2000 and 2007.  That delay in nest-leaving is usually explained by the greater representation of Hispanics and Asians in the young adult population (who tend to live with parents longer), or to the need for men (and women) to stay in school longer to qualify for the jobs that are being created by the post-industrial economy, or to the slower pace that today’s young adults approach marriage and family formation.  But these influences continued to operate after 2007 as well, and have likely not run their course.

Another factor to consider when explaining post-2007 trend is the increase in the number of young adults turning age 25 starting in 2005.  Figure 2 plots the growth of the number of persons in the civilian population between the ages of 15 and 34, by single years of age, between 2005 and 2011.  The increase in the number of 26-31 year olds over the past six years is clearly evident. These persons were 20-25 year olds in 2005 and were part of the growing birth cohorts from the tail end of the Baby Bust that were further inflated by under 25 year old immigrants who arrived between 1995 and 2005.  As more persons crossed the 25 age threshold at mid-decade, the 25-34 age group became more weighted at the younger ages. And since 25-29 year olds are ever-more likely to live at home because of the various long-term cohort trends just mentioned, compared to 30-34 year olds who are more likely to have fledged the nest, the overall share of 25-34 year olds still living at home should have accelerated after 2005.

Figure 2

Source: Census Bureau Monthly Civilian Population Estimates for July
http://www.census.gov/popest/data/national/asrh/2008/2008-nat-civ.html

http://www.census.gov/popest/data/national/asrh/2011/2011-nat-civ.html

Also evident in Figure 2 are the looming echo boom adults under the age of 25 in 2011 who will turn 25 in the near future.  These echo boomers, already larger than the cohort they will replace, will be further augmented by immigration over the coming decade. These aging echo boomers will initially further skew the 25-34 age group toward the younger ages, and buoy up the share of 25-34 year olds likely to be living with parents, at least for the next five years, after which the oldest echo boomers will begin to turn 30.