Not All Hard-Hit Neighborhoods Recover Equally

by Jackelyn Hwang
Meyer Fellow

Foreclosures disproportionately hit minority neighborhoods across the U.S. during the housing crisis. In Boston, over 80 percent of foreclosures took place in just five of its 15 planning districts—Dorchester, East Boston, Hyde Park, Mattapan, and Roxbury; nearly 75 percent of the residents in these five districts are non-white, while the remainder of Boston is 70 percent white. While we know foreclosures took place more frequently in these minority areas, we know less about the paths that foreclosed properties followed and whether these paths are similar across these hard-hit areas.

In a new working paper, I show that foreclosed properties within the hardest-hit areas of Boston have quite different trajectories, which leave some sections more disadvantaged than others in the housing market recovery. Integrating several data sources (foreclosure deeds, real estate sales transactions, property tax records, crime and 911 reports, constituent service requests, inspection violations, and building permits), I explore the following questions:

• Who buys foreclosures? 
• Do they maintain them? 
• Do these characteristics affect the quality of the local neighborhood?

As in many other states, if a property owner in Massachusetts defaults on his or her mortgage and is unable to stop foreclosure proceedings (by paying the debt or negotiating new mortgage terms), the property is sold at a public auction. About 15 percent of the residential foreclosures (1-3 family units and condominiums) in Boston were purchased by investors directly at auction, but most properties remained in the hands of the bank following the auction. Eventually, the bank resells the property, but this can take many months and even years. During this time, the property is often unoccupied, which can lead to declining conditions of the property and the area around it. A local ordinance has attempted to stymy this by requiring owners of foreclosing properties, including lending institutions, to register with the City. Once the property is purchased from the bank, the property may follow many paths: owner-occupied or rented, fixed up, or left to decline.

The findings show that within Boston’s hard-hit planning districts, not all foreclosed properties and their surrounding areas have experienced the same trajectory in the wake of the housing crisis and recovery. Investors were more likely than owner-occupants to purchase foreclosed properties in sections that had greater shares of blacks, even after accounting for socioeconomic and housing characteristics of the areas and characteristics of the foreclosed property. Indeed, only around one in five foreclosed properties were purchased by owner-occupants in areas that were majority black, but nearly one in three were purchased by owner-occupants in areas that were less than 50 percent black. Moreover, individual investors were more likely than both owner-occupants and larger investors to purchase foreclosed properties in sections with greater shares of foreign-born residents.

When I examine how well new owners maintain their properties, the types of buyers who tended to concentrate in areas with higher shares of blacks were also less likely to maintain their properties. Foreclosed properties purchased by investors registered as trusts—which include non-owner-occupant family, realty, and land trusts and carry more legal risk than corporations, but also maintain anonymity and do not pay state fees—were 2.5 times more likely than owner-occupants to have maintenance-related inspection violations and service requests placed against them and were half as likely to obtain permits to fix their properties. Other types of investors were also more likely than owner-occupants to have maintenance-related inspection violations.

Lastly, areas where a higher percentage of foreclosures are purchased by investors registered as trusts also have higher rates of property-related issues in the local area. The lower quality of property maintenance and greater rates of blight in particular sections of these hard-hit areas can detract investment in the areas that need it most. Nonetheless, the distribution of various types of foreclosure buyers are not associated with local levels of crime and social disorder, such as loitering, but areas with higher foreclosure rates had more crime and disorder.

Consistent with a long line of sociological research on residential segregation and residential preferences, minority areas, and certainly those with high foreclosure rates, crime, and disorder, are in the least demand by all residents. Larger investors appear to be more willing or financially able to take on these assets, but how they maintain their properties has important implications for the future stability of these neighborhoods. After all, visible blight serves as an important cue for potential investors and households.

What can be done? Recognizing that owner-occupants may not be the only possible solution for foreclosed properties, given the relatively large stock over the last several years, policies can work to: 

1. Develop financial incentives and provide resources to ensure that investors purchasing foreclosed properties maintain them; and, 
2. Create resources and opportunities for smaller, local investors or owner-occupants to purchase and maintain properties in areas struggling to recover.

Creative programs like the Landlord Entrepreneurship Affordability Program, which supports low- and moderate-income families in purchasing, rehabilitating, and serving as an owner-occupant landlord in small-scale rental properties, are what truly distressed areas need. 

Some Thoughts on a Surprising Household Growth Estimate

by Dan McCue
Research Manager

Many media outlets and blogs (including our own), have reported on the results of the Housing Vacancy Survey (HVS) for the fourth quarter of 2014, which showed the US homeownership rate had dropped to its lowest point in fully 20 years. But the fourth quarter HVS contained another surprising reading—one that could be even more noteworthy than the continued fall in the homeownership rate. The HVS is one of very few sources of short-term estimates of household growth – an important gauge of housing demand.  And the surprise here was that HVS data show household growth going through the roof in the fourth quarter of 2014, with year-over-year growth in excess of 1.6 million households. This comes after household growth had long been stalled out, averaging less than 600,000 per quarter for much of the previous five years (Figure 1).

The concern and attention surrounding this number breeds from the thick cloud of uncertainty behind trends in household growth. Survey data from the Census Bureau such as the HVS, ACS, and CPS/ASEC give different and sometimes conflicting measures of household growth year-to-year, each with wide margins of error, which makes it difficult for analysts to call out trends with much confidence.  Amidst this lack of clarity is a widely held anticipation, or possibly hope, that household growth, having been ‘pent-up’ after such a long period of weakness, is primed to rebound strongly and this Q4 number from HVS might signal an inflection point.

Source: US Census Bureau, Housing Vacancy Survey Revised Estimates of the Housing Inventory: 2000 to Present, Table 8a.

One possible explanation for such an abrupt change in the rate of household growth in the fourth quarter HVS would be some change in how the survey is conducted or weighted that caused a discontinuity in the series. But the folks at HVS report that there were no structural or methodological changes to the dataset that would have been behind the sharp rise.

Without any methodological justification for the sudden jump, another factor may be some degree of sampling variation that produced an abnormally high estimate for the quarter. HVS has noted that quarter to quarter variability within the survey has increased and in many respects, this Q4 number is simply a prime example of how erratic quarterly data in the HVS can be and why we prefer not to make much of any one quarter and opt instead to look at rolling averages or other smoothed versions of this data to get a sense of recent trends.  But even averaged over the previous four quarters, Q4 still pulls the annual household growth reading for 2014 up significantly, to 789,000, representing a significant increase from the 524,000 annual growth reported for 2013, although still well below the long-run pace of 1.2 million per year that the Joint Center estimates is the baseline amount to expect given current levels of adult population growth and changes.

Alternatively, this fourth quarter increase could be a sign that the HVS is simply catching up to reality with its household counts after underestimating household growth over the past several years, In fact, prior to the 4th quarter results, the primary concern with HVS estimates was that they were overly low (see previous blogs on the topic here and here), in showing continued weakness in new household formation even as the economic recovery continued to gain steam.

Indeed, there are a variety of other market indicators that would suggest that household growth has been increasing at a modest pace in recent years and more than has been suggested in HVS quarterly releases prior to Q4. Most notably, employment growth has been ratcheting up over the last three years, from 2.3 million in 2012 to 2.4 million in 2013 and 3.1 million last year. Importantly, these gains have also been felt among young adults who are so important to household formation, with the unemployment rate of those age 25-34 dropping from 8.9 to 5.9 percent over this period. The slow rise in housing starts from 550,000 in 2009 to 1.0 million last year, at the same time that vacancy rates have declined, also suggests that household growth has been picking up steadily over this period.

In short, given the nature of survey data, we are not putting too much trust in the accuracy of this one quarter’s estimate of household growth reaching a 1.6 million annual pace, but do believe household formation has been gaining momentum, which bodes well for a stronger housing recovery in 2015. But there are also headwinds. Indeed, rising rents, declining rental affordability, and rising student debt levels remain barriers to household formation for many. Given the lack of clarity, certainly there is good reason to keep an even closer eye on this important measure over the course of the coming year. 

What Will Happen to Housing When the Baby Boomers are Gone?

by George Masnick
Senior Research Fellow

As baby boomers age and die, adult population growth will begin to fall off sharply in the coming decade. Though this decline will have a dampening effect on household growth, it will occur over several decades and much may be offset by the millennial generation beginning households of their own. Even when baby boomers do release housing back into the market, it may not be suitable for, or desired by, younger occupants, so despite slower adult population growth in the future, demand for newly built housing will persist.

According to recent Census Bureau population projections, adult population growth will start turning sharply downward later this decade (Figure 1). After increasing by close to 2.5 million each year for more than a decade, growth in the population age 20 and older will steadily decline to about 1.5 million per year by 2050, a 40 percent drop. 

Source: 2014 Census Bureau population projections 

Despite their improving life expectancies, the oldest baby boomers will soon turn 70, and begin to die off in ever-greater numbers. Today, there are about 2.6 million deaths every year, but this number will rise to over 4 million a year by 2050. Meanwhile, births are also projected to increase over the same time period, but only by about 500,000. Consequently, the rate of natural increase (births minus deaths) is projected to fall dramatically (Figure 2). Today, population growth is about evenly distributed between migration from abroad and natural increase. Under the new Census Bureau assumptions, natural increase will fall to half the level of growth from immigration by 2035, and further decline to about one third by 2050.

Source: Census Bureau 2014 population projections 

Adult population growth has generally been the primary driver of household growth in the U.S. For most years since 1990, there have been roughly 2.5 million more adults over the age of 20 compared to the year before. This growth came from the aging of those born in the U.S. 20+ years ago, as well as immigration during the past two and a half decades. On average, almost half of all persons over the age of 20 head an independent household. Therefore, the adult population growth we’ve seen over the past 25 years alone would account for annual household growth of about 1.2 million.

Actual annual household growth was either above or below 1.2 million because of shifts in the age structure of the adult population, and because of changes in age-specific rates of household formation (headship) linked to social, demographic, and economic changes. These latter changes include trends in marital status and fertility, minority composition and nativity, and employment and income, to name the most important. 

Age structure changes have had a positive effect on household growth as aging baby boomers inflated successive age groups that have higher headship rates. For example, the oldest boomers were age 35-44 in 1990, 45-54 in 2000 and 55-64 in 2010. As they aged, the share heading an independent household increased from 53.4 percent in 1990, 56.1 percent in 2000, and 58.5 percent in 2010. On the other hand, recent social, demographic, and economic trends have generally had a negative effect on age-specific rates of household formation, particularly in the younger age groups. Higher minority shares and delayed marriage have had a negative effect on headship rates, as has the Great Recession’s impact on employment and income. It is important to note, however, that not only have the effects of population aging and the broad demographic trends affecting headship rates tended to cancel each other out, but each has been small compared to that of adult population growth, numbering in the low hundreds of thousands annual net household growth or decline (Figure 3).

Source: Joint Center calculations using 1990, 2000 and 2010 decennial census data

Projected declining adult population growth because of increasing deaths will have several effects on housing markets, mentioned below. But it will not have an immediate and proportional impact on household growth for a variety of reasons. First, many initial baby boomer deaths will occur to married couples, leaving the surviving spouse to continue to head a household. Many deaths will also occur to people who do not head a household, but rather live in a household headed by children or other relatives, or in institutional settings (assisted living or nursing facilities). Declining household growth because of increased household dissolutions among the elderly will be spread out over many decades. Furthermore, when dying baby boomers do begin to have a larger impact on total net household growth, aging millennials could cause the changing age structure effect to be more positive, similar to what baby boomers exerted as they passed into middle age, offsetting the effects of declining adult population growth. It is also entirely possible that a fuller recovery from the Great Recession will reverse the fall in headship rates, further offsetting any effect of slower adult population growth. 

When we reach a point where baby boomers are releasing housing in greater numbers back to the market, however, we still cannot assume that it will proportionately reduce the demand for newly built housing to accommodate young adults. Many homes vacated by aging seniors will not be in demand by tomorrow’s young adults, being in the wrong part of the country or otherwise unsuitable (age restricted communities, for example). Some will be simply too expensive. Some “affordable” vacated homes in desirable locations will be torn down and replaced by larger and more energy efficient / amenity rich houses targeted to older buyers.  Many houses will sit on the market for long periods of time before sellers are willing to recognize that they are overpriced. Some homes in declining communities will become abandoned.

In short, while the housing market does somewhat resemble a game of musical chairs, with successive age groups “moving up” as their incomes and families grow, and older households exiting, this process can be inefficient for young adults moving into units vacated by baby boomers because of the reasons discussed. In addition, the majority of baby boom household dissolutions will not take place until after 2030. It will not be until 2060 or later that the last of the baby boomers, born in the early 1960s, will die. Between now and 2030, new construction will still be needed to meet the housing demand from the large cohorts under the age of 30 that are currently in the pipeline, and which will be further inflated by any future immigration. Where that housing will be located and what it will look like is far less certain.  

Homeownership Rates Continue to Decline, but Minority Owners Still Better Off than Before the Housing Boom

by Rachel Bogardus Drew
Post-Doctoral Fellow

The Census Bureau recently released its 2014 Q4 Housing Vacancy Survey (HVS) data, giving us a complete look at the boom and bust in homeownership rates over the last 20 years. The HVS’ reported homeownership rate, though far from perfect, remains the most up-to-date and cited statistic on homeownership in the U.S., and thus an important barometer of the housing status of American households. One advantage of the HVS is its long time frame, going back to 1965 at the annual and regional level, which helps to put recent trends in homeownership into a historical context. Figure 1 shows that the national homeownership rate rose steadily through the late 1960s and 1970s, from 63 to 65.6 percent, before declining slightly in the early 1980s. After a decade of stagnation, the rate rose rapidly from 1994 to 2004, from 64 to a record high of 69 percent. Since then, however, the national homeownership rate has declined almost fully back to its 1994 level.

Source: U.S. Census Bureau, Housing Vacancy Survey

The roller-coaster ride of the national homeownership rate from the last 20 years, while dramatic in its own right, only tells a small part of the homeownership story. Another advantage of the HVS data is reporting on homeownership rates for subsets of households by race/ethnicity and age, which add important texture to this story. Homeownership rates by race and ethnicity, for example, have generally followed the same up-and-down trend as the national rate, although no identified racial or ethnic group has given back all their gains. Indeed, when measured by the difference in their homeownership rates relative to 1994, only blacks are close to their former level (Figure 2). Households in the ‘other’ category (mostly comprised of Asians, Pacific Islanders, and multi-race householders), which grew their share of homeowners by 12 percentage points during the boom, remain fully 7 percentage points up today.

Notes: Hispanic includes all races. All other races includes multiracial. 

Source: U.S. Census Bureau, Housing Vacancy Survey.

The reason the national homeownership rate has declined all the way back to its 1994 level, even when no individual racial or ethnic group has done so, is because of the simultaneous shift in the race/Hispanic origin composition of households in the U.S., which has increased the share of all households that are headed by a minority. Due to the lower homeownership rates of minorities, relative to non-Hispanic Whites, this shift automatically lowers the homeownership rates of the nation, independent of any changes in minority-specific homeownership rate.

The second set of data from the HVS to shed more light on homeownership trends are the changes in rates by age of householder. Similar to the breakouts of homeownership rates by race and ethnicity, most of the age groups identified share the same rise and fall trend over the last 20 years, although householders ages 65 and older did not decline appreciably following the mid-2000s boom (Figure 3). The youngest households, those under age 35, gained the most in their homeownership rate during the boom, but have since declined to one-and-a-half percentage points below their pre-boom rate. Middle-age groups, meanwhile, have seen their homeownership rates fall nearly five percentage points below their mid-90s level, with 35 to 44 year olds experiencing a full ten percentage point swing in the last ten years. These dramatic declines are greater than the overall decline in homeownership because of the shifting age composition of households, which have skewed older over the last twenty years as the baby boomers progressed into higher ownership middle and early retirement ages, being replaced in the 25 to 44 age group by the smaller and more racially diverse Generation X cohorts with lower ownership rates. The low levels among younger cohorts, however, do suggest that the national homeownership rate is only back to its mid-90s level because of sustained homeownership by older households, and that among those in their prime working years the actual homeownership rate is indeed well below so-called ‘normal’ levels.

Source: U.S. Census Bureau, Housing Vacancy Survey.

A quick glance at these data may raise some concerns about the future of homeownership, especially for younger households and minorities who will account for large shares of households going forward. Yet caution should be exercised in extrapolating these trends forward.  For one thing, the HVS data often shows unexplainable jumps in quarterly rates and counts of households, which are somewhat muted by these annual averages. Second, recently moderating house prices and a move to relax lending restrictions, along with the reduction in FHA mortgage insurance premiums, should give home buying a boost. Third, most people, and especially young adults, remain in favor of homeownership, despite the risks exposed during the recession and foreclosure crisis. For these reasons, few analysts expect homeownership rates to fall much further. If it were to happen, however, the story would change from one of returning to a pre-boom norm of about 64 percent, to entering a new era of low homeownership rates unlike anything we have seen in the last 50 years.