How Much of the Homeownership Rate Decline from 2005-2015 is Due to Foreclosures?

Jonathan Spader
Senior Research
Associate

The U.S. homeownership rate declined to 63.5 percent in the first quarter of 2016, a drop of 0.3 percent from the prior quarter and 5.5 percent from its peak in 2004, according to the new homeownership rate figures released in April. [Figure 1]. This decline also appears in the seasonally-adjusted measure—which shows a decline of 0.1 percent—and follows two quarters of gains.

A natural question following this recent volatility is whether the recent downtick is the beginning of a further slide, or whether the volatility over the previous four quarters is a sign that the homeownership rate is finally levelling off. However, a comprehensive answer to these questions is beyond the scope of this blog post, other than to say that existing projections vary—for example, see Myers and Lee (2015), Urban Institute (2015), Mortgage Bankers Association (2015).

Instead, this blog post focuses on the contribution of foreclosures to the decade-long decline in the homeownership rate, assessing the extent to which slowing foreclosures may ease downward pressure on the homeownership rate.

Source: Housing Vacancy Survey

While the number of completed foreclosures has declined from its 2010 peak, it remains elevated above its pre-crisis levels [Figure 2]. According to CoreLogic data, a total of about 670,000 foreclosure sales, short sales, and deed-in-lieu transactions took place in 2015. This is down from a high of 1.4 million foreclosure completions in 2010 but well above the pre-crisis average of 228,000 foreclosure completions per year from 2000 to 2004.

Understanding the contribution of foreclosures to homeownership rate declines is therefore necessary in forming expectations about the homeownership rate in coming years. While both the CoreLogic measure of foreclosure completions and the MBA estimates of the foreclosure inventory are declining quickly, the upshot is that foreclosures could produce further homeownership rate declines in 2016 (and possibly thereafter).

Source: JCHS tabulations. Foreclosure completions include foreclosure sales, short sales, and deed-in-lieu transactions from CoreLogic data. Foreclosure inventory from Mortgage Bankers Association data. 

Foreclosure completions, short sales, and deed-in-lieu transactions contribute to the decline in the homeownership rate to the extent that they displace homeowner households. However, precisely measuring the contribution of these transactions to changes in the number of homeowner households is hampered by data limitations. Specifically, available data on the total number of foreclosed properties do not contain reliable information about whether properties are owner-occupied at the time of the foreclosure. Our estimates of the total number of foreclosure-related homeownership exits are therefore approximations and subject to the limitations of the data. Nonetheless, they shed light on the volume of foreclosures relative to the decline in the homeownership rate between 2005 and 2015.

First, CoreLogic data identifies a total of 9.6 million foreclosure completions, deed-in-lieu transactions, and short sales between Q3 2005 and Q2 2015. However, this total includes both transactions that displaced homeowner households and foreclosures affecting investor-owned properties or second homes. If we apply the Housing Vacancy Survey’s estimate that 60.2 percent of all housing units were owner-occupied in 2005, the CoreLogic data would imply that 5.8 million homeowner households lost their homes during this period. This estimate may slightly understate the number of owner-occupied foreclosures to the extent that multi-unit properties are more likely to be renter-occupied; however, a larger concern is that investment properties are likely to be over-represented among foreclosures. As an alternative, we also apply a more conservative estimate that 50 percent of foreclosure completions affected homeowner-occupied properties, producing a lower estimate of 4.8 million foreclosures among owner-occupied properties. 

For comparison, the Federal Reserve Bank of New York’s Consumer Credit Panel identifies 11.5 million consumer credit reports with a new foreclosure appearing at any point between Q3 2005 and Q2 2015. However, this figure includes individuals with investment properties and second homes, as well as duplicate counts of foreclosures that appear on the records any cosigners of the mortgage. Raneri’s (2016) categorization of homeowners, vacation properties, and investment properties suggest that homeowners account for about 78.3 percent of credit bureau records with a new foreclosure during this period, suggesting that 9.0 million of the new foreclosures affected owner-occupants. Additionally, CPS data suggests that married spouses are present in 60.1 percent of homeowner households—in other words, the number of affected credit records would amount to 160.1 percent of the number of households. If we use this figure to approximate the number of cosigners, the data implies that approximately 5.6 million homeowner households experienced a new foreclosure during this period. While this estimate is a rough approximation, it is consistent with the range of 4.8-5.8 million foreclosure-related homeownership exits described above. 

Comparing these figures with the size of the decline in the homeownership rate suggests that foreclosures have played a role in the homeownership rate decline—and underscores the need for attention to continued foreclosure volumes. The Current Population Survey estimates that the United States included 125.7 million households in 2015. The estimates of 4.8-5.8 million owner-occupied foreclosures would therefore amount to 3.8-4.6 percent of all 2015 households. 

In order to compare these figures to the actual decline in the homeownership rate, the estimates must be adjusted for the presence of homeownership re-entries. Raneri (2016) uses Experian data to estimate that approximately 12.6 percent of homeowners who experienced a foreclosure or short sale between 2007 and 2015 have since re-entered homeownership. Applying this estimate, the High estimate of 5.8 million owner-occupied foreclosures would have reduced the number of homeowners in 2015 by 5.1 million, and the Low estimate of 4.8 million would have reduced the number of homeowners in 2015 by 4.2 million. The High estimate amounts to 4.0 percent of all U.S. households in 2015, and the Low estimate amounts to 3.4 percent of all U.S. households in 2015. 

Comparing these figures to the decline in the homeownership rate is not quite apples-to-apples, because many households moved in with family members or went through other types of household formations and dissolutions during the foreclosure process. Additionally, the estimates described above are very rough approximations and must be treated as such, allowing for a relatively wide margin of error. Nonetheless, this comparison suggests that owner-occupied foreclosures might explain about half or more of the decade-long homeownership rate decline. 

Figure 3 presents similar statistics for multiple age groups. The homeownership rate decline shows the percentage point difference in the age-specific homeownership rate between 2005 and 2015, showing an 11 percentage point decline among households aged 26-35 and a 10 percentage point decline among households aged 36-45. The age-specific estimates of foreclosure-related homeownership exits are calculated by apportioning the High (5.1 million) and Low (4.2 million) estimates across age groups using the age categories in Li and Goodman (2016)—which reports the age distribution in 2015 of individuals who had a new foreclosure appear on their credit record during the decade of the foreclosure crisis. 

The resulting age distribution reveals that foreclosure-related homeownership exits better explain the reduction in age-specific homeownership rates among older age cohorts than among younger age cohorts. The High and Low estimates are roughly proportional to the observed homeownership rate decline for several age groups older than age 45. In contrast, these estimates amount to only about half the size of the homeownership rate decline among households aged 36-45, and only a small share of the homeownership rate decline among households younger than 36. Because 35 year-olds in 2015 were only 25 at the peak of the housing crisis in 2005, this pattern is perhaps not surprising. Nonetheless, it highlights that the decline in the overall homeownership rate is likely due to both foreclosure-related homeownership exits and reduced homeownership entries among young households. 

Sources: JCHS tabulations of Current Population Survey data and CoreLogic data on foreclosure completions.

The estimates described above are rough approximations and must be viewed as such. With that in mind, the findings nonetheless offer several potential insights about the role of foreclosures in the recent homeownership rate decline. First, the estimates suggest that foreclosure-related homeownership exits may explain about half or more of the decade-long homeownership rate decline. Second, and equally important, this means that foreclosures are likely to continue to put downward pressure on the homeownership rate until the foreclosure inventory clears and the volume of foreclosure completions returns to a normal level. 

Lastly, these conclusions do not mean that other factors have not also played a role; Figure 3 clearly shows that sluggish rates of homeownership entry among younger households have also contributed to the decline in the homeownership rate between 2005 and 2015. In fact, the slowdown in homeownership entries among young households has likely played an increasing role in homeownership rate declines over time—and will be central to homeownership rate changes in coming years. Instead, the focus on foreclosures in this blog is simply a reminder that foreclosure volumes have not fully dissipated as a headwind to recovery of the homeownership rate. 

Housing Inadequacy Remains a Problem for the Lowest-Income Renters

Irene Lew
Research Analyst

In the early 1970s, in response to growing concerns about the housing conditions of poor families, the US Department of Housing and Urban Development (HUD) developed a measure of housing adequacy for its American Housing Survey (AHS) that continues to be used by the agency today. This adequacy measure was originally designed to evaluate the extent to which the national housing stock met the standard of “a decent home and a suitable living environment” established by the Housing Act of 1949. While the condition of the housing stock has improved over the past several decades, the rental stock is still three times more likely than the owner-occupied stock to be considered inadequate. And problems persist among the most affordable rentals.

While fairly complex, the AHS adequacy measure factors in various housing problems related to plumbing, heating, electrical wiring, and maintenance. Using this AHS measure, the majority of the nation’s rental housing stock is in physically adequate condition. As of 2013, just 3 percent of occupied rental units were categorized as severely inadequate and 6 percent were moderately inadequate. In fact, the adequacy of the rental stock has improved over the past decade, with the share of rentals categorized as physically inadequate declining from about 11 percent in 2003 to 9 percent in 2013. 

Notes: Inadequate units lack complete bathrooms, running water, electricity, or have other deficiencies. 

Source: JCHS tabulations of HUD, American Housing Surveys.

Stricter building codes have certainly helped to encourage higher quality, particularly the construction of units with complete plumbing and heating systems. As a result, severe physical deficiencies have been rare among the rental stock, especially among newer rentals. Just 1 percent of rentals built 2003 and later was classified as severely inadequate, compared to 4 percent of those built prior to 1960.

It is noteworthy, however, that the AHS adequacy measure does not account for certain health-related quality issues such as the presence of mold or structural issues such as holes in the roof or foundation, so housing quality problems may in fact occur at higher rates than the survey reports. And although physical deficiencies have become less common among the nation’s rental housing stock, housing problems disproportionately appear in units occupied by the lowest-income renters. In 2013, 11 percent of units occupied by extremely low-income renters (those with incomes less than or equal to 30 percent of area medians) were physically inadequate, compared to just 7 percent of those with incomes above 80 percent of area medians.

Notes: Extremely low / very low /  low income is defined as up to 30% / 30–50% / 50–80% of area median income. Inadequate units lack complete bathrooms, running water, electricity, or have other deficiencies.

Source: JCHS tabulations of HUD, 2013 American Housing Survey.

The lowest-income households also accounted for the largest share of renters reporting overcrowded conditions and physical housing problems such as toilet breakdowns, exposed electrical wiring, heating equipment breakdowns lasting six hours or more and the presence of rats in the unit. 

Notes: Extremely low / very low /  low income is defined as up to 30% / 30–50% / 50–80% of area median income Overcrowded conditions refer to units where there are more than two people per bedroom. Holes in the floor are those that are about four inches across.  

Source: JCHS tabulations of HUD, 2013 American Housing Survey.

Matthew Desmond’s most recent book, Evicted, vividly captures these statistics, drawing attention to the grim housing conditions of families in low-rent units in inner-city Milwaukee who must live with the constant presence of roaches and other vermin, clogged sinks and bathtubs, holes in their windows, and broken front doors.

Rentals occupied by extremely low-income households in central cities have the highest physical inadequacy rates, especially those located in small multifamily buildings with 2-4 units. Indeed, 16 percent of these units were categorized as inadequate, compared to 12 percent of those in buildings with 50 or more units. As I pointed out in a previous post, small multifamilies are a critical source of low-cost housing because they tend to charge lower rents than those in much larger structures, but much of this stock is rather old and at higher risk of loss from the affordable stock due to deterioration.

As this recent NPR piece suggests, the narrow margins for mom-and-pop landlords operating in low-income neighborhoods do not provide sufficient incentive for landlords to make improvements or repairs in a timely manner. Indeed, according to the American Housing Survey, 13 percent of extremely low-income renters reported in 2013 that the owner of their unit usually did not start major repairs or maintenance quickly enough, compared to less than half that share (6 percent) among higher-income renters with incomes above 80 percent of area medians.

The prevalence of housing deficiencies among units occupied by the lowest-income renters highlights the importance of bolstering building code enforcement efforts at the state and local levels. However, municipalities are often faced with tight budgets that lead to dwindling code enforcement teams. Indeed, according to one estimate in 2013, Cleveland and Detroit, among others, have cut their code enforcement workforce by about half since the middle of the last decade. Cities like Baltimore, Portland, and the San Francisco Bay Area are also facing shortages of building inspectors that make it difficult to deal with building code violations. While increased code enforcement can identify landlords who are failing to maintain their properties, this could also lead to unstable housing situations for current tenants. Renters may withhold rent or call local building inspectors as a tactic to push landlords to make necessary repairs, but this could lead to eviction threats or the initiation of a formal eviction process due to nonpayment of rent.

At the federal level, budgetary constraints have also impacted efforts to address the physical deficiencies among the aging public housing stock, which was largely built before 1970. Federal appropriations for the public housing capital fund fell by 34 percent over the past decade and HUD is faced with an estimated backlog of $26 billion in capital maintenance and repairs (as of 2010). HUD’s housing choice voucher and project-based rental assistance programs, which subsidize rentals for low-income households in the private market, require landlords to pass annual or biennial inspections for housing quality. However, the public housing stock is not subject to regular inspections and has largely been prohibited from using private capital to finance capital needs and repairs. As a result, compared to other types of assisted rentals, physical housing problems are more common among the public housing stock. In 2013, over half (53 percent) of public housing units had more than two heating equipment breakdowns lasting at least six hours and 13 percent of units had water leaks due to equipment failures within the previous 12 months.

Living in unsafe, physically inadequate housing can lead to adverse health and developmental outcomes for low-income families. Indeed, recent research confirms that children exposed to defects such as leaking roofs, broken windows, rodents, and nonfunctioning heaters or stoves were more likely to experience emotional and behavioral problems. Among five housing characteristics studied—quality, stability, affordability, ownership, and receipt of housing assistance—poor physical quality of housing was the most consistent and strongest predictor of emotional and behavioral problems in low-income children and adolescents. Poor housing conditions such as mold, chronic dampness, water leaks, and heating, plumbing, and electrical deficiencies, are also associated with health risks like respiratory illness and asthma. These findings underscore the urgent need for cities to prioritize code enforcement and work collaboratively with nonprofit tenants’ rights groups to deal with landlords who are not responsive to requests for necessary repairs.

Renters Also Have Healthy Housing Concerns

Elizabeth la Jeunesse
Research Analyst

The Joint Center recently released a working paper highlighting American consumers’ concerns and awareness of “healthy housing” issues, which include indoor air quality, water quality and other indoor environmental concerns. One of the more compelling findings of the study was that renters expressed healthy housing concerns at a higher rate than homeowners. Indeed, 36 percent of renters we surveyed reported some level of healthy housing concerns or suspected risks, while only 24 percent of homeowners did. Indoor air quality issues were most prevalent—including dust, dampness and moisture, lack of sufficient ventilation, and other indoor-air related problems including air pollution from outdoors. Other major concerns included water quality, and basic safety issues such as pests, and concerns about the physical structure.

Notes: Sample size is 820.  Renter households were asked, “In the past few years, how concerned have you been about your current rental home negatively affecting your or another occupant’s health?  This may include but is not limited to concerns related to mold/moisture, indoor air quality, asthma, chemicals in the home, noise insulation problems, light issues or other “healthy housing” issues important to you.“

Source: JCHS tabulations of Healthy Home Renter Survey (Summer 2014), The Farnsworth Group

Renters’ high level of concern is not surprising. Results from the American Housing Survey (AHS) showed that as of 2011 renters scored as worse off than owners across nearly every measure of healthy-home risks and concerns. Renters were more likely to live in inadequate housing conditions, encounter mold, musty smells and second-hand smoke from other units, as well as report hazards (loose railings, broken steps, insufficient illumination for stairs) than homeowners.

Along with these indoor issues, health risks in these places can be compounded with higher outdoor air pollution. Results from the 2013 AHS further showed that renters were more likely to report living close to highways/railroads/airports (20 percent) compared to homeowners (9 percent). Another 7 percent of renters reported living near industrial areas, compared to only 3 percent of homeowners. The higher concentrations of outdoor air pollution in these areas can infiltrate the home when ventilation methods do not allow for adequate air filtration.

Another factor that may contribute to renters’ concerns is the condition of their units. The rental housing stock is older, with a median building age of 43 years, vs 38 years for owner-occupied homes. Many older rental structures were not designed to modern standards for indoor environmental health. For example, many older multifamily buildings lack any basic ventilation systems for cooking with gas-stoves. Renters also tend to live in closer proximity to each other, with over 60 percent of renters living in multifamily buildings (vs. 11 percent of homeowners). The associated wear and tear of higher turnover, and neighbors’ behavior such as smoking indoors, can impact renters’ quality of life.

Rental property owners’ maintenance and upkeep behaviors certainly also influence renters’ satisfaction with their living conditions. But while most state and municipal sanitary and housing codes govern most basic issues such as structural integrity and pests, they rarely incorporate newer research on indoor environmental quality concerns. These concerns include formaldehyde in building products, inadequate or non-existent ventilation for gas-stove cooking, second-hand smoke, and other off-gassing chemicals (e.g., VOCs) from indoor furnishings such as carpets and flooring.

The chart below provides a snapshot of renters’ specific indoor environmental concerns based on our survey results, beyond basic issues typically addressed by housing codes. As it shows, air quality and other indoor issues impacted renters living in both single- and multi-family homes. Dust and moisture concerns were most common. Renters also expressed awareness of chemical issues, including from the building itself but also from interior products/furnishings/carpeting. Among renters living in multifamily structures, noise issues and odors or smoke from neighboring units were also cited frequently.

Notes: N=239, including 80 renters living in single family detached homes and 159 renters living in multifamily or attached homes. Renter households that expressed some basic interest/concern over indoor environmental issues were asked, “Of the following healthy home issues, how would you rate your level of concern/interest over the past few years regarding your current rental home?“

Source: JCHS tabulations of Healthy Home Renter Survey, The Farnsworth Group.

While individual renters can take some minor steps to mitigate indoor environmental risks at home, most renters are limited by the fact that they do not own their units, and therefore have little incentive for—if not an outright prohibition from—making physical modifications to their home. Therefore integrated, long-lasting healthy housing solutions will need to come from multiple stakeholders, including not only property owners, managers and developers, but also building product manufacturers, as well as those who regulate the rental industry. All of these stakeholders should examine ways to incentivize, increase our understanding of, and promote healthier rental housing, including ways to make effective healthy housing strategies for renters more cost-effective.

The growing market for energy efficient housing may set a precedent for how healthy multifamily solutions might take hold. Recently numerous articles have highlighted the good business sense of pursuing energy efficiency. As a recent McGraw Hill study suggested, multifamily builders find that customers are willing to pay more for “green” units. While energy efficiency also saves on energy bills, healthy-home advancements in rental properties can potentially increase resident retention and satisfaction—both of which are of economic benefit to the rental industry.

With the ongoing, rapid development of research related to healthy housing, as well as the tendency of consumers to seek out information on this topic, we expect to see demand in this area to grow in the future. Indeed, as awareness of healthy housing research and risks grows, renters are likely to increase their demand for healthy housing attributes. Rental property owners who can get out in front of this trend may be better poised down the line to capitalize on the growing demand for health-conscious home environments.

Read the working paper

Why Does Affordable Housing Need Saving?

Alexander von Hoffman
Senior Research Fellow

In recent years the skyrocketing housing prices in major cities in the United States have raised the specter of driving out people who cannot afford to pay the increasingly high rents. Many housing advocates argue that the most practical way to prevent dislocation of the poor is to save government-subsidized privately owned low-income rental dwellings.

Why does such “affordable housing” need to be saved? After all, you might point out, public housing doesn’t change into private market housing.

In fact, subsidized rental housing is quite different than public housing. Begun in the 1930s under President Franklin Roosevelt, public housing was created and managed solely by government agencies. Under subsidized housing programs, the first of which started about 1960, the federal government gave various financial incentives to private nonprofit and for-profit companies to build, manage, and own rental projects for low-income households. Public housing was pretty much all government; subsidized low-income housing took the form of public-private collaborations.

Most significantly, the projects under the two housing programs ran for dramatically different lengths of time. The federal government financed public housing over such long terms – with sixty year construction loans, for example – as to make it seem almost permanent. In contrast, the terms of the subsidies under public-private housing schemes were relatively short – most for only twenty or twenty-five years.

Back in the 1960s and ‘70s, the authors of the subsidized housing programs gave little thought to what would happen when the subsidies ended. But years later, when the subsidies began to expire, people realized that enormous numbers of low-income dwellings could easily disappear. Poor people would have no place to live. In response, housing advocates raised the cry, “preserve affordable housing!”

New Franklin Park Apartments in Boston, Massachusetts

The story of how people realized that privately owned subsidized housing needed to be saved and how they went about saving it is the subject of my newly published Joint Center for Housing Studies working paper, “To Preserve Affordable Housing in the United States: A Policy History.”

For some time now, I have been examining the subject of public-private low-income housing. Unlike public housing, remarkably few people know about these programs. Ask about them and you might get a vague response, “Is that Section 8?” Such unawareness is remarkable because these subsidized housing programs have created millions of low-income rental units, far more than public housing has.

I first studied the origins and causes of America’s subsidized low-income housing and published my findings in an article, “Calling Upon the Genius of Private Enterprise: The Housing and Urban Development Act of 1968 and the Liberal Turn to Public-Private Partnerships” published in the journal Studies in American Political Development (October 2013).

Now in the Joint Center working paper, I have explored the way America’s public-private housing policy unfolded.

Skyview Park Apartments in Scranton, Pennsylvania

My research reveals that the public-private housing programs created in the 1960s and 1970s were highly productive but beset by troubles. Buffeted by bad underwriting, weak management, and economic hard times, many of the early housing projects deteriorated. Housing advocates for the poor jumped in to rescue the troubled projects from defaulting, becoming unlivable, or both. After studying the problems, the advocates sought ways to buttress the incomes of financially troubled housing projects or convey them to responsible parties. In Washington, sympathetic federal officials implemented new programs and procedures to help the advocates stabilize the conditions of the beleaguered properties.

The process, I found, created a cadre of experienced and informed housing activists and government officials. So when the subsidies of the housing programs began to expire in the 1980s, these policy veterans threw themselves into preventing the low-income residential stock from either deteriorating or being converted to expensive private-market housing.

Their efforts, however, set off a political backlash from the owners of the housing who insisted on the right to do what they wanted with their property, including cashing out. The two sides fought each other in the courts, Congress, and federal government until the late 1990s when they compromised and joined forces.

Since then, a broad coalition – including advocates for the poor, for-profit and nonprofit developers, government officials, and philanthropic institutions – coalesced to support preservation of affordable housing. Since the 2000s, the National Housing Trust, with the support of the MacArthur Foundation, has led a highly successful campaign to enlist state and local governments in the cause.

In short, the plethora of programs and efforts to maintain the subsidized low-income housing has become a key component of America’s low-income housing policy. Perhaps it is not surprising, then, that people now suggest preservation of affordable housing as a practical way to prevent displacement of the poor.

Read the working paper