Watch the Inventory – and the Investors

by Eric Belsky
Managing Director

As housing demand has been coming up, the inventory of homes for sale on the market has been going down.  This tightening of supply relative to demand is the bedrock of the recovery. It gives consumers confidence and a sense of urgency to buy.

Those interested in the course of home prices should watch inventory levels, especially relative to demand.  Multiple listing services (MLS) provide measures of inventories at the metropolitan level and typically even for submarkets within them.  If you start to see inventories in a market climb, the recovery in prices—and demand which is partly linked to the urgency created by rising prices—may not stay on course.

In assessing housing market recovery, then, an important question is what is in store for inventories of homes for sale.  Will demand at some point be outstripped by inventory growth as new home building ramps up again and more existing owners place their homes on the market because of rising prices?

The answer to this question of course will hinge on conditions in individual housing markets.  Broadly speaking, the dynamics will likely differ depending on the share of homeowners in a market who are underwater and the activity of investors in single-family rental properties.

In places where only a small fraction of homeowners are underwater, rebounding homes prices may be enough to spark owner interest in selling their existing homes to trade up or down.  With interest rates so low and the potential to move unfettered by negative net equity, many may start to feel that now is the time to sell.

In places where many owners are deeply underwater, however, even a strong single-digit increase in home prices may not be enough to induce many owners to place their homes on the market.  After all, they would still have to write a check at the closing table if they did. Therefore, one would expect inventories to fall more in places with negative net equity as demand picks up because homeowner interest in selling does not follow suit.

In fact this is precisely what seems to be occurring. Inventories have fallen more sharply and asking prices risen more in areas with more underwater homeowners (click figure to enlarge). 

JCHS tabulations of data from CoreLogic and www.deptofnumbers.com

However, the buyers of these homes are not necessarily individuals looking to move. In many of these places much of the demand has come from investors who snapped up homes at low prices and then rented them out. Figure 2 lists places where there has been a significant shift in the share of single-family homes that are rented. These are the markets where investors have been most active, helping to soak up the excess supply of distressed homes.

Source: JCHS tabulations of US Census Bureau, American Community Survey data.

Moving forward, it is therefore not just what homeowners in these places do that matters but also what investors will do with recently acquired single-family properties they are currently renting out. Many will look for a chance to exit their investments when prices appreciate enough to make it worthwhile.

For investors in distressed markets, the run-up in prices from the trough is pure upside. Many may head for the door at about the same time, especially if they discover that it is both more arduous and costly to manage scattered-site, single-family rentals than they had anticipated.

If enough investors in any of these markets start to head for the door to try to gain from capital appreciation, home price appreciation could slow.  So to predict where prices may be headed, keep your eyes on investors and what they are doing.  Local realtors will see the first signs of activity in homes now rented shifting back to the for-sale market.  Seek them out and find out what they are seeing.

Will Student Loan Debt Keep Young People from Buying Homes?

by Chris Herbert
Research Director

The sharp rise in student loan debt over the last decade has caught everyone’s attention - the numbers are truly eye-popping. Estimates from the Federal Reserve Bank of New York found that the total value of outstanding student loans nearly quadrupled between the start of 2003 and the third quarter of 2012, from $241 billion to just under $1 trillion.  Student loans now account for a greater portion of consumer debt than either credit cards or auto loans.  And as the outstanding balance has grown, so too have delinquency rates. Together these trends have raised concerns that when today’s college graduates want to buy a home, they will have a hard time making the move, as their student debt will limit their ability to save or qualify for a mortgage.  But while there is no doubt that more young people are shouldering significant student loans, it is important to look at how this rising debt is distributed across households, to assess how much of a drag on homeownership these loans are likely to become.

Reports of increases in student loan debt naturally conjure images of recent college graduates as the primary bearers of this burden. In fact, the increase in student loans has been felt across the entire age spectrum—with the largest share of the growth actually among those over age 40 (Figure 1).  As of 2012, aggregate outstanding student loan debt was more or less evenly divided between borrowers under age 30, between 30 and 39, and 40 and older.  Looking back at 2005, student loan debt was more concentrated among those under age 30. But since then, borrowing has grown more rapidly for those in their 30s and over 40.  While information is not available on the uses of these loans, it seems likely that borrowing has increased both for 30-somethings going back to graduate school as well as for parents helping to finance their children’s educations.  Whatever the explanation, it is clear that the student loan burden is not just affecting recent college graduates.

Source: Federal Reserve Bank of New York, Consumer Credit Panel/Equifax. http://www.newyorkfed.org/studentloandebt/

It’s also important to consider how the increase in borrowing is distributed across the young households who might be interested in buying a home. One reason aggregate borrowing has increased so much is that more young people are taking out student loans.  Data from the Survey of Consumer Finances indicates that among those under age 30, the share of households with a student loan increased from 30 percent to 41 percent between 2004 and 2010, while among those age 30- 39 the share jumped from 21 percent to 34 percent.  However, while the number of borrowers increased, the typical amount borrowed barely budged (Figure 2).  The median student loan debt among those under 30 was essentially unchanged in real 2010 dollars over this period, at about $11,000.  Among those age 30-39 the median was likewise fairly constant at about $15,000. So while more young people were taking on loans, for most borrowers the amount of debt was not significantly higher than in the past.

But over the same period, the average loan amount has shown more of an increase, up by nearly $4,000 among those under 30 and more than $6,000 for those aged 30-39 (Figure 2).  The divergence in trends between median and average borrowing amounts signals that there has been a jump in the share of borrowers taking on sizeable amounts of debt.  Among those under 30, the share of borrowers with outstanding debt exceeding $50,000 increased from 5 percent of borrowers to 10 percent and for those 30-39 this share jumped from 14 to 19 percent.  While these borrowers account for a minority of all those with student loans, they account for a big share of the growth of total debt outstanding, representing 70 percent of the rise among those under 30 and 79 percent among those 30-39.  So a non-trivial portion of the problem of mounting student loan debt is concentrated in a minority of households.

Source: Joint Center tabulations of Survey of Consumer Finances.

In assessing the impact of student loan debt on the ability of young adults to buy a home, it is also important to consider what share of income young renters are devoting to their monthly student loan payments. (In fact, many of those with student loans already own a home—including 30 percent of those under 30 and 61 percent of those 30-39.)  In 2010, the median renter under 30 and aged 30-39 both faced a monthly student loan payment of $150.  The range of loan payments was also identical for these two age groups, from $50 per month at the 10^th percentile of the distribution up to $500 per month at the 90^th percentile.  But when we sort households by the share of monthly income needed to make these student loan payments, households under 30 are found to face higher burdens because their incomes are lower at this stage of life.  The median renter under 30 devoted about 6 percent of their income to student loan payments, while those 30-39 paid a little less than 4 percent (Figure 3). (Of note, these figures only cover those actually making payments on their loans; due to deferments and defaults nearly half of borrowers under 30 and a third of those 30-39 did not have payments reported on their loans.)

Source: Joint Center tabulations of Survey of Consumer Finances.

While these amounts are not trivial, by themselves they shouldn’t be enough to put homeownership out of the running. The CFPB just released guidelines that establish a 43 percent debt to income ratio for qualified mortgages. Under this guideline, after paying their student loans, the median young renter would still have room for a sizeable housing payment (though car and consumer debt must also be figured in).  However, for borrowers at the upper end of the distribution of student debt burdens, their loan payments are likely to create a greater constraint: while renters under 30 at the 75^th percentile are paying 10 percent of their monthly income for student loans, at the 90^th percentile the burden rises to nearly 20 percent. 

Overall, while the rise in student loan debt is certainly a cause for concern, it may not be as significant a drag on the ability of young adults to move into homeownership as many fear, since the typical borrower has not seen a significant jump in the amount of debt incurred and seems to have a manageable monthly payment. On the other hand, with much of the increase in student debt among both those age 30-39 and even older households there may be more need for concern about the impact of these loans on the ability of existing homeowners to balance their household budgets and save for retirement.

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.