Failure to Launch

by Dan McCue
Research Manager

With graduation season behind us, millions of newly minted college graduates will be returning to live in their parents’ homes. For some, it won’t be just for the summer. According to the US Census Bureau’s American Community Survey, at last count in 2011, fully 41 percent of college graduates under age 25 lived at home with their parents (Figure 1) along with 18 percent of graduates aged 25-29.

Source: JCHS tabulations of US Census Bureau, 2011 1-Year ACS.

As the figure shows, many college graduates have come to be known as “boomerang children” - those who, instead of venturing out and forming their own household after graduating college, return to live with their parents.  Since the recession began, the term boomerang children has become well known, largely because the situation has become so common.

Source: JCHS tabulations of 2007 and 2011 1-year ACS.

In 2011, there were 16.5 million 18-24 year olds living with their parents and another 4.9 million aged 25-29.  Combined, that’s over 2.9 million more young adults living with their parents in 2011 compared to four years earlier, before the Great Recession. While population growth has helped lift these numbers, the increase in the share of young adults living with their parents in 2007-11 has meant that, among those aged 25-29 alone, there were nearly a million (945,000) more adults living with their parents in 2011 than there would have been had 2007 population rates held constant, while for adults aged 18-24, there were fully 1.2 million more.

Such large numbers living in what many parents and children alike would call an unsustainable situation are why boomerang children are now being looked at as a possible boon to household growth.  As these young adults start to move out of their parents’ basements, they add so-called “pent-up” demand on top of normal household growth. However, a pent-up demand estimate requires an assumed return to earlier “normal” rates – and what is to be considered normal is a tricky thing to determine these days.  For example, if the change in rates of adult children living with their parents in 2007-11 had not occurred, 1.5 million more adults under 30 would have been heading independent households in 2011.  Assuming no change in rates in 2000-11 would lead to even higher estimates of pent-up demand.

Although a return to 2000 or 2007 rates may or may not be in the cards, mere stabilization of current rates will help household growth rebound. Indeed, population growth among 18-29 year olds was expected to push up the overall number of households by over 400,000 in 2007-11; it was the drop in rates of headship that led to the significant declines. With no more drops in rates of household headship, and no more increases in shares of adults living with parents, then population growth can take over again and return significant household growth levels among young adults, regardless of pent up demand. This fall, data releases from the Census Bureau and the Bureau of Labor Statistics will provide updated information that will shed light on whether or not such stabilization is starting to occur or, alternatively, if rates are heading in one direction or another.  Perhaps then we’ll be blogging about the growing number of empty-nester households. 

Strong Demand for Rental Housing Driving Gains in Multifamily Construction

by Ellen Marya
Research Assistant

As the housing recovery gains momentum, one encouraging sign has been the strong return of multifamily construction. According to the Census Bureau’s Survey of Construction and Building Permits Survey, construction on 245,300 multifamily units was started in 2012, the most since 2008. (Figure 1) The surge in construction activity is only beginning to result in new supply on the market given the long lags from the time a project is conceived until construction is completed (only 166,000 units in multifamily buildings were completed in 2012, just slightly above the low point in 2011). But looking ahead, multifamily construction will continue to accelerate, as permits for over 310,000 multifamily units were issued in 2012, also the highest level since 2008. 

Source: US Census Bureau, New Residential Construction.

Gains in permitting have been widespread: three-quarters of the 100 largest metro areas accelerated their multifamily permitting in 2012. Nationwide, the multifamily rebound is outpacing improvement in the single-family market. Multifamily permitting was up over 51 percent between 2011 and 2012, more than twice the gain in single-family permits and the third consecutive double-digit increase. The rapid recovery in the multifamily sector has led to speculation that some markets may be in danger of overbuilding. But while recent gains are dramatic, a longer-term view of both supply and demand indicates that such concerns are likely overblown—at least for now.

Current increases in multifamily permitting are from historically low levels. From a peak of over 473,000 units in 2005, multifamily permits decreased by more than 70 percent to 142,000 in 2009, the fewest in 25 years. In the context of these drastic swings, permitting is just beginning to return to levels in line with long-term averages. Nationwide, in 2012, nearly 81,000 fewer multifamily units were permitted than the average annual level from 2000 to 2009. Permitting in 34 of the 100 largest metros did top average levels from the 2000s in 2012, including seven of the top ten highest permitting areas (Figure 2).

Source: JCHS tabulations of US Census Bureau, New Residential Construction.

This boost in supply is occurring in conjunction with rapidly growing demand for rentals. Nearly 93 percent of multifamily units completed in 2012 were rentals, the highest level in decades. According to the Housing Vacancy Survey, the number of renter households increased by over 1.1 million between 2011 and 2012, marking the eighth straight year of renter growth. Rentership was especially strong in each of the top ten highest permitting areas, where growth in renter households outpaced overall household growth between 2010 and 2011, the most recent years with metro-level data available from the American Community Survey. In total, these ten metros added 154,000 households between 2010 and 2011, but the number of renter households increased by nearly 268,000.

Additional signs indicate strong rental markets in these highest permitting areas. According to MPF Research, vacancy rates in professionally-managed apartment complexes were near or under 5 percent in eight of these markets as of the fourth quarter of 2012. Monthly rents in the ten markets were up an average of 3.6 percent in the fourth quarter of 2012 from the same quarter a year earlier, compared to 3.0 percent nationwide. As construction timelines for multifamily buildings often span several years, market conditions will continue to develop during the lag between permitting and completion of new units. However, generally tight markets and enduring renter growth suggest that the robust return of multifamily construction currently represents a response to rising demand, rather than the formation of a new bubble.

Are More Older Americans Retiring with Mortgage Debt?

by Irene Lew
Research Assistant

As the first wave of baby boomers prepare for retirement, it would be easy to assume that they’ve paid off their mortgage and credit card debt. However, data from the Census Bureau’s Survey of Income and Program Participation (SIPP) shows that older Americans today are grappling with mounting debt levels, even into their retirement years.  Among households aged 55 to 64, total median household debt jumped from $42,654 in 2000 to $70,000 in 2011—a 64 percent increase—while households aged 65 and over are now carrying more than twice the amount of household debt they were carrying a decade ago.  Even more surprisingly, older Americans had a larger increase in total median household debt than younger households, with the amount of total median household debt among householders under the age of 35 growing by a relatively modest 13 percent between 2000 and 2011.

Note: Percent changes are based on 2011 dollars.

Source: US Census Bureau, Survey of Income and Program Participation (SIPP), 1996 and 2008 Panels. 

The increase in debt among older Americans has been driven by a spike in the number of households who hold secured debt, which includes mortgages and home equity loans, even into their retirement years. According to data from the Survey of Consumer Finances, the share of households aged 65 and over with mortgage debt has nearly doubled over the past 20 years, from 21 percent in 1989 to 40 percent in 2010; among households aged 55-64 during the same time period, the share grew from 46 percent of households in 1989 to 69 percent in 2010. Just between 2001 and 2010, there was a 10 percent increase in the share of households aged 55-64 with mortgage debt and a 14 percent increase in the share of households aged 65 and over with mortgage debt.

Source: JCHS tabulations of Survey of Consumer Finances. 

It’s not just that more seniors are carrying mortgage debt; they are also saddled with much higher mortgage debt than they were carrying 20 years ago.  Although the median mortgage debt of all homeowners who are still carrying mortgage debt has increased from nearly $54,000 in 1989 to $109,000 in 2010, among homeowners aged 65 and over there was a 76 percent increase in the median amount of mortgage debt, from $15,180 in 1989 to $63,000 in 2010 (after adjusting to 2010 dollars).

While the dramatic rise in the share of older Americans with mortgage debt is partly the result of easily-accessible credit before the Great Recession (when many Americans took out home equity loans, extended mortgage terms, or refinanced their homes and took out cash), there is also evidence that older households were not spared from the Great Recession. A 2011 AARP study points out that, post-recession, a larger share of older homeowners with mortgages, particularly those with incomes below $23,000, are paying 30 percent or more of their income for housing costs. In fact, 96 percent of homeowners aged 50 and older with mortgages, who have incomes under $23,000, pay 30 percent or more of their income for housing.

Furthermore, a recent report from the Consumer Financial Protection Bureau (CFPB) indicates that more senior households are taking out reverse mortgages. According to the report, 70 percent of reverse mortgage borrowers in 2010 opted to take the full amount of the loan as a lump sum at closing, up from just 2 percent of borrowers in 2008. While data is not available on how they use these funds, this dramatic increase raises concerns about whether borrowers will have sufficient financial resources to cover their expenses later in life.

Despite Rising Home Prices, Homeownership More Affordable than Ever

by Rocio Sanchez-Moyano
Research Assistant

For those able to obtain loans in today’s constrained credit environment, the monthly cost of homeownership is at historic lows, thanks to low interest rates.  Though the National Association of Realtors’ median single family home price increased by 6 percent in 2012, falling interest rates have made mortgage payments cheaper: assuming a 20 percent down payment and 30-year fixed-rate mortgage, monthly payments on a median priced home in 2012 were $644. Compared to median incomes, payments are lower than they have been in more than two decades.

Sources: JCHS tabulations of Freddie Mac, Primary Mortgage Market Survey; National Association of Realtors;  US Census Bureau, Moody’s Analytics Estimates.

The record low interest rates available in 2012 helped reduce monthly mortgage payments in 82.9 percent of metros from 2011 to 2012; payments also declined in 80.3 percent of metros that experienced price gains.  Even in metros with substantial price appreciation, such as Phoenix (24.6 percent) and San Francisco (11.9 percent), growth in mortgage payments was muted, rising 13.3 and 1.7 percent, respectively.  In fact, interest rate declines over the last year were enough to offset price increases of up to 10 percent price appreciation.

The current interest rate environment would keep payment-to-income ratios affordable for median buyers in a majority of cities even under much larger price increases.  Following the methodology used by the National Association of Realtors (NAR) in calculating their housing affordability index, a mortgage payment is considered affordable if it represents no more than 25 percent of monthly income.  Using this as a threshold, mortgage payments on a median priced home were affordable in more than 95 percent of metros in 2012.  Even if house prices were to rise by 20 percent, without a change in interest rates, 91.5 percent of metros would remain affordable to the median buyer.  In fact, the cost of a nationally median-priced home would have to increase by more than 72.1 percent to become unaffordable at the median household income.  Interest rates are so far below their historical average that few metros would become unaffordable to the median buyer even with moderate changes in interest rate.  For example, if interest rates increased to 5 percent, comparable to rates in 2009, only 2 percent more metros would become unaffordable to the median buyer.

Though mortgage payments are at historic lows, purchasing a home is still unaffordable for many prospective buyers.  In some traditionally expensive markets, such as the large California metros and Honolulu, monthly mortgage payments were already too costly for the median homebuyer in 2012.  For first time homebuyers, whose payments are approximated using a 10 percent down payment on a home priced at 85 percent of the median, and incomes of 65 percent of the median, 17.1 percent of metros were unaffordable.  The effect is more pronounced in the largest 20 metros, as 35 percent of them are unaffordable to first time buyers. (Click table to enlarge.)

Notes:  Payments and payment-to-income ratios for the median homebuyer assume a 30-year fixed-rate mortgage with 20 percent down payment on a median priced home and median income for the metro; for a first time homebuyer, payments and payment-to-income ratios assume a 30-year fixed-rate mortgage with a 10 percent down payment on a home priced at 85 percent of the median and an income of 65 percent of the median, as per the NAR first time homebuyer affordability index. Sources: JCHS tabulations of Freddie Mac, Primary Mortgage Market Survey; National Association of Realtors; US Census Bureau, Moody’s Analytics Estimates.

While it is likely that homeownership will remain affordable in the short term, these historic levels of affordability may not last.  Prices increased in 86.6 percent of metros from 2011-12 and interest rates were slightly higher in the first months of 2012 than at the end of 2012, according to the Primary Mortgage Market Survey issued by Freddie Mac.  Buyers who were waiting for the best deal as prices and interest rates continued to drop before entering the market may be spurred by current trends to think that this may be the ideal time to buy.

Building a New System of Housing Finance

The JCHS research team is busy these days, putting the finishing touches on the 2013 State of the Nation's Housing report, which will be released via live webcast on Wednesday, June 26.  In the meantime, we’re pleased to share another guest blog. Recently, we held a symposium entitled Homeownership Built to Last: Lessons from the Housing Crisis on Sustaining Homeownership for Low-Income and Minority Families. At the event, Sarah Rosen Wartell, President of the Urban Institute, delivered the following remarks to the assembled group of policymakers and members of industry, the nonprofit community, and academia. 

by Sarah Rosen Wartell
Urban Institute

Over the last 75 years, housing has been a critical component of the physical security, psychological identity, and economic opportunity of millions of Americans—although we have not yet achieved equitable access to those benefits, something to which I know those in this room are committed.

Today we are building a new system of housing finance from the ashes of the system that crumbled in the last decade.  Yet, we began this endeavor before we had a blueprint completed—we have laid pieces of the foundation before we know the design of the first floor, let alone the shape of the roofline. What is more, to over-extend the metaphor, the ground upon which we are building is shifting. As a consequence, I don’t think we will have a grand reform moment, but rather a series of discussions and incremental change.

As part of those discussions, we must continuously ask: in this new system, will homeownership continue to offer the advantages of physical security and psychological identity? Will it continue to offer economic opportunity—the opportunity to build wealth and assets that make so much else possible? And, if so, who among us will gain those benefits?

I fear we are expecting homeownership to accomplish too much: we’re asking it to close gaps in incomes and opportunities, and to address economic volatility—challenges that have deeper roots than housing. Homeownership cannot be the route to overcoming growing inequality and its persistence along racial lines. But if the new system cannot erase these inequalities, it is imperative to ask if it will exacerbate them—if it will calcify the divisions between the “asset haves” and “asset have nots,” and the “income haves” and “income have nots.”

I wish I could tell you what the future will bring, but you should be highly skeptical of anyone who has great confidence about how sweeping policy change and shifting socio-economic factors will combine to determine the future, as we are in a period of profound policy change. Underway now are the implementation of new Basel capital standards, which are changing financial institution behavior; the implementation of hundreds of Dodd-Frank provisions (most relevant QM and QRM, but inevitably others) that will also have consequences we cannot predict; efforts to restore the FHA Fund’s capital levels, which will either strengthen or hobble FHA; and the creation of a new “architecture”—including servicing standards and a new securities platform to segregate the MBS issuance and credit risk functions. The elephant in the room is the impact of what comes after Fannie and Freddie as they are (as the Administration likes to say) “unwound.”

As the principal focus of policymaking right now is on avoiding excess leverage and systemic risk, and not principally about ensuring affordability and access to credit, a key question is how access and affordability will be pursued in the new framework. Some mechanism will be politically necessary, but will they be sufficient? Will they be a fig leaf? Can access be done in a non-distorting way?

Beyond the future housing finance system, what will be the consequences of changes, if any, to the Mortgage Interest Deduction and broader tax reform? And what about likely further reductions in domestic discretionary spending?

The U.S. is also experiencing transformational socioeconomic and demographic shifts that will fundamentally affect housing demand and the effectiveness and desirability of housing as a wealth-building tool. As the Joint Center and some of my own colleagues at the Urban Institute and the Bipartisan Policy Center have so ably documented, household formation patterns are changing, our senior population is exploding, and our immigrant population is both increasing and suburbanizing.

For example, children are increasingly born into non-marital families: 40 percent of births are to unmarried moms, and these percentages vary dramatically by race. And while in some of those cases, a second adult is present, absent marriage, co-habitation doesn’t usually last.  The result for homeownership could be profound, as single-earner households face a narrower set of housing choices.

We are also seeing significant generational differences in wealth accumulation. Just last month, Urban Institute scholars including Signe-Mary McKernan, Gene Steuerle, and others published work showing that even with the Great Recession, over the last forty years, people are wealthier than their parents’ generation—unless they were under forty.  Today’s young people, in particular the cohort in their thirties, have accumulated far less wealth than their parents over a comparable period of time.  Some of that stems from coming of age in the era that led to the housing collapse, but not all. Another challenge is that younger people without college degrees have less predictable earnings.

Sadly, that same economic volatility affects many of those with a college degree in the 21st century economy.  Employment is far less secure. And deeper trends in the economy suggest that middle skill workers will not see any end to the wage stagnation of the last few decades, giving rise to questions about the ability of more of the workforce to sustain homeownership.

Minorities—who historically have had lower levels of educational attainment and thus incomes—make up a growing share of the U.S. population. While educational attainment is increasing, it is unclear whether these rising levels will overtake the effects of shifting population composition, or if the housing market demand will be shaped by lower-income consumers in the long term.

And an additional challenge is the aging of the population and its consequences for demand for different kinds of housing units.  We just don’t know how all of these trends will intersect with policy change.

There are also three trends in the mortgage market – partly policy-driven, but not exclusively – that keep me up at night: underwriting rigidity, the cost of credit, and the role of down payments.

In terms of underwriting, we have gone backwards.  We now have limited flexibility with little consideration for compensating factors.  Rigid rules have replaced rules of reason.  This change, which falls disproportionately on lower income households, recent immigrants, retired Americans and the self-employed, comes from a confluence of regulatory policy and private sector incentives.  Well-intentioned individuals who committed to avoiding the mistakes of the bubble years are overshooting. One statistic stands out: I am told the average loan that is turned away by GSE automated underwriting systems has an average credit scores well north of 700 and average LTV below 80.  Manual underwriting is a shallow promise in the era of rep and warranty concerns.  So we see overlays based on rigid ratios not only on GSE loans, but also FHA.

A second issue is that we haven’t really absorbed the extent to which the cost of credit is going to rise in the years ahead.  When we fully price the value of the guarantee – especially as there will be pressure to price it for another “100-year flood” or, in this case, financial catastrophe, the real cost of credit is going to rise A LOT.

There is also pressure in Congress to change the rules of how we estimate what credit costs taxpayers.  “Fair value accounting” will make the accounting for government credit risk more expensive, which will lead to higher premiums and guarantee fees. Even today, before these changes, despite low interest rates, the cost of credit is not as inexpensive as it seems.  Today, the primary-secondary market spread is 50 to 100 bps higher than its historic levels.

And then there are risk-based premiums. We’ve always had pooling of risk, but we can expect much less in the future. While we have traditionally had price banding—pooling of risks but not a single pool, we are moving toward more granular pricing, some at the expense of credit-impaired borrowers.  

A real challenge for those who care about affordability is managing in a world of greater risk-based pricing.  We have built a financial system that prices credit based on risk, yet pools or average prices prepayment risk.  Low-wealth individuals are the losers on both sides of these trades.  We need more research to provide greater transparency on the consequences of risk based pricing.

I am also concerned about learning the wrong lessons about consumer leverage and downpayments.  I accept that loss severity is greater with lower equity, but am less convinced that proclivity to default is affected by LTV.  Further, there is a difference between what drove the crisis and what may have exacerbated the losses suffered: when unemployment rises so dramatically and prices fall 50 percent, does it matter whether current LTV is 190 or 180?

Going forward, we need to understand how combinations of factors influence performance and create prudent regimes that allow for other factors to compensate for lower equity. I also am attracted to testing the concepts discussed yesterday that build in savings, first in the lead up to ownership with a promise of mortgage at the end, and throughout ownership to provide the necessary cushion against unexpected costs of loss of income.

We also need a way to lower the cost of capital for innovation, to provide additional credit enhancement for innovative products and services. The Center for American Progress’ and Mortgage Finance Working Group’s reform paper has a concept known as the “Market Access Fund” which we would fund out of an assessment on all MBS – guaranteed or not—and that can be delivered through a combination of high performing state and local HFAs and competitive allocations to innovative products by MIs, CDFIs, or other nonprofit and private capital providers.  Some will say, isn’t that FHA’s role?  I have long hoped it would be so.  But I think we need an additional strategy – a nimbler and more flexible tool – as I have little confidence Congress will ever stop writing FHA underwriting standards in statute.

Finally, we face a pressing need for better information – particularly, more analysis and quick learning that connects the seemingly disparate macro and micro economic forces that determine a household’s ability to purchase a home and save.  In addition, much of the impact on families and communities is determined by capital markets, secondary markets, and financial institution regulatory policy, and not the retail consumer and mortgage issues that advocates for affordable housing typically focus on. Yet the gulf between the two worlds is so great, and the language of analysis is so different. If we could manage to better translate between the two, and create a body of shared knowledge, I am confident we would be in a much better position to reimagine and build our housing system of the future.

In closing, we have only just begun to reconstruct our national housing finance system, and we face tremendous uncertainty around the forces that will affect it. Will homeownership continue to serve the critical asset-building role it has for 75 years? And if so, how do we create a system that enables access to it in the face of volatile economic and social dynamics? We need to show how we can do access without increasing risk to the system.

If anyone can determine the best way forward, it is the minds assembled here today. You all have not only the brainpower, but the commitment to affordability and access. Thanks again to Eric, the Joint Center, the Ford Foundation, NeighborWorks America, and Bank of America for bringing us together today.