Thursday, September 27, 2012

Over the Next Two Decades, Baby Boomers will Age in Place

by George Masnick
Over the next two decades, the entire baby boom generation (age 45-64 in 2010) will cross the 65+ age threshold. Baby boom homeowners have dominated housing markets for so many decades that it is easy to imagine them exercising a large influence during the next two decades as they move into their senior years. A recent report from the Bipartisan Policy Commission makes just that case, arguing that the next twenty years should see significant additions to the housing stock released by aging baby boomers because of discontinued household headship and death.

But this report fails to underscore that the vast majority of baby boom household dissolution won’t occur until after 2030. Only about 15 percent of the 46+ million units baby boomers now occupy will be turned back to the market between now and 2030, assuming cohort household dissolution rates held constant at 2000-2010 levels. This works out to about 1 million total baby boomer housing units returned to the market between 2010 and 2020, and another 6.2 million between 2020 and 2030.  For owner-occupied housing, these numbers are 165,000 during 2010-2020 and 5.2 million between 2020 and 2030.  If baby boomers are healthier and live longer than their immediate predecessors, these numbers should be even lower.

Source: Joint Center calculations of household counts in 2000 and 2010 Decennial Censuses. Assumes cohort attrition rates held constant at 2000-2010 levels.

If more than 85 percent of baby boomers will continue to occupy housing as household heads for the next two decades, can we say anything with confidence about how they will affect housing markets?  Housing analysts have mostly focused on housing adjustments that aging boomers will likely make by moving – to smaller or one-story homes (perhaps in communities that are scaled to be less automobile dependent); to retirement destinations that are warmer, have lower taxes, or are “senior oriented” in terms of services and leisure opportunities; or to locations closer to kids and grandkids. Eventually, some will find themselves moving to assisted living. While during the next two decades many boomers will do all of these things, the majority of boomers will almost certainly not do any of them.  The majority of baby boom homeowners over the next two decades will simply age in place. 

By aging in place, boomers will likely follow existing trends among older homeowners. Elderly owners are the least mobile demographic group. Less than three percent of owners age 65-74 change residences in any given year, and this fraction has been declining, while for owners age 75+, the share that moves in a given year is now about 1.5 percent.  Such low mobility rates result in elderly homeowners having increasing durations of residency in their present homes: the older the owner, the higher the proportion with long-term residency. Indeed, according to the American Housing Survey, the majority of homeowners age 65+ have lived in their homes for 20 or more years (Figure B). These patterns have changed little over the past decade.

Source: Joint Center tabulations of 1999, 2003, 2005 and 2009 American Housing Surveys.  The 2004 data are averages of 2003 and 2005.

Aging in place does not necessarily mean that housing adjustments fail to take place.  Renovation and remodeling activity will allow those aging in place to repair, modernize, and reconfigure their homes.  Some of this remodeling activity will take place before age 65 to prepare the home for aging in place.  The 50s and early 60s are an ideal time to undertake major remodeling projects – the kids have fledged the nest and the still-employed parents have some additional disposable income.  Past trends suggest that while there is some fall-off in total remodeling spending after owners turn age 65, elderly owners will remain fairly active in spending on renovation and repair (Figure C).  More detail about aging in place and remodeling activity is the subject of a forthcoming Joint Center working paper.

Source: Joint Center tabulation of 2009 American Housing Survey.

Wednesday, September 19, 2012

Homeownership’s Appeal Endures through the Housing Bust: A Key Question is Why?

by Chris Herbert
Research Director
The beating the U.S. housing market has taken in recent years inevitably raises the question: do people still want to own homes? Indeed, it would be surprising if the allure of owning hadn’t taken a hit, since owning has long been considered a safe and secure way to build wealth.  But over the last few years, owning a home has been anything but a safe and secure investment. That said, a recent working paper I wrote with Rachel Bogardus Drew, analyzing data from Fannie Mae’s National Housing Survey on attitudes toward homeownership, concludes that there is little correlation between the extent of the downturn in housing and people’s attitudes toward homeownership. Overall, Americans continue to express very positive views of homeownership as a financial choice and many expect to own a home at some point in the future. Despite millions of foreclosures and trillions of dollars of lost housing wealth, homeownership appears to have retained its place as a key part of the American dream.

The study pools data from Fannie Mae’s National Housing Survey from mid-2010 through the fall of 2011.  We examine how geographic variations in the extent of the housing bust are related to attitudes toward homeownership, using questions about whether respondents view owning as financially preferable to renting and whether respondents expect to buy a home at some point in the future (which is arguably a better overall indicator of whether homeownership is preferred).

As shown in Figure 1, large majorities of respondents (over 85%) continue to feel that owning is a better financial choice than renting. Renters, households with annual incomes under $10,000, and those under age 25 are least likely to view owning more favorably, but even in these cases more than 7 out of 10 feel it’s a better financial choice.   (Click charts to enlarge.)

Source: Fannie Mae National Housing Survey as reported in “Post-Recession Drivers of Preferences for Homeownership”, Rachel Bogardus Drew and Christopher Herbert, Joint Center for Housing Studies, Working Paper W12-4.

Meanwhile, almost 90 percent of respondents expect to own at some point in the future (Figure 2), with those most expecting to own being under the age of 45. Since 19 out of 20 of these younger adults expect to own a home at some point in the future, these results certainly do not suggest that positive attitudes toward homeownership have diminished. Of course, it may still be the case that there has been a change in the timing of moves into homeownership. During the boom, the sharp run up in house prices likely led many young people to jump into buying earlier than they might have. both out of a desire to share in the windfall profits that the housing market seemed to offer and out of fear of being priced out of the market if they waited too long to buy. Now that the bubble has burst, these premature moves to owning are less likely, with more young adults deferring buying during the time of life when they are likely to move more frequently to accommodate changes in jobs and family circumstances.

Source: Fannie Mae National Housing Survey as reported in “Post-Recession Drivers of Preferences for Homeownership”, Rachel Bogardus Drew and Christopher Herbert, Joint Center for Housing Studies, Working Paper W12-4.

In the study we examine whether the responses to these questions are correlated with changes at the zip code level in house prices during the bust or the share of delinquent loans in the area. We also examine whether respondent’s views are associated with their own exposure to the housing crisis by knowing someone who is in default, has strategically defaulted, or whether they themselves are underwater on their mortgage. Our analysis found no association between house price declines and views toward homeownership. In fact, the only associations we found were that owners without a mortgage who were exposed to higher delinquency rates or knew a strategic defaulter were slightly less likely to view owning as financially preferred. We also found, perhaps not surprisingly, that owners who were underwater on their mortgages were somewhat less likely to expect to own again, although they were no less likely to view owning as being financially more favorable. Current renters, however, had no change in attitudes toward homeownership associated with any of these measures of distress.

Of course, even though Americans overall continue to view ownership favorably from a financial perspective, buying a home is not purely a financial decision, and the non-financial factors are often overlooked in the discussion about homeownership’s continued appeal. While buying a home is the most significant financial decision that many people make in their lifetime, the choice of whether to own and which house to buy is ultimately a choice about the type of housing that best meets your family’s needs across a variety of dimensions: for daily living space, for a place to gather with family and friends, for the ability to change your home to suit your tastes, for the right to stay there as long as you like, for security and privacy, access to quality schools, and for a community where you can put down roots. In fact, when the Fannie Mae survey asks respondents to rate a range of factors related to whether owning is preferred, many of the most highly-rated factors are, in fact, not financial (see Figure 3). In the end homeownership’s enduring appeal may reflect the fact that the housing bust has not changed the consumer’s calculus in weighing these non-financial factors.

Source: Fannie Mae National Housing Survey as reported in “Post-Recession Drivers of Preferences for Homeownership”, Rachel Bogardus Drew and Christopher Herbert, Joint Center for Housing Studies, Working Paper W12-4.

Wednesday, September 12, 2012

The Linchpin of the Housing Recovery

by Eric Belsky
Managing Director
Credit is the lifeblood of housing.  Without credit, housing does not get built and home buying is possible only for those with enough cash to cover the full costs. We live in a society in which many homebuyers lack the ability to come up with large downpayments.  Thus, the availability of low downpayment loans for first-time buyers is critical to recovery of the for-sale market, especially now that so many homeowners are underwater on their mortgages and unlikely to sell until doing so does not force them to suffer a loss.  This is one of the main reasons that the Federal Housing Administration (FHA)—an agency launched in 1934 to get credit flowing to housing during the Great Depression—has been so essential to this housing recovery. 

Apart from FHA, access to low downpayment loans all but evaporated for home purchase loans in the wake of the Great Recession and remained tight in 2012. FHA estimates that in the first quarter of 2009 it supplied 89 percent of purchase loans with downpayments of 5 percent or less.  Even in the first quarter of 2012, it commanded an 83 percent share.  And FHA supplied more than half of purchase loans with downpayments of 10 percent or less in the first quarter of 2012. 

Indeed, FHA has played an outsized role in the home purchase market, largely as a result of its willingness to take on low downpayment loans and at lower credit scores than Fannie Mae,  Freddie Mac, or conventional lenders without FHA insurance. While FHA scaled up both its refinance and its home purchase loan endorsements to fill the void left by the exit of lenders willing to lend without a government guarantee after the housing bubble burst, FHA supplied just 13 percent of refinance loans originated in 2010 but nearly half (48 percent to be more precise) of home purchase loans (net of manufactured homes). 

As important as FHA has been for home purchasers more generally, it has been especially so for low-income home purchasers, minority home purchasers, and those buying in low-income or predominantly minority census tracts.  For example, in 2010 government backed loans (which are mostly FHA) accounted for roughly two thirds of home purchase loans in low-income and mostly minority neighborhoods.  But home purchasers outside of low income and mostly minority tracts relied on FHA as well, though to a lesser degree (click chart to enlarge).

Notes: Federally backed loans include FHA/VA and USDA Rural Housing loans. Loans include owner-occupied purchase loans and exclude manufactured housing. Low-/moderate-/high-income neighborhoods are census tracts with a median family income less than 80%/80-120%/more than 120% of area median. Minority/mixed/white neighborhoods are census tracts with a minority share of more than 50%/10-50%/less than 10%. Source: JCHS tabulations of 2010 Home Mortgage Disclosure Act data.

And it is not just FHA’s role in allowing a recovery in home sales that has elevated its importance since it was called upon to play the historic mission it was created to serve.  Unlike single-family building which has only started to revive in earnest, multifamily construction increased by 54 percent in 2011 and is on track to increase by another 40 percent in 2012. In the 12-month period coinciding with the 2011 fiscal year in which FHA endorsed loans for the construction of about 30,000 units in multifamily (5+ unit) buildings, construction was started on 143,000 such multifamily units. That same fiscal year, FHA endorsed loans for the purchase or refinance of another 146,000 multifamily apartments, providing needed liquidity to the market. 

Why is recognizing FHA’s crucial role in supporting a housing market recovery so critical?  For one, the recovery is still in its early innings and private capital will likely take time to do more low downpayment and lower credit score lending. For another, FHA has fallen below a 2 percent capital reserve requirement against insurance-in-force. This means it is under pressure to tighten underwriting standards to bring up its capital levels. So far, FHA has not required any cash infusions, in contrast to several private mortgage insurance companies that have failed, banks that have needed bailouts, and Fannie Mae and Freddie Mac that have had to draw on Treasury to the tune of about $187.5 billion thus far under the Senior Preferred Stock Purchase Agreements. While this could change given the inevitable elevated level of claims stemming from the collapse in home prices, FHA has been able to pay for most claims from premiums it is taking in.  But there are no guarantees. 

To date, FHA has taken many actions to shore up its financial position, including increasing premiums, lifting the minimum downpayment necessary from 3.0 to 3.5 percent, placing credit score boundaries around who can qualify for a 3.5 percent downpayment, and, importantly, increasing enforcement actions against lenders, tightening lender approval standards, and reducing seller concessions from 6 percent of home’s sale prices to the greater of 3 percent of sales price or the appraised value or $6,000.  These changes have dramatically increased the chances that its new business will be on sound footings.

But pressure may build on FHA to do more.  If that pressure translates into a more dramatic reduction in the availability of low downpayment loans, the housing recovery will almost surely suffer. At the same time, borrowers who present reasonable risks will miss out on what may be a great opportunity to build wealth through homeownership. 

Welcome to Housing Perspectives

Welcome to Housing Perspectives, the blog of the Harvard Joint Center for Housing Studies. Drawing from the Joint Center’s ongoing research and analysis, Housing Perspectives provides timely insight into current trends and key issues in housing.

Housing is profoundly intertwined with personal wellbeing, community stability, and national welfare. For over forty years, the Joint Center has analyzed the consequences of housing policy and markets. We’ve researched how and where people are housed, the challenges of equity and affordability, the meaning of trends in ownership, rental housing, remodeling, and finance, and the relation of housing to the strength of our communities and cities. Our mission is to inform housing policy and practice, offering leaders of industry, institutions, and government fresh perspectives and information.

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Housing Perspectives posts are written by staff of the Joint Center, drawing from their wide-ranging knowledge and experience studying housing. We hope you will follow Housing Perspectives, and we welcome your comments.