The Negative (and Positive) Spillovers of Concentrated Foreclosure Activity in New York City

by Kristin L. Perkins
Postdoctoral Fellow

Foreclosures have negative effects not only for the people who lose their homes, but also for the neighborhoods where they lived.

In an article that recently appeared in Urban Affairs Review, Michael J. Lear, Elyzabeth Gaumer, and I conclude that, at least in New York City, neighborhood foreclosure activity during the peak of the Great Recession was associated with an individual property's risk of foreclosure, but not in the way that most previous research has assumed. These findings suggest that financial institutions' practices during the foreclosure process may have contributed to how quickly neighborhoods recovered from that crisis above and beyond the institutions' roles in causing it. The research focused on two key phases in the foreclosure process, an early phase when a lender filed a foreclosure notice after a property owner missed some mortgage payments, and a later phase when properties were actually scheduled to be auctioned. (In New York, the latter process often occurs more than a year after the former one.)

Although New York City's housing market fared better than many other markets during the recession, it was not immune to the problems associated with that downturn. Illustratively, in 2007 and 2008, there were nearly 14,000 foreclosure filings annually, double the number in 2004. In 2009, the number increased to over 20,000. The number of foreclosure auctions, however, was much smaller, ranging from 3,000 to 4,500 a year between 2007 and 2009.

This foreclosure activity was also highly concentrated. Between 2007 and 2009, over half of the city's foreclosure filings occurred in just nine of the city's 55 sub-borough areas (SBAs), all of them in Brooklyn or Queens. Moreover, over half of the city's auctions took place in just six SBAs. Not all specific areas with the highest concentration of foreclosure auctions, however, were among the areas with the highest concentration of foreclosure filings. Rather, the share of foreclosure filings that result in scheduled foreclosure auction varied considerably across boroughs, from less than 10 percent being scheduled for auction in parts of Brooklyn to more than 40 percent in parts of Queens.

My coauthors and I hypothesized that the number of scheduled foreclosure auctions surrounding a property that had received a foreclosure filing is positively associated with the likelihood of that property itself reaching auction, net of other factors. Since foreclosure filings do not necessarily involved a transfer of ownership, however, we thought they might not have as strong an association as auctions may have.

Drawing on data about individual property and neighborhood characteristics in addition to foreclosure activity, we found that levels of neighborhood foreclosure activity in both phases were, in fact, associated with an individual property's outcome, but in different directions. Holding constant individual property and neighborhood characteristics, as the number of nearby properties with a foreclosure filing increases, the probability that an individual financially-distressed property will be scheduled for foreclosure auction decreases. This pattern is reversed for properties in the later phase of the foreclosure process. As the number of nearby properties scheduled for auction increases, the probability that an individual financially-distressed property will be scheduled for foreclosure auction also increases (See Figure).

These findings also suggest that at least in New York, banks and loan servicers may have delayed the processing of foreclosures in areas with larger numbers of properties with foreclosure filings. They may have done so because foreclosed properties may not sell as quickly or as profitably as in more desirable areas where there are fewer distressed properties and/or where foreclosed properties sell right away. Future research should examine these practices in more detail, not only in New York, but in other states as well and, in doing so, underscore the importance of financial institution practices not just in the lead up to the Great Recession, but throughout the recovery process as well.

New Data Shows US Renter Cost Burdens Easing, But Still Elevated

by Dan McCue
Senior Research
Associate

The number of renters paying 30 percent or more of their income on housing decreased in 2015 by 240,000 households, reversing an eight-year trend of annual increases in the number of “cost-burdened” renters, according to new data released last week by the US Census Bureau. Unfortunately, however, the decrease was very modest in comparison to previous years. Indeed, the decrease in rent-burdened households recorded in 2015 was less than half the increase recorded in 2014. Moreover, the data show that there still are 21.4 million “cost-burdened” renters in 2015, 1.15 million more than in 2010 and fully 4.0 million more than in 2005 (Figure 1).

Source: JCHS tabulations of US Census Bureau, 2015 1-Year American Community Survey estimates via FactFinder

The data also show some improvement in the number and share of “severely burdened” renters (those paying 50 percent or more of their income on rent). However, this growth was not enough to return to the pre-recession levels of 2008 and earlier. Overall, the number of renters paying 50 percent or more on rents decreased from 11.50 million to 11.28 million in 2014–2015, which was the lowest number since 2010. The share of renters with severe burdens dropped from 26.6 percent of all renters in 2014 to 25.8 percent in 2015. This is the lowest rate recorded since 2008, when 25.0 percent of renters paid 50 percent or more of incomes on housing.

In addition, the decline in the overall number of cost-burdened renter households in 2015 masked some worsening of cost burden rates within many income groups (Figure 2). Among people earning $20,000-to-$34,999 annually (which in many areas is still a low and/or moderate income), the share of those who were cost-burdened rose from 70.8 percent in 2014 to 71.3 percent in 2015. While a much smaller share of renters making more than $35,000 a year are cost-burdened, there were modest (less than one-percentage point) increases in the share of cost-burdened households, for these renters as well. In comparison, while more than 80 percent of the renters who make less than $20,000 a year are cost-burdened, that figure fell by less than one percent between 2014 and 2015.

Source: JCHS tabulations of US Census Bureau, 2014 and 2015 1-Year ACS data.

Taken together, these shifts suggest that the overall decline in cost-burden rates for renters is due to growth in the number of renters with higher incomes and a decline in the number of low-income renters. While this could be viewed as a positive trend for renter households as a group, the fact that renter burden rates continue to grow within and among higher income groups suggests affordability problems are growing across the income spectrum and even for higher income groups.

Tomorrow, we’ll take a closer look at the improvement trends across various metropolitan areas.

Great Recession Increased Fragmentation in Remodeling Industry

Abbe Will
Research Analyst

During the last industry downturn, home remodeling contractors experienced increased fragmentation due to especially large growth in small and self-employed remodelers. Additionally, concentration gains that were achieved by larger-scale firms in the industry upturn were reversed somewhat—all according to recently acquired tabulations of the U.S. Census Bureau’s 2012 Economic Census and Nonemployer Statistics. Conducted once every five years, the Economic Census measures payroll business activity at the industry level, while the Nonemployer Statistics capture similar data for businesses with no paid employees. Special tabulations of the Economic Census and Nonemployer Statistics done for the Joint Center’s Remodeling Futures Program specifically isolate residential construction businesses—either general (i.e. full-service and design/build) or special trade (e.g. HVAC/plumbing, electrical, painting, and roofing)—who have more than half of receipts from remodeling and repair activity.

According to Joint Center estimates from these data sources, the number of residential remodeling contractors reached 716,000 by 2012, up from 652,000 at the peak of the market in 2007 (Figure 1). General remodelers increased their ranks over 12% to 263,000, and special trade remodelers increased 8.5% to 450,000. Overall, the total number of contractors serving the remodeling industry increased almost 10% from 2007. Most of this growth, however, was driven by increases in self-employed remodelers, who saw double digit growth between 2007 and 2012—about 11% for special trades and nearly 17% for general remodelers. The number of payroll contractors grew only 3.5% during this same period.


Notes: Includes residential remodeling establishments with more than 50% of receipts from remodeling activity including maintenance and repair. Self-employed remodeling contractors include those with annual revenues of at least $25,000 assuming those with smaller receipts are most likely part-time, partially retired, or “hobby” contractors where remodeling is likely not their main source of income.
Sources: JCHS estimates using unpublished tabulations from US Census Bureau, Economic Censuses of Construction and Nonemployer Statistics.

The self-employed already made up a large share of home improvement businesses before the boom and bust—about 62% in 2002—and by 2012 their share increased to almost 70% of businesses operating in the remodeling industry. Of course, even though self-employed contractors are a growing share of remodeling businesses, they remain very small businesses: 44% had receipts less than $50,000 in 2012 and 29% had receipts between $50,000 and $99,999. Although the number of self-employed remodelers with less than $150,000 in annual receipts* increased 15% from 2007-2012, those with receipts of $150,000 or greater increased only 3%. Indeed, much of the increased fragmentation in remodeling contractors occurred at the smallest end of the revenue spectrum.

Even remodeling contractors with payrolls continue to be dominated by smaller-scale businesses: over half of payroll remodelers generated under $250,000 in revenue in 2012 (Figure 2). However these smaller-scale remodelers only accounted for 10% of total payroll receipts. Larger-scale firms with $1 million or more in revenues made up just 13% of all remodeling payroll businesses in 2012 but were responsible for generating 62% of total industry receipts and accounting for nearly half of industry payroll employees. Although these largest remodeling firms saw a decline in their shares of industry establishments, employment, and receipts from the peak of the market in 2007, they remained well above pre-boom shares of a decade ago in 2002. Even after suffering the worst market declines on record, larger-scale remodeling companies continue to play a dominant role in the market.

Notes: Residential remodeling establishments are defined as general and special trade contracting establishments with more than 50% of receipts from remodeling activity including maintenance and repair. Receipt categories are not inflation-adjusted.
Source: JCHS tabulations of unpublished data from US Census Bureau’s Economic Censuses of Construction.

In fact, when considering the very largest general remodeling companies in terms of value of receipts over the 2002 to 2012 period, the largest 50 firms continued to increase their share of industry receipts. In 2002, the 50 largest remodelers accounted for 5% of all industry receipts generated by general remodelers with payrolls. This share jumped to 7.9% by 2007 as the market boomed, but even during the industry collapse, the top remodelers were still able to increase their market share to 8.5% of total receipts. The average value of residential remodeling receipts for the top 50 general remodelers with payrolls was over $85 million in 2012, which at first might sound unrealistically high given that the average general remodeling firm had under $650,000 in revenue that year, but could be explained with even just one significant outlier skewing the concentration figures.

Ultimately, these recent data releases provide important updates on the evolving structure of the remodeling contracting industry and a more complete understanding of the impact of the Great Recession. The remodeling industry experienced increased fragmentation during the market downturn, especially among smaller contractors. Larger-scale firms did lose some of their concentration gains of the boom years, but there is evidence that the remodeling industry continued to concentrate at the very top of the market. The top 50 largest companies increased their share of industry receipts even during the downturn, a considerable advantage of scale. Further analysis of the changing composition and organization of remodeling contracting firms over the past business cycle will be included in a research note to be published later this year.

*receipt categories not adjusted for inflation

Home Conversions – and Reconversions – Expected to Generate More Remodeling Activity

Kermit Baker
Senior Research Fellow

During the housing bust, and continuing into this housing recovery, large numbers of owner-occupied homes have been converted to rental units. Distressed owner-occupied homes that were foreclosed or sold as short-sales often ended up as rentals because, given the weakness in the housing market and broader economy, few households were looking to buy or were able to buy. Private investors often bought up homes built for owner-occupancy once they saw the strong demand for rentals and the rising rents that these homes commanded.

Once the housing market settles and the demand for homeownership begins to pick up, it is likely that many of these homes will filter back into the owner-occupied housing stock. What will this process look like, and how much modification will be undertaken after this transition occurs? To begin to think about this issue, the Joint Center looked at homes that have already gone through this process; namely owner-occupied homes that have been converted to rentals, and then converted back to owner-occupancy.

While this phenomenon didn’t get much attention until the recent housing crash, it turns out to be fairly common. Starting with owner-occupied homes in 1995 from the American Housing Survey, we tracked these homes for the next 20 years to see which ones changed tenure. Almost a quarter (23.4%) of homes in this 1995 cohort was converted to a rental at least once over this period. While multifamily condos were the most likely type of owner-occupied home to be converted – over half of these condos was rented at least once over this period – so were over a third of single-family attached and manufactured homes, as were over 20% of single-family detached homes.

Note: Sample composed of owner-occupied units in 1995 that were occupied in at least 7/10 surveys from 1995-2013. 

Source: JCHS tabulations of HUD, 1995-2013 American Housing Surveys

Typically, homes that were converted to rentals were somewhat less desirable than homes that were continuously owner-occupied over this period. On average, they 

• are older – pre-1940 homes were 50% more likely to be converted than homes built after 1990,
• have a lower value – homes valued at $100,000 or less were twice as likely to be converted as homes valued at $200,000 or more,
• and are more likely to be located in central cities.

No doubt reflecting the lower value of these homes, spending on home improvement projects was generally lower. For the periods that they were owner-occupied, spending on homes that would be converted to rentals averaged 10% to 15% less than the average for all owner-occupied homes.

The pattern of home improvement spending on converted homes is particularly interesting. For homes that were converted to rentals and then converted back to homeownership, spending on home improvement projects was over 20% below average prior to being converted to a rental unit, and almost 20% above average after that same rental unit was converted back to homeownership.

Notes: Rental sample composed of occupied units in 1995 that were occupied in at least 7/10 surveys from 1995-2013 and were owner-occupied in at least two surveys before first rental period and after last rental period. Average spending is calculated for years in which the unit was owner-occupied. Broader sample composed of occupied units in 1995 that were occupied in at least 7/10 surveys from 1995-2013 and were owner-occupied in at least one survey. 
Source: JCHS tabulations of HUD, 1995-2013 American Housing Surveys

It may be that owners were underinvesting knowing that the home would be converted to a rental, or just the opposite – that the home was converted to a rental because it was in poor enough condition that a sale was difficult. Likewise, after reconversion to an owner-occupied home, higher spending may reflect the need to fix it up after a period of renting, or that the new owner wanted to upgrade the home or customize it to the household’s needs.

There are over four million more rental units now than there were in 2010, and over eight million more than there were in 2005. As many of these rental units return to the owner-occupied stock, we’ll see a boost in home improvement spending. On average, almost $1,000 more is spent per year on home improvements for a home that is converted from renting to owning as compared to a home converted from owning to renting. For every million rentals converted back to homeownership, therefore, there is expected to be almost a billion dollars more spent each year on home improvement activity. 

Article review- “Patriarchy, Power, and Pay: The Transformation of American Families, 1800-2015”

George Masnick
Senior Research Fellow

At my age, there is little that makes my jaw drop, especially while reading an article in one of my professional journals. However, this is exactly what happened when “Patriarchy, Power, and Pay: The Transformation of American Families, 1800-2015” by Steven Ruggles appeared in the latest issue of Demography. (Another almost identical version of this paper is available free of charge here.) What struck me as amazing is the way Ruggles provides a long-term perspective on many of the demographic and economic trends taking place today that I have studied using a much shorter time frame. And by long-term, we are talking 150-200 years!

The Joint Center for Housing Studies' early effort to describe changes in household structure and the labor force participation of American womenThe Nation's Families, 1960-1990– adopted a temporal perspective from 1960-1990. Published in 1980, we thought at the time that a three-decade perspective was all that was needed to understand the dramatic changes of that era. Wrong! The longer historical perspective sheds much more light on the origins of today’s demographic shifts, particularly in household structure, and what they might mean for housing.

Ruggles begins with the trend in the share of persons age 65+ who live in multi-generational families. We have noted the increase in this household type during the past two decades, primarily due to the increasing share of Hispanic and Asian immigrants for whom multi-generational residence is more common, and have speculated about its implications for housing consumption. But since we housing researchers rarely look at trends spanning more than 30 or 40 years, we have no sense of whether the upward trend in multi-generational living is indeed all that significant.

Ruggles’ Figure 1, reproduced below, shows how slight the recent turnaround has been relative to longer-term historical levels. The high share of the labor force based in an agricultural economy drove the very high historical incidence of older Americans living in multi-generational households. Three quarters of the labor force in 1800 worked in agriculture, and farm labor still was in the majority in 1850 when the share of 65+ living in multi-generational families was also 75 percent. Ruggles explains convincingly why an agricultural based economy tied the generations together, and why the rise of wage labor off the farm split them apart.



Ruggles’ main theme is that the decline of what he calls the “corporate family” – those working in agriculture and other (often related) family businesses – and the gradual transformation of the workforce to include first only male breadwinners, and later dual earner and female breadwinner households – had the effect of making household structures both simpler and more fluid. Once again, his long-term perspective is enlightening in looking at the recent trend in such things as delayed marriage and divorce. Age at first marriage for both men and women has been rising steadily since 1960, and he predicts that the share of never-married 40-44 year old women will almost double in the near future, rising from 15 percent in 2010 to about 28 percent in 2030. Similarly, the rate at which married women are divorcing has increased steadily since 1960, showing no sign of this trend slowing. Consequently, the share of all households without a married couple present – which held near 20 percent between 1850 and 1950 – has risen to over 50 percent in 2010, and continues its upward trajectory.

Nor is it simply the case that young adults are just trading marriage for cohabitation. To be sure, this is happening to some degree, but Ruggles notes that the share of 25-29 year olds without a co-residing partner has grown from 23 percent in 1970 to 48 percent in 2007 to 54 percent today. The fastest growing household type is single-person rather than cohabiting couples, as more and more adults of all ages who never married, are separated/divorced, and are widowed live alone.

If the household is the unit of both production and consumption, greater fragmentation and instability in household structures is troublesome. The primary household production good today is the next generation, and the U.S. appears to be following the lead of many European countries in developing fertility levels below replacement. Nothing that Ruggles presents in his paper provides comfort that the recent declining fertility rates are simply due to the lingering effects of the Great Recession and will likely reverse themselves.

One contributing factor to declining fertility may be trends in income. Households have always provided the mechanism for combining incomes. To Ruggles’ dismay, the evolving global economy is leaving more American households without secure incomes. The long slide in the relative earning power of young men over the past 40 years has been mitigated by the steady rise in employment of wives. But now that fewer and fewer households contain a married couple, and given that women’s real wages have also begun to decline, aggregate household incomes for married couples has begun to decline as well. Ruggles suggests that the largest source of decline in economic opportunity for young people, especially over the past two decades and in future decades, may be the automation of both manufacturing and services made possible by new technologies.

Housing consumption broadly should follow the downward trends in employment and income. Boosting household formation and homeownership rates, especially among the young, will require a reversal of many of the long-term demographic and economic trends that Ruggles discusses.

Ruggles’ article has sixteen figures, some only going back in time to 1940, but many spanning 150 or more years. I highly recommend you take a look. Some will surely make your jaw drop too.

Democracy and the Challenge of Affordability: The Case of Housing

by Quinton Mayne
Harvard Kennedy School

This post kicks off a month-long series that our colleagues at the Ash Center for Democratic Governance and Innovation are doing on affordable housing as a challenge to the health of American democracy, and in particular local democracy in the United States. The series, edited by Harvard Kennedy School Assistant Professor Quinton Mayne, is part of the Ash Center’s Challenges to Democracy series, a two-year public dialogue inviting leaders in thought and practice to name our greatest challenges and explore promising solutions.

Over the past two years, the Ash Center has welcomed leading experts from across the country to debate the structural weaknesses preventing the United States from achieving its democratic potential. Democracy demands an equal right of participation; but as the Challenges to Democracy public dialogue series has shown, the formal design and practical workings of America’s political institutions are preventing the full realization of participatory equality. Some of the key challenges covered in our series to date include the erosion of voting rights and access, the decline of social movements, and the integration of immigrants into political life.

In addition to metrics of participation related to voice and input, democracy can also be judged by its outputs. When public officials produce policies responsive to the needs and demands of citizens, democracy would appear to be in good health. But are elected politicians enacting laws and designing programs in line with popular preferences? Answering this question from the point of view of affordability, there is good reason to question the health of American democracy.

Long before the Great Recession struck in 2008, affordability posed a major problem for the American middle-class dream. The rising costs of health care and college education have made the headlines for many years now. Energy and gasoline prices also cycle in and out of the news, and in the past half-decade or so the cost of child care has grown in importance. The devastating effects of the recession on individuals and families across the nation, coupled with the organized groups and movements that emerged and strengthened in defense of those affected by the recession, brought a much-needed urgency to the issue of affordability.

Despite this heightened attention and the public policies and programs it has produced, democratically elected officials in city halls, state capitols, and the corridors of power in Washington, D.C. are struggling to systematically respond to the challenge of affordability.

Nowhere is the democratic challenge of affordability more obvious than in the case of housing. According to a 2014 report issued by Harvard’s Joint Center for Housing Studies, 35 percent of U.S. households in 2012 were in housing that they could not afford. In other words, just over one in every three American households was paying in excess of 30 percent of their income in housing alone. If we break down this statistic and look just at renters, more than 50 percent are cost-burdened. The picture becomes even more alarming when we train our gaze on Americans with lower levels of income. Among households with annual incomes of less than $15,000 – which roughly equates to working year-round at the federal minimum wage – more than four out of every fifth household spent 30 percent or more of its income on housing, and almost 70 percent spent more than half their income on housing.

These are shocking statistics. They are also politically troubling ones because they suggest that large numbers of Americans with pressing need are being underserved by the democratic process. Governments across the U.S. may not be able to eradicate housing unaffordability, but they certainly have the tools and means to reduce it greatly below current levels. That they have not been able to do so to date poses a major democratic challenge, and one that we will be looking at in this series of seven posts on the Challenges to Democracy blog.

Over the next month we will be publishing commentaries and thought pieces from authors that we have invited to examine the issue of housing affordability principally through the lens of local government. As a complex issue shaped by a variety of social and economic forces, the problem of affordable housing cannot be addressed by cities alone. State and federal policy is also fundamentally important. That being said, many cities have fiscal and legislative resources at their disposal that can be used to improve the current situation.

Some of these municipal resources can increase residents’ access to affordable housing through indirect means. This includes investments in public transit and the regulation of local labor markets. Other resources are more direct: cities can increase the supply of affordable housing through financial support and direction provision. Crucially, cities also enjoy far-reaching land-use and zoning powers that can profoundly affect Americans’ access to affordable housing. In the blog series we will be looking at how and why city governments are succeeding and failing in using their resources and powers to tackle the widespread burden of housing costs.

The opening blog posts focus on the problem at hand. In the first post, Adam Tanaka, a doctoral student in urban planning at Harvard’s Graduate School of Design, interviews officials overseeing a newly created innovation lab that aims to tackle the problem of housing affordability in the City of Boston in the coming years. The second post by Margaret Scott, a Master in Urban Planning candidate at the Graduate School of Design, considers how housing affordability has been suburbanized in recent years and the difficulties that this new geography poses for those hoping for government action.

The next two blogs focus squarely on the real demands that responding to the challenge of housing affordability places on politicians and the public sector. Given the magnitude of the problem, achieving an adequate supply of affordable housing requires local politicians with bold visions for the future who are able to build and manage broad coalitions of economic and social actors. The third post, also from Adam Tanaka, addresses this question of the pressing need for coalition building and governmental ambition by considering the affordable housing plans recently announced by Mayor de Blasio of New York City. As in many other advanced industrial democracies, public housing authorities have long served as important vehicles for local governments in the U.S. to meet affordable housing need. In our fourth post, Margaret Scott reflects on whether public housing could hold the key to unlocking supply to address the current housing affordability challenge.

The final posts turn to the role that grassroots activism plays in alleviating the burden of unaffordable housing. Focused on a non-profit that has operated in Boston for four decades, our fifth post by Adam Tanaka looks at the power of community organizations not only to place demands on elected politicians to get more affordable housing but also to serve as partners with the public sector to plan and deliver affordable housing. Our final post is by two documentary filmmakers, Andrew Padilla and King Williams, who were featured speakers in our November 2014 panel discussion, The Politics of Displacement in the American City. In their post, Padilla and Williams reflect on the role that they and other filmmakers have played in raising awareness of the problem of housing affordability and galvanizing support in favor of more effective government action.

As the blog series will show, the challenge of generating an adequate stock of affordable housing in the United States does not appear to be wanting for policy prescriptions or technical solutions. The problem instead appears to lie at the feet of elected politicians. That so many Americans are today burdened by the cost of housing (as well as the cost of child care, health care, and college education) is attributable to policy choices made by governments over many years. This is not to downplay the difficulty of tackling the problem of affordability either in the past or the present. As our blog posts confirm, the task at hand is a demanding one: elected officials must attend to a complex and changing constellation of forces and actors, and they cannot act alone. That being said, the challenge of responding to the clear and present need for affordability remains fundamentally a democratic one.

Read more posts in the Challenges to Democracy series.

Quinton Mayne is Assistant Professor of Public Policy in the Kennedy School of Government at Harvard University and a member of the Joint Center for Housing Studies Faculty Committee. His research and teaching interests lie at the intersection of comparative and urban politics.

New Report: U.S. Home Improvement Industry Outpaces the Broader Housing Recovery

In the aftermath of the Great Recession, the U.S. home improvement industry has fared much better than the broader housing market, according to our new report. Emerging Trends in the Remodeling Market. While residential construction is many years away from a full recovery, the home improvement industry could post record-level spending in 2015.

A number of factors have contributed to the strengthening remodeling market: following the housing bust, many households that might have traded up to more desirable homes decided instead to improve their current homes; federal and state stimulus programs encouraged energy-efficient upgrades; and many rental property owners, responding to a surge in demand, reinvested in their properties to attract new tenants.

Additionally, with the economy strengthening and house prices recovering, spending on discretionary home improvements (remodels and additions that improve homeowner lifestyles but which can be deferred when economic conditions are uncertain) rose by almost $6 billion between 2011 and 2013, the first increase since 2007.

Improvement spending, however, has not been evenly distributed across the country. Homeowners in the nation’s top 50 remodeling markets accounted for a disproportionately large share—nearly 60 percent—of overall improvement spending. Thanks primarily to their higher incomes and home values, owners in metro areas spent 50 percent more on improvement projects on average than their non-metro counterparts in 2013 (see interactive map).  

The remodeling industry also faces a radically different landscape than before the recession. “After years of declining revenue and high failure rates, the home improvement industry is, to some extent, reinventing itself,” says Kermit Baker, director of our Remodeling Futures Program. “The industry is finding new ways to address emerging growth markets and rebuild its workforce to better serve an evolving customer base.”

Looking ahead, there are several opportunities for further growth in the remodeling industry. The retiring baby boom generation is already boosting demand for accessibility improvements that will enable owners to remain safely in their homes as they age. Additionally, growing environmental awareness holds out promise that sustainable home improvements and energy-efficient upgrades will continue to be among the fastest growing market segments.

Millennials, however, are the key to the remodeling outlook. “The millennials’ increasing presence in the rental market has already helped lift improvement spending in that segment,” says Chris Herbert, managing director of the Joint Center. “It’s only a matter of time before this generation becomes more active in the housing market, supporting stronger growth in home improvement spending for decades to come.”

Download the full report, infographic, and media kit.

Join the Twitter conversation with #HarvardRemodeling 

Why Does Mortgage Debt Continue to Rise Among Older Homeowners?

by George Masnick
Senior Research Fellow

According to the Federal Reserve Bank of New York, aggregate mortgage debt stood at $8.6 trillion in Q2 2014, down from its peak of $10.0 trillion in Q3 2008. Many have interpreted this decline as a sign that consumers have become chastened by the Great Recession’s bursting of the housing bubble and are voluntarily paying down their mortgage debt to more sustainable levels. For those thinking in such terms, I recommend a paper further analyzing the same Consumer Credit Panel data that produces the aggregate debt estimates just cited. In a masterful exercise, Fed economist Neil Bhutta concludes that the recent drop in mortgage debt has more to do with shrinking inflows than with expanding outflows, including mortgage defaults:

"While few borrowers, compared to prior years, have been increasing their mortgage debt, they also do not appear to be aggressively paying down their mortgages… It is therefore possible that many borrowers might actually be credit constrained (they would like to increase their debt, but cannot find a willing lender …).” (p. 3)

A critical limitation of the Fed’s Consumer Credit Panel data is that it includes very limited demographic information (only the age of the borrower). But Bhutta’s findings are supported by a recently released Census Bureau report on the growing wealth inequality in the U.S. that reports on trends in mortgage debt broken down by a wide variety of household demographic characteristics. These data, collected by the Survey of Income and Program Participation (SIPP), clearly show a post-Great Recession decline in the share of young households with home debt (Figure 1) – consistent with a dramatic slowing of movement into first-time homeownership. At the same time, the report also shows that the percentage of older households with home debt has continued to increase. Since 2000, the share of homeowners aged 65-69 with home debt increased by almost 33 percent, and the share of those aged 70-74 increased by almost 65 percent. This trend is consistent with today’s older owners failing to pay down their mortgages as diligently as did earlier generations. Both equity extractions to garner cash to pay for other expenditures, and simple refinancing and extending the payment period to lower monthly payment costs will slow the pace at which homeowners pay off their mortgages.

Source: Census Bureau tabulations of Survey of Income and Program Participation (SIPP) data

Moreover, among those households with home debt, overall median debt outstanding has continued to increase post-Great Recession, albeit at a diminished pace (Figure 2). The increase in median home debt is especially true among the elderly. Median outstanding home debt for homeowners aged 65-69 with a mortgage increased by 46 percent between 2000 and 2005, and another 8 percent between 2005 and 2011. The corresponding figures for 70-74 year old owners with home debt are 18 and 33 percent. This doesn’t necessarily indicate a recent rise in refinancing activity among these older households. Rather it likely is attributable to the aging of 60-64 and 65-69 year olds (with higher mortgage debt from the previous periods) into the 65-69 and 70-74 age groups.

Source: Census Bureau tabulations of Survey of Income and Program Participation (SIPP) data

Growing mortgage debt among the elderly is troubling. Declining income later in life is inevitable for most households. With mortgage payments a continuing part of the monthly household budget, in addition to real estate taxes and the expense of home repairs, many elderly with high housing cost burdens will need to postpone retirement or spend less on other needs like food or health care. Fewer will be able to draw on wealth accumulated through growth in home equity to help pay the bills late in life. Some will let their homes fall into disrepair or will be forced to sell their homes when they would prefer to age in place. This is a trend worth our continuing attention and concern. 

What Will Stop the Slide in Homeownership Rates? Keep Your Eye on Incomes.

by Chris Herbert
Research Director

As highlighted in our new State of the Nation’s Housing report, the national homeownership rate declined for the 9^th straight year in 2013 and now stands at its lowest point since 1995 (see Figures 18a and b, from our report, below). The falloff in homeownership has affected a broad range of demographic groups, but has been most severe among those in their late 20s through their early 40s, with their rates down at least 8 percentage points since 2004. In fact, while the overall homeownership rate is still slightly above the pre-boom rate of 64 percent, the share of households age 25-44 owning a home is at its lowest point since annual data became available in the early 1970s. Since these are prime ages for both first-time and trade up homebuyers, this substantial decline in owning has been an important reason for the continued weakness in the housing market.  

Predicting when homeownership rates will stabilize—and possibly turn back up— must begin with an understanding of what’s been driving the downturn.  There are many culprits. The dramatic fall in home values, which decimated housing wealth and forced millions into foreclosure, has made everyone far more aware of the financial risks associated with buying a home. Still, our analysis, and a variety of other surveys, indicate that the majority of young adults want to own a home someday. So changing preferences for owning would not seem to account for such a dramatic falloff in the homeownership rate over such a short period.

The incredible increase in the use of student loans is no doubt also a contributing factor.  Between 2001 and 2010 the share of 25-34 year olds with student loans rose from 26 to 39 percent.  And since 2010 the total amount of student debt outstanding has increased by about 40 percent.  At the same time, however, the median amount owed among 25-34 year olds only rose from $10,000 to $15,000 between 2001 and 2010, which should not be a substantial deterrent to buying a home.  Our analysis also found that the share of these young borrowers with high amounts of debt ($50,000 or more) rose from 5 to 16 percent, but this still a minority of all households in this age group. A recent Brookings Institution report came to a similar conclusion, finding that the median loan payment to income ratio has not exceeded historical levels.  So while mounting student loan debt and increasing delinquency among these borrowers is not the main reason young Americans are deferring homeownership, it is certainly a factor.

Today’s far more restrictive mortgage underwriting standards are another limitation for those looking to buy a home.  The decline in lending to borrowers with credit scores in the 600s has pushed up the average score for new borrowers well into the 700s. Since roughly half of all consumers have credit scores under 700, this is making it hard for many to qualify for mortgages. While there are some indications that lenders are starting to relax their standards, so far there hasn’t been much movement in the average score for borrowers.

But at a fundamental level, it may not be necessary to look much further than trends in household incomes to explain the rise and fall in homeownership over the past two decades.  Median household income for 25-34 year olds and 35-44 year olds grew sharply from 1994 through 2000, during a period when homeownership rates showed steady gains. Growth in homeownership then slowed as incomes softened during the mid-2000s (see Figure 4, from our State of the Nation's Housing report, below).

While many blame lax underwriting for driving the homeownership rate boom, in fact much of the gains occurred during the 1990s when the economy was producing solid income growth. Since 2006, median household incomes have fallen substantially for those 25-44, with the homeownership rate declines mirroring these trends.  In fact, just as the share of households 25-44 owning a home is as its lowest point since the early 1970s, the real median household income for this age group is at its lowest point since 1972. So, while young households are facing a number of headwinds to buying a home, until we see a resumption in income growth we are unlikely to see an upturn in homeownership rates.

A Disappointing Report on Recent Household Growth Leads to More Questions than Answers

by Dan McCue
Research Manager

Although household growth is the major driver of housing demand, getting an accurate picture of recent trends in this measure is difficult, especially when Census surveys show conflicting trends.   On January 31, the most recent Housing Vacancy Survey (HVS) was released with Q4 numbers and some annual data for 2013.  As one of the few surveys that provide timely measures of household growth, the release was much anticipated in hopes that it would shed more light on trends of a recovery seen elsewhere in the housing market, but the results were disappointing, if not somewhat confusing. 

In its recent release, the HVS reported annual household growth of just 448,800 in 2013.  This represents a 48 percent drop in household growth relative to that from 2012 and marked the lowest annual household growth measure since 2008, in the depths of the Great Recession (Figure 1).

Source: US Census Bureau, Housing Vacancy Survey

In September we noted that the HVS was showing a disconcerting slowdown in household growth after finally having picked up in 2012.  With the annual number now in, this low measure of household growth in the HVS is puzzling, at odds with an assortment of other housing market indicators that have been painting a more positive picture for housing overall.  In particular, the drop in household growth did not mesh with several other trends:

• The much higher 1.375 million annual growth reported in the 2013 Current Population Survey Annual Social and Economic Supplement (CPS/ASEC);
• The same, steady increase in jobs in 2013 as during the previous year; and
• Increased momentum in the housing market, including a further decline in vacancy rates, an increase in new home sales, and an increase in housing construction during the year.

The divergent measure of household growth from the HVS is also troubling because while the HVS is known to have a downward bias in its estimated count of households, it has been useful in tracking short-term trends in that it provides more timely estimates than other sources and has generally been subject to less sampling error.  Indeed, while the CPS/ASEC and HVS both originate from monthly CPS surveys, the HVS annual household growth number is a 12-month rolling average of year over year growth, whereas annual growth in the CPS/ASEC is year over year growth for the single March survey, making it more volatile and less reflective of trends throughout the entire year.

But this is not the only—or most important—source of difference between HVS and CPS/ASEC household counts.  These two surveys differ more fundamentally in that CPS/ASEC arrives at its estimate of households based on weights derived from estimates of the total population and the share who are heads of household, while the HVS estimates households using weights that add up to estimates of the total housing units in the country, with the household count derived as the number of housing units that are not vacant (see Note on Table 3).  During census years, the CPS/ASEC head-counting method has generally produced totals much closer to the decennial Census –the Census Bureau’s benchmark survey of people and housing--while the HVS stock-controlled method has generally produced estimates that are lower by around 3-4 million households. This suggests the HVS household estimates are generally biased lower to begin with.

With its household estimates pinned to estimates of the housing stock, the surprisingly low HVS household growth estimate may be at least in part due to overly low estimates of growth in the total housing stock.  As shown in Figure 2, over the past few years, the total housing stock estimate used by the HVS has been growing slowly and very steadily since 2011, gaining around 350,000 units a year.  At the same time the Census Bureau’s New Residential Construction surveys show a significant upturn in the number of new housing units completed in 2012 and 2013, reaching 762,000 units.  In order for the HVS estimates of changes in the housing stock to be accurate, this would suggest a surge in demolitions that roughly offset the recent surge in new construction, which seems unlikely. 

Source: JCHS tabulations of US Census Bureau, Housing Vacancy Survey and New Residential Construction data.

There is a third census survey from which household growth can be measured, the American Community Survey (ACS), that might shed more light on the recent trend. The ACS is not as timely, however, and the results for 2013 are not due to be released until late 2014.  Still, for 2012 the ACS reported household growth levels in between the HVS and CPS counts (978,000), suggesting it might prove a moderate and viable tie-breaker between the other two surveys on the direction of the recent trend. But since the ACS household estimates are linked to the same housing stock estimates as the HVS chances are the ACS, too, will be subject to a downward bias.

Overall, the discrepancies in these surveys are troubling given the importance of household growth as an indicator of the health of the economy and the housing market.  For the time being, housing analysts are flying in the dark on this key metric.

Why We Should Care About the Great Recession’s Most Unfortunate Victim: Homeownership

by Rob Couch
Guest Blogger

From time to time, Housing Perspectives features posts by guest bloggers. This post was written by Rob Couch, a member of the Banking and Financial Services, Real Estate and Governmental Affairs practice groups at the law firm Bradley Arant Boult Cummings in Birmingham, Alabama.  Rob also serves on the Housing Commission of the Bipartisan Policy Center in Washington, DC..  Previously, he served as General Counsel of the U.S. Department of Housing and Urban Development and as President of the Government National Mortgage Association (Ginnie Mae). His post reflects thoughts he shared at a Brown Bag Lecture delivered at the Harvard Kennedy School on November 14, 2013.

In my lunchtime talk at the Harvard Kennedy School, sponsored by the Joint Center for Housing Studies, I discussed why recent government efforts enacted in the wake of the financial meltdown have caused increasingly stringent underwriting standards. These efforts have resulted in fewer homeowners, particularly first time purchasers, and the widening of the homeownership gap between certain minorities and white Americans. One of the questions from the audience during my talk came from a young man who challenged the continuing validity of the “Dream of Homeownership.”

After the bubble of 2007, some might think homeownership isn’t as worthy a goal as it used to be. In particular, younger Americans who have recently witnessed homeowners suffer financial loss or foreclosure due to declining home values or job loss may be especially wary.  A sizable percentage of young people are not yet in a stable career and want the flexibility that renting offers, and many young Americans who do want to own a home cannot meet underwriting criteria or afford a down payment given the combination of student loan debt and high unemployment.

Nonetheless, as Eric Belsky explains in his paper, The Dream Lives On: The Future of Homeownership in America, most young adults surveyed say they intend to buy a home in the future.   Furthermore, the results of several surveys cited in Belsky’s paper reveal that a majority of both owners and renters believe that owning makes more sense than renting. And for good reason; numerous studies have confirmed the economic and societal benefits of owning a home.

As a homeowner makes payments against his mortgage, and as the value of the property appreciates, the borrower’s equity in the home increases. If necessary, this equity can be accessed though the sale of the home or through a “cash out” refinance or a revolving line of credit. Homeowners also enjoy tax benefits as, in most cases, the annual interest paid on a mortgage and property taxes are fully deductible. Due to the long-term fixed-rate feature of most mortgages and the lifetime cap placed on adjustable-rate mortgages, homeowners are insulated from some of the inflationary pressures on the cost of housing faced by renters.

For the past thirty years, the wealth gap between the most affluent citizens and moderate wealth families in the United States has steadily widened. Households that are able to convert their greatest monthly living expense – rent—into a tax protected asset through amortizing long-term debt have a powerful tool for accumulating wealth. The family that owned its own home in 2010 had a median net worth of $174,500, compared to families who rented and had a net worth of $5,100. Belsky’s paper provides a more detailed analysis of the financial benefits of homeownership.

The benefits of homeownership extend beyond the financial ones, though. Children who grow up in owned homes have higher academic achievement scores in both reading and math and have a 25% higher high school graduation rate than children whose parents rent. Children of homeowners are twice as likely to acquire some post-secondary education, and they are 116% more likely to graduate college. As adults, they earn more and are 59% more likely to own their own home, extending the benefits of homeownership on to the next generation.

Society as a whole also benefits from homeownership. Research has shown that homeowners are more likely to be satisfied with their neighborhoods, and thus more likely to give back to their communities. People who own their homes more often participate in civic activities and work to improve the local community, and they are 15% more likely to vote. Lastly, they tend to have greater longevity in a residence, leading to a more stable neighborhood.

Considering the benefits homeownership offers to society as a whole, young Americans aren’t the only demographic group affected by recent policies. Recent reports estimate that the African-American community, with wealth more concentrated in homeownership than any other asset, lost more than 50% of its net worth during the housing crisis. The deterioration in homeownership has been disproportionately severe on African-Americans, Hispanics, and younger people, leading to a widening of the gap in minority/white homeownership rates.

Recent government efforts to protect borrowers who fail to pay their loans, particularly settlements that have been extracted from the industry and increased servicing standards, have had the effect of compounding the losses from bad loans, thereby encouraging even more conservative lending and hurting a much larger group of potential borrowers by depriving them of the opportunity to achieve homeownership. The overarching policy goal should be to facilitate homeownership, not to shift the burden of non-performance from defaulters to aspiring borrowers. Policies need to change if we wish to continue making homeownership a reality for the broadest group of eligible borrowers in the United States.  My recent paper, The Great Recession’s Most Unfortunate Victim: Homeownership, discusses how we can address this important issue.

The Metropolitan Revolution

by Bruce Katz
Guest Blogger

Next Wednesday, September 25, I will be coming to Harvard to share a message: there is a Metropolitan Revolution underway in this country.

While the national economy continues to suffer the lingering effects of the Great Recession—with nearly 10 million jobs needed to make up the jobs lost during the downturn and keep pace with labor market dynamics and more than 107 million people living in poverty or near poverty—the federal government is mired in partisan gridlock and ideological polarization, leaving local and metropolitan leaders to pick up the slack.

In many ways, this transfer of responsibility is not only a cyclical event but also a structural change, given the harsh realities of the shifting federal budget. With a rapidly aging national population, mandatory federal spending on health care and retirement benefits is projected to rise by $1.6 trillion annually by 2023.  This will inevitably squeeze federal spending on critical investments around education, infrastructure, housing and innovation. The result will be a U.S. governance structure that looks very different in a decade: Washington will do less; local governments and metropolitan networks will do more.

To make it through this fiscal resort, we need to rethink power in America. Metros will lead on policy innovation; the federal government (and even state governments) will follow.

The good news is that smart city and metropolitan leaders aren’t waiting for national solutions to local problems. Across the nation, in metros as diverse as New York, Houston and Denver, Portland and Detroit, Los Angeles and Cleveland, leaders are doing the hard work to grow jobs and make their economies more prosperous: investing in infrastructure, making manufacturing a priority again, linking small businesses to new investors and global markets, giving workers the skills they need to compete.

A new metropolitan playbook defines the Metropolitan Revolution:

First, cities and metros are forming broad based networks to co-design and co-produce solutions. The unique advantage that metropolitan areas have over states and the national government is that they are networks of leaders, rather than hierarchies of government officials. Successful metro-level initiatives incorporate broad input and support—from business and civic leaders, heads of universities and philanthropies, as well as elected officials. 

Second, city and metropolitan leaders are taking the time to understand the starting points of their disparate economies and set distinctive visions based on their analysis. The Great Recession reminded us that metro areas perform different functions in the global economy depending on what they make, the advanced services they provide, what they trade and which cities and metros they trade with. What makes Denver a powerful metropolis on the global stage is different from what propels Detroit; the same for Portland, Pittsburgh and Phoenix. 

Finally, city and metropolitan leaders are “finding their game changers” -- designing, financing and delivering transformative economy-shaping solutions that build on their distinctive assets and advantages. The Applied Science Districts in New York City. State-of-the-art transit in Los Angeles and Denver. A new export strategy in Portland; smart manufacturing initiatives in Northeast Ohio; successful efforts to integrate immigrants in Houston.  Even a burgeoning Innovation District in Detroit.

Cities and metropolitan areas will do more because they can. 

The United States is the world’s quintessential Metropolitan Nation.  All 388 metropolitan areas house 84 percent of the nation’s population and generate 91 percent of the national GDP. The top 100 metropolitan areas in the United States alone sit on only 12 percent of the land mass of the country but house 65 percent of the population, generate 75 percent of the GDP. They also concentrate and congregate disproportionate shares of the assets that the nation needs to compete globally: modern infrastructure, skilled workers, advanced industry firms and advanced research institutions.

The United States also devolves more fiscal responsibilities to cities and metropolitan areas (and their states) than other countries. Despite the attention given federal efforts like No Child Left Behind and Race to the Top, local and state governments already account for over 90% of total government spending. Despite the focus on still unrealized proposals like a National Infrastructure Bank, states and localities already account for over 70 percent of transportation infrastructure spending and are the driving force behind such investments in such asset categories as roads, transit, rail, ports, airports, water and sewer and, of course, urban regeneration and basic municipal services.   

Make no mistake: cities and metropolitan areas (and a mixed group of states) will drive strategic investments in education and infrastructure going forward, and they already are. San Antonio’s recent passage of a ballot initiative—Pre-K for SA and Detroit’s corporate and civic support for the M1Rail along Woodward Corridor—are only the latest examples of communities (broadly defined) stepping up to get stuff done.

Yet it is also likely that cities and metropolitan areas will lead in areas traditionally left to the federal government, like investments in basic and applied science and affordable housing. The recent sequestration of federal funding for such traditional federal responsibilities as the National Institutes of Health and public housing sent a strong signal about how unreliable our national government has become. The response will be growing state and metropolitan support via the ballot box for basic and applied research (e.g., California’s $3 billion Stem Cell Research and Cures Initiative) and growing local and metropolitan innovation on the affordable housing front via inclusionary zoning, public private partnerships and local housing trusts capitalized through real estate transfer taxes.

The bottom line is this: the health of the United States should never be defined by what happens in Washington, D.C. Our metropolitan areas are the engines of our economy, the centers of global trade and investment and the driving forces of national competitiveness and prosperity.  In the coming decade -- in this century -- they will be the vanguard of policy innovation and national progress.

Bruce Katz is a Vice President at the Brookings Institution, co-director of the Metropolitan Policy Program, and the co-author of The Metropolitan Revolution (Brookings Institution Press, 2013).  He will speak at the Harvard Kennedy School on Wednesday, September 25 at 7pm (Belfer Building, 79 JFK Street, Cambridge, MA, Starr Auditorium). The event is free & open to the public.