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August 2014

Housing Recovery Continues

But So Do Hurdles

By NWREporter

August 2014

State of HousingNWREporter - August 2014. The housing recovery, like the broader economy, appears to be on the path to slow and steady improvement, but challenges remain. Those are among findings in the 2014 edition of The State of the Nation's Housing, a publication of Harvard University's Joint Center for Housing Studies (JCHS).

The report provides an assessment of the state of the housing market and the foreclosure crisis, the economic and demographic trends driving housing demand, the state of mortgage finance, and ongoing housing affordability challenges.

Researchers say growth is being restrained by tight credit, still elevated unemployment, mounting student loan debt among young Americans, sluggish household growth, and ongoing affordability concerns. Consequently, millennials - which are key to a more robust recovery - and other first-time homebuyers are kept out of the market.

Given the sheer volume of young adults coming of age, the number of households in their 30s should increase by 2.7 million over the coming decade. That growth should boost demand for new housing, the report's authors stated.

"Ultimately, the large millennial generation will make their presence felt in the owner-occupied market," says Daniel McCue, research manager of the Joint Center, "just as they already have in the rental market, where demand is strong, rents are rising, construction is robust, and property values increased by double digits for the fourth consecutive year in 2013."

Home sales rose significantly, but low inventories persist, the JCHS reported. Sales of newly-built homes jumped 17 percent in 2013, with sales of existing homes rising 9 percent. For-sale inventories averaged 2.1 million last year, some 200,000 fewer than the previous year, and about 600,000 below the averages during 1999-2013. Contributing to tight inventory, more than 7 million homes are reported to be vacant and held off market.

Researchers found new construction strengthened during 2013, jumping 18 percent from 2012. However, last year's volume of new starts, at 925,000 units, was well below the historical average of 1.46 units. Single family homes accounted for about two-thirds of the starts. The share of new units built as rentals reached its highest level since 1974.

Widespread gains in prices occurred last year, but the report's authors flagged "trouble spots."

Home values rose in 97 of the 100 largest metro areas in 2013, up from 73 metros in 2012. "But the recovery has been far from even within metro areas as cumulative price declines from 2006-2013 were three times more severe in minority neighborhoods than in mostly white neighborhoods," the researchers stated in their analysis.

Slow household growth continues to be a drag on demand, but researchers expect improvement over the next decade, with minorities driving 76 percent of projected net growth. The number of households aged 70 and older is expected to increase by approximately 8.3 million. Millennials will form 24 million new households, offset in part by declines among baby boomers and pre-boomer households.

More than 15 million adults in their 20s and 3.1 million in their 30s lived in their parents' homes in 2013, according to research by JCHS.

Continuing an eight-year slide, homeownership rates slipped again in 2012-2013. JCHS found the drop has been most dramatic among younger adults. Measured from previous peaks, homeownership rates have shrunk 6 percentage points among black households and 4 percent points among both Hispanic and Asian/other households. For white households the drop was 3 percentage points. Researchers also reported continued expansion of white-minority homeownership gaps.

Among first-time owners, minorities represent a growing share, but they still struggle to obtain loans. Between 1993 and 2013, Hispanic share of first-time owners rose from 4 percent to 9 percent, and the Asian/other share climbed from 2 percent to 6 percent. During the same period, the white share fell from 86 percent to 77 percent.

In 2011-2012, denial rates for convention purchase mortgages among Hispanics was reported to be 25 percent, while for blacks it was 40 percent - nearly twice to three times the rate for whites.

Researchers also examined incomes relative to the rising cost of housing, and found they're failing to keep pace. Real median household incomes fell another 1.4 percent in 2011-2012, hitting its lowest level in nearly two decades. Additional findings indicate:

  • From 2002 to 2012, the real median income for households aged 25-34 fell 11 percent, leaving their real incomes below those of same-aged households in 1972.
  • Since 2002, the real median annual incomes among households in their 50s-the peak earning years for this group as they look to retire over the coming decade-have fallen by $9,100 among 50-54 year olds and by $5,700 among 55-59 year olds.

Mounting student loan debt will likely delay homeownership for young Americans, according to findings in the JCHS report:

  • Consumer debt rose 14 percent from the end of 2010 to the end of 2013, accounting for more than a quarter (26 percent) of aggregate household debt, the highest share since early 2004.
  • Student loan debt has accounted for 63 percent of the growth in total debt over the past year and for nearly the entire increase in non-housing consumer debt since 2003. Student loan balances reported on credit reports increased by $114 billion in 2013 alone.
  • Between 2001 and 2010, the share of households aged 25-34 with student loan debt soared from 26 percent to 39 percent, with the median amount rising from $10,000 to $15,000. Within this group, the share with at least $50,000 in student debt more than tripled, jumping from 5 percent to 16 percent.

Cost burdens remain near record levels. Nearly 41 million households were cost-burdened, spending more than 30 percent of their income for housing. That's up by more than 9 million from a decade earlier. On a brighter note, median housing costs for homeowners have fallen faster than incomes since 2007, helping to ease the burden.

More than one-fourth of renters are considered severely burdened (paying more than 50 percent of income for housing).

Spending such high amounts on housing has spillover effects-compared to similar families living in more affordable housing, observed Michael Spotts, senior analyst-project manager at Enterprise Community Partners in Washington, D.C. In commenting on similar findings in an earlier report, he noted severely cost burdened low-income families spend one-third less on food, one-half less on clothing and four-fifths less on health care.

The State of the Nation's Housing report has been released annually since 1988. It serves as a resource for both public policy makers and private decision makers in the housing industry.