The State of Housing
Richard Green, Senior Advisor on Housing Finance in the Office of Policy Development and Research.
This past fall, the state of housing reached something approaching normalcy in some dimensions (new construction and price) but continued to worsen in others (rental affordability and the homeownership gap between underrepresented minorities and others).
When President Obama took office in January 2009, residential construction in the United States was at its lowest level since World War II; only 490,000 units were built that month (on a seasonally adjusted annualized basis). By November 2015, that total had risen to nearly 1.2 million units — an increase of 139 percent over the course of the administration. This total has still not, however, reached the average level of new construction over the past 55 years of 1.4 million units.
The below normal (if substantially improving) levels of construction explain why housing prices have recovered substantially from their troughs. Prices in all 20 Case-Shiller cities are well above their troughs, in part because the paucity of construction has led to falling vacancy rates nearly everywhere. In two cities, Dallas and Denver, prices are at all-time highs, and Portland, San Francisco, and Boston have recovered all of their losses. A particularly noteworthy fact is that prices have recovered while the homeownership rate has declined. The price story is an absence of supply story.
Although the demand for owner housing has been stagnant, the demand for rental housing has soared, pushing up rents even in the face of strong multifamily construction. Rental demand has risen sharply for several reasons.
First the marriage rate in the United States has been falling steadily. According to Pew, 65 percent of the “greatest generation” were married by the age of 35; among millennials, the marriage rate is only 26 percent. After taking into account age, education, race, ethnicity, and geography, married couples are 22 percentage points more likely to be owners than singles. If millennials continue to postpone (or avoid) marriage, the ownership rate will continue to fall.
Second, racial and ethnic minorities, again after taking into account the standard list of demographic and economic characteristics, have lower ownership rates than non-Hispanic whites. The population of African Americans, Asians, and Hispanics is growing much faster than the population of non-Hispanic whites. African Americans, for instance, have a homeownership rate that is 17 percentage points lower after controls than it is for non-Hispanic whites. If homeownership rates among the groups whose population is growing fastest continue to lag, the pressure on the rental market will become even greater.
The reasons for lagging ownership among minorities are doubtless varied and complex, but part of the gap almost certainly results from continued discrimination in housing markets and issues with access to credit. Turner and Yinger have demonstrated the continued existence of discrimination, but we will say a few words about access to credit here.
One group of Americans, now very large, does not have access to mortgage credit at the moment: those whose homes went into foreclosure during the global financial crisis. RealtyTrac puts the number of homeowners who were foreclosed upon at more than 5 million, or about 4 percent of U.S. households. These households overwhelmingly became rental households (some doubled up with other families or moved back to their parents’ homes), and this phenomenon alone put sudden pressure on rental markets. They also became ineligible for mortgage debt for at least 3 years (the number of years the Federal Housing Administration requires to have followed foreclosure for borrowers to become eligible for a loan) to 7 years (the minimum number of years post-foreclosure government-sponsored enterprises require before issuing a loan). Many of these potential borrowers are about to become eligible again for mortgages, and should thus relieve pressure a bit from rental markets. But many, having been traumatized by the homeowning experience, might decide to remain renters. As it happens, minorities bore a disproportionate share of the foreclosure burden.
The other access to credit issue involves access to wealth and credit scoring. Many researchers have shown that children’s wealth is highly correlated with parents’ wealth. African Americans, who as a group were stripped of wealth and who were over generations systematically denied access to credit, have less wealth than non-Hispanic whites even after controlling for income and education. The absence of wealth among older generations means that it is more difficult for younger generations to accumulate downpayments and establish excellent credit scores. This puts generation after generation of minorities at a disadvantage when it comes to owning a home.
The combination of diminishing numbers of married couples, the fallout from the recession, and access to credit issues have pushed rental demand and therefore rents as well. While there are many methods for measuring rental affordability, perhaps the most telling is that in the vast majority of American metropolitan areas, median-income renter households must spend more than 30 percent of their gross income on the median rental unit. Economists like to talk about “choice,” suggesting that people “choose” to live in expensive housing. But both within and across our cities, affordable rental housing is not a choice that is available to the median-income renter.