[User] Older, lower-cost rentals are also being lost to rent inflation. The low-cost units that do remain in the stock are often in gentrifying areas. Among remaining older, lowest-cost units—the only ones affordable to households with incomes below 30 percent of area medians—the rents in more than half shifted up to a higher range between 2003 and 2005. To keep these units in the afford- able stock, government would have to ask owners to restrict rent increases and to compensate them for the loss of income they incur from holding rents to below-market levels. Non-Metropolitan Trends According to American Community Survey (ACS) estimates, 5 million renter households—or one out of every seven—lived in non-metropolitan areas in 2006. Based on this source, only 14 percent of new rental construction since 2000 occurred in these areas. But when compared with the 1990 definitions of metropoli- tan boundaries from the American Housing Survey, it is clear that many were only recently reclassified from non-metro to metro. As a result, rental construction is much more highly concentrated in these outlying counties than the ACS would suggest. Indeed, using the 1990 metro definitions, the share of rentals built in non-metro areas in 2000–2005 was a much larger 33 percent. In addition, non-metro renters generally have less education, with 87 percent lacking college degrees compared with 77 percent of metro renters. While non-metro renters also tend to have lower incomes, the lower rents they pay mean that a smaller share of non-metro than metro renters are severely cost burdened. Non- metro renters—and especially low-income and minority renters— do, however, have a higher incidence of housing quality problems. In the longer run, demand for rental housing will depend on both demographic trends and financial market conditions, including the cost and availability of mortgage credit. The growing share of minority households and the strong pace of immigration will sup- port solid growth in renter households. While overall demographics slightly favor homeownership, homeowner demand will remain suppressed until credit standards are relaxed, mortgage interest rates fall further, and home price appreciation returns. To bring affordability back to its level in 2000 would take some com- bination of large price declines, interest-rate reductions, rent defla- tion, and unprecedented real income growth. But even at the start of the decade, housing costs were well out of reach for many of the nation’s most vulnerable households, including low-wage workers and families with children. Distressingly, veterans are among the types of households with high housing cost burdens and, worse, a high incidence of homelessness. Owners who recently moved are especially likely to be severely cost burdened. While this in part reflects their younger average age, the share of recent movers with severe burdens has climbed sharply since 2001, due in part to the run-up in house prices, the increase in interest rates after 2004, and the interest-rate resets on many adjustable loans originated in 2004 and 2005. Tapping home equity through second mortgages has apparently led to higher housing cost burdens as well. In 2006, approximately 20 percent of all middle-income homeowners with second mortgages paid more than half their incomes for housing. This is nearly twice The State of the Nation’s Housing the share among those with only a first mortgage. Among low- income homeowners, 90 percent of those with second mortgages are severely cost burdened compared with 70 percent of those with just a first mortgage. For homeowners earning more than the median income, the likeli- hood of being housing cost burdened nearly doubled between 2001 and 2006. Some of this increase reflects the substitution of mortgage debt for unsecured consumer debt through either cash- out refinances or second mortgages. In the short run, this allows borrowers to reduce their monthly carrying costs on the same amount of debt. But consumer debt can be discharged in bank- ruptcy without the lender’s consent, while mortgage debt cannot. As a result, debt substitution exposes homeowners to even greater foreclosure risk. Local land use regulations are also contributing to the increase in housing cost burdens by skewing development toward more expensive homes and restricting the types and density of hous- ing that can be built. One study concluded that land use restric- tions slow building activity and inflate housing prices both during boom times and over the long term. In addition, despite having higher average incomes as well as higher housing costs, the most restrictive metros have a greater incidence of severe housing cost burdens. In 2006, the aggregate share of severely cost-burdened renters was about three percentage points higher in these areas than in the least restrictive metros. The reason the gap is not larger is that severe burdens are concentrated among low-income households that have to stretch to afford housing even in the least restrictive metro areas. Severe cost burdens are housing costs exceeding 50% of total household income. Sources: JCHS tabulations of the 2001 and 2006 American Community Surveys. Joint Center for Housing Studies of Harvard University 29 As if this were not enough, households with children are more likely to face crowded or inadequate living conditions. Nearly one in five low-income families—and nearly one in four low-income minority families—reported living in structurally inadequate housing in 2005. What is more, this poor-quality housing is not necessarily affordable. Indeed, these families have a slightly higher incidence of severe cost burdens than otherwise similar families living in adequate units. Challenges of Disabled Veterans Veterans with disabilities make up 29 percent of the 16.4 million veteran households, but 42 percent of the more than 1.5 million veterans with severe housing cost burdens. Low incomes are a key factor, with fully one in three working-age veteran householders with disabilities in the bottom income quartile, compared with just one in ten without disabilities. Even after controlling for income, however, the incidence of severe housing cost burdens is still slightly higher among younger veterans with disabilities than those without. This is in stark contrast to the experience of older disabled veterans and the disabled low-income population in general, who normally have lower cost burdens because they receive priority in the allocation of rental assistance. While homeless veterans are more likely than non-veterans to suf- fer from post-traumatic stress disorder, the National Alliance to End Homelessness (NAEH) and the National Survey of Homeless Assistance Providers and Clients attribute their homelessness to many of the same causes: lack of a support system and high rates of mental or physical illness and/or drug addiction. Nearly half of home- less veterans reported having a mental illness and about 10 percent ■ Most Restrictive Metros ■ Least Restrictive Metros Notes: Most (least) restrictive metros are the top (bottom) third of metros ranked by the Wharton Residential Land Use Regulatory Index. Severe cost burdens are the aggregate shares of renters across metros spending 50% or more of income on housing. Sources: Freddie Mac, Conventional Mortgage Home Price Index; 2006 American Community Survey. Minorities are all non-white householders, including Hispanics. Households with severe cost burdens spend more than 50% of income on housing. The State of the Nation’s Housing reported having a mental health problem in the past year. The shares reporting problems with drugs (40 percent) and alcohol (58 percent) are similar to those among other homeless adult males. Tragically, veterans are a large share of the chronically homeless. According to NAEH estimates, veterans make up about 63,000 of the Americans in this category. The chronically homeless often have complex medical conditions such as mental disability and/or an addiction, and cycle in and out of hospitals, shelters, jails and institutions. Several cities, including New York City and Portland, Oregon, have developed permanent supportive housing and prevention programs that have successfully reduced chronic homelessness while also saving public resources. Heavily targeted toward renter households, federal housing assis- tance currently does next to nothing for owners that have severe housing cost burdens and are at risk of losing their homes. While federal and state governments have intervened to blunt the impending wave of foreclosures, the relief is temporary and in many cases relies on the voluntary efforts of lenders, servicers, and investors. The largest-scale program uses federal housing insurance to allow some homeowners to refinance their way out of trouble. As it is, however, many owners do not qualify for any of the forms of assistance being offered. Once the current storm passes, foreclosure rates may settle back down but the affordability problems of owners—and especially of former owners forced back into renting—will persist.

[Assistant] The Outlook The weakness of the economy does not bode well for income growth in the short run. But even in the longer run, the housing cost pressures on working Americans are unlikely to lighten. Much of employment growth will continue to be in part-time and low- wage positions. This trend, together with the high operating costs of housing and the restrictions on building modest homes at higher densities, makes efforts to meet the nation’s affordability chal- lenges an uphill battle.


[User] Meanwhile, the baby boomers will boost demand for senior housing. The units built over the next 10–20 years that inten- tionally cater to older Americans will be the housing available for generations to come, given that growth of the over-65 popu- lation will slow dramatically as the now similarly sized baby- bust generation moves into retirement. So far, however, federal support for senior housing is limited to minimal new construc- tion of subsidized units. Moreover, the current funding system encourages expensive trips to skilled nursing facilities to the detriment of lower-cost, less institutional assisted living options and programs that allow elders to remain in their homes. Senior housing issues will therefore gain much greater urgency over the coming decade. While house price declines and a federal tax credit drew first- time homebuyers into the market, those same price declines also left millions of current owners unable to sell their homes without incurring losses. Meanwhile, loan performance continued to erode and foreclosures mounted as unemployment soared. The State of the Nation’s Housing Near the height of the housing boom, mortgage payments on a median-priced home peaked at 32.7 percent of median house- hold income. By the first quarter of 2009, the share had retreated to just 19.6 percent of median income. After edging higher in mid-2009, payment-to-income ratios hit a new low of 18.9 per- cent in the first quarter of 2010 as interest rates eased and the median home price fell back from modest summertime gains. First-Time Homebuyer Surge The first-time buyer share of home sales typically decreases during expansions and increases during recessions. In hot housing markets, the share declines as first-time buyers are priced out and current homeowners take advantage of rising prices to trade up. When markets are weak, overall sales activ- ity is depressed and current owners tend to stay in place. According to the National Association of Realtors®, the first- time homebuyer share climbed in both 2007 and 2008, and then surged in 2009. First-time purchasers rose from 36 per- cent of all homebuyers in 2006 to about 45 percent in 2009. The increase in share added roughly sales in 2008–9. Without this gain, existing home sales for the year would have fallen by 63,000. Dismal Loan Performance When combined with heavy job losses, the same lower home prices that drew first-time homebuyers into the market con- tributed to stunningly poor mortgage loan performance. The number of loans more than 90 days delinquent or in foreclo- sure was high and climbing in early 2010. With such high delinquency rates, foreclosures have contin- ued to rise. Rates for subprime mortgages remain especially high not only because of a increase in the current inventory of loans in foreclosure, but also because of the 1.5 Source: US Census Bureau, Housing Vacancy Survey. Despite a much higher incidence of serious delinquencies and foreclosures among subprime loans, most problem mortgages are now prime loans. During this cycle, record home price declines and heavy job losses have left prime loan perfor- mance orders of magnitude worse than in previous cycles. Indeed, serious delinquency rates for prime conventional loans typically remain well below 2 percent even during downturns, but were 7.1 percent in the first quarter of 2010. Among prime loans that Freddie Mac owns, a recent survey found that 58 percent of delinquent borrowers cited unemployment or cur- tailment of income as the reason for their payment problems. Running a distant second is excessive financial obligations (16 percent), and third is illness or death (11 percent).

[Assistant] Delinquencies and foreclosures have been highly concentrated by state. California and Florida alone account for more than a quarter of loans at least 90 days delinquent, plus more than a third of loans in foreclosure (Table A-6). Serious delinquency rates are highest in Florida (20.6 percent), Nevada (19.6 per- cent), Arizona (12.8 percent), and California (12.1 percent), and lowest in North Dakota (2.3 percent), Alaska (3.0 percent), and South Dakota (3.5 percent). In the states with the highest incidence of delinquencies, foreclosures will likely weigh on home price gains.


[User] With Fannie and Freddie looking for higher-quality loans and subprime lending virtually eliminated in 2008–9, borrowers with lower credit scores flocked to alternative nonprime prod- ucts such as USDA-guaranteed rural loans and FHA-insured loans. Indeed, according to First American CoreLogic, the FHA share of the home purchase market ballooned from just 6.6 percent in 2007 to 30.1 percent in 2008 and then climbed to 56.4 percent in 2009. But as loan losses mounted, FHA also reduced the flow of credit to lower-scoring borrowers, doubling the share of originations to applicants with scores above 680 between 2007 and 2009. Meanwhile, the federal stimulus package increased funds for a USDA-guaranteed mortgage program from $6 billion to $12 billion, but the strength of demand is likely to exhaust these resources well before the end of the fiscal year. Until dam- aged credit histories have time to heal or businesses find more sustainable ways to lend to people with lower credit scores, the shortage of loans available to these buyers will hinder the housing market recovery. The State of the Nation’s Housing Although renter household growth increased last year, rental vacancy rates climbed to a new high. Early in 2010, however, occupancies in some areas appeared to be stabilizing. With multifamily construction near record lows, property prices still falling, and sales still depressed, the national rental market has yet to make a convincing recovery. Nevertheless, such low levels of construction could set the stage for a strong rebound to keep up with demand once household growth returns to its long-run pace. With vacancies rising and landlords trying to retain tenants in the midst of the severe recession, nominal rents stalled and inflation-adjusted rents edged downward. After decades of steady increases, the Consumer Price Index registered a flat- tening in nominal rents and a 2.9 percent decline in real rents between the December 2008 peak and April 2010. At the same time, MPF Research—which picks up changes in effective rents caused by landlord concessions, such as a month of free rent—reported a 3.1 percent nominal decline in rents for better-quality apartments owned by large institu- tional investors. By this measure, nominal rents were down in metropolitan markets last year, and real rents in 53 of the 64. The weakest markets were in the West, with San Jose posting the largest rent drop of 9.5 percent, and Seattle, Salt Lake City, Oakland, and Las Vegas all registering declines of 7 percent or more. Rising vacancy rates in more expensive units were likely behind the softer rents for institutionally owned properties. Indeed, the number of vacant rental units offered 5 Rental housing Prices of apartment properties fell again last year, although the pace of decline slowed. According to the NCREIF price index, rental property prices dropped 29.4 percent from their first-quarter 2008 peak through the fourth quarter of 2009. Over the course of the year, however, quarterly price declines eased from 9.6 percent to 2.9 percent. After slid- ing for most of the decade, the capitalization rate was up by roughly 1 percentage point in 2009, to 6 percent. These trends largely reflect investor demand for higher expected returns. Falling net operating incomes also contributed to the price declines, although they did recover slightly in the fourth quarter—suggesting that rental markets may have started to stabilize. About 12.1 percent of multifamily loans are held in trusts for commercial mortgage-backed securities (CMBS). According to Moody’s Economy.com, the share of multifamily loans in CMBS that were at least 60 days delinquent, in foreclosure, or post-foreclosure and owned by the issuing trusts (REO) jumped from 1 percent of balances outstanding in December 2007 to 12.9 percent in April 2010. Falling property values, high vacancy rates, and deteriorat- ing loan performance have dampened the demand for credit and made it more difficult to get, especially for development. While debt is more available for existing properties, under- writing terms have tightened. Multifamily loan originations by private CMBS conduits have dropped to essentially zero. Meanwhile, HUD announced increases in the minimum required net worth for FHA-approved lenders. Other under- writing changes proposed for FHA-insured multifamily loans would raise debt service coverage ratios, reduce loan-to-cost ratios, and double construction contingencies and working capital escrows. Immigration is driving the changing composition of rental demand. Continuing the strong growth posted in the 1990s, the foreign-born share of renter households increased from 17.4 percent in 2000 to 19.6 percent in 2009. Indeed, the num- ber of Hispanic renters has more than tripled from just 1.9 million in 1980 to 7.0 million. The Outlook As in the homeowner market, several opposing forces are at work in the rental market. On the downside, high unem- ployment—especially among minorities and the young—is a drag on demand. In addition, the narrowing cost differential between owning and renting could keep first-time home- buying strong even after the federal tax credit expires. On the upside, however, the echo boomers are starting to form independent households, many owners that have lost their homes to foreclosure will turn to renting, and some would- be homebuyers will be unable to qualify for loans. Moreover, improving labor markets typically benefit rental markets more immediately than home sales. The combined effects of these forces will determine how fast rental property values rebound, loan performance improves, and credit flows more readily to multifamily developers. Like housing and household growth more generally, the strength of the rental recovery will depend heavily on how quickly and strongly job growth comes back.

[Assistant] Assuming that headship rates by age and race/ethnicity remain at 2008 levels and homeownership rates hold at 2009 levels, renter household growth in 2010–20 should easily top the 3.1 million mark reached in 1999–2009. Indeed, the total number of renters is expected to rise by about 3.8 million even under a low-immigration scenario and by about 5.0 million under a high-immigration scenario. In either case, minority households will make up the majority of renters by 2020.


[User] A record 18.6 million house- holds faced these high cost burdens that year, an increase of since 2007 and 4.7 million since 2001. Living within these households were 44.2 million Americans, including 13.7 million children. Although the shares with cost burdens grew faster for home- owners during the 2000s, the incidence of cost burdens remained far higher for renters. Nearly one in four renter households had severe cost burdens in 2008, compared with roughly one in eight owner households. And nearly half of renters, but a third of owners, had at least moderate cost burdens (spending 30–50 percent of income for housing). The primary reason for this disparity is that renters typically have much lower incomes than owners. The nation’s 4.5 million single parents in the lowest income quartile, along with their 9.1 million children, face the worst affordability challenges. They have greater space needs and must worry more about safety and school quality when choos- ing homes than households without children. Half of low- income single-parent households spent 63 percent or more of their incomes on housing in 2008. Low-income minority single-parent households had even harsher cost burdens. Income-Housing Cost Mismatch Roughly three-fourths of households with severe housing cost burdens fall within the bottom income quartile, and a sober- ing half of all households in this quartile have severe burdens. This stems from a mismatch between their low incomes and the cost to supply the most basic of homes. The median income of households in the bottom quartile was $14,868 in 2008. At that level, their monthly housing costs (includ- ing utilities) would have to be no more than $372 to meet The nation has not faced housing problems of this magnitude since the Great Depression. Heavy job losses and lingering high unemployment rates have increased housing insecurity for millions of families. The share of US households with severe housing cost burdens reached a record high in 2008 and may have climbed again in 2009. Although households have switched from net spenders to savers, their balance sheets have still not recovered from the debt binge of the boom years. Unemployment and Housing Insecurity The nation lost approximately 8.4 million jobs from the begin- ning of the recession in December 2007 through December 2009. Under normal circumstances, the economy has to produce well over a million jobs per year to keep up with growth in the labor force. As of April 2010, the employment deficit was about 11 mil- lion. Although job growth has revived, most economists predict that it will take years to catch up and that unemployment will remain relatively high for an extended period. Job losses and reductions in work hours have left many households with much less income to cover their housing Note: Severe (moderate) housing cost burdens are more than 50% (30–50%) of pre-tax household income. 29 Joint Center for Housing Studies of Harvard University costs. Although overleveraging and overstretching income— combined with house price declines—were responsible for much of the increase in mortgage loan defaults in 2006 and 2007, joblessness is now an important driver of the foreclo- sure crisis. Moreover, high unemployment rates have dis- couraged some individuals from forming households of their own, thus slowing the absorption of vacant homes. Job losses have also kept the number of severely housing cost-burdened households high despite the improvement in affordability. Despite an increase of well over a million households overall, the number of multiple-earner households dropped by 2.7 mil- lion between 2007 and 2009. At the same time, the number of households with no earners jumped by 2.2 million, or 20 percent. Some households facing short-term job losses are able to tide themselves over by collecting unemployment benefits, drawing on savings, borrowing against retirement accounts, or receiving support from family. But for others—especially households with only one worker—the impacts are immediate and disastrous. Even worse off in the current downturn are the record numbers of long-term unemployed. In April 2010, some 6.7 million work- ers had been out of work for more than half a year. Education is a key factor, with the jobless rate for workers without a high school diploma at 14.5 percent in April 2010—more than three times that of workers with college degrees. But even controlling for age and education, minorities have relatively higher unemployment rates. Moreover, there is some evidence that if a generation of young adults suffers high unemployment rates, these workers may have difficulty catching up with the incomes of preceding generations. A strong recovery could, however, Notes: Severely burdened (unburdened) households dedicate more than 50% (less than 30%) of monthly outlays to housing. Low-income households are in the bottom quartile of all households ranked by total monthly expenditures. Data exclude renters reporting no rental payments. Household Deleveraging The housing boom of the 2000s triggered massive mortgage borrowing as the number of homeowners increased, the share of loans with small downpayments soared, and owners tapped into their skyrocketing home equity. Indeed, inflation-adjust- ed mortgage debt climbed 88 percent between the beginning of 2000 and the fourth-quarter 2007 peak.

[Assistant] The debt binge not only fueled consumption but also helped to inflate home prices. All told, the aggregate value of household real estate jumped 76 percent in real terms from 2000 to 2006. After the boom went bust, the value of household real estate plunged 32.6 percent from the end of 2006 through the end of 2009, while mortgage debt declined only 5.0 percent from its fourth-quarter 2007 peak. Nonetheless, the overwhelming majority of borrowers who took on more mortgage and consumer debt during the boom will continue to make payments and attempt to refinance to lower interest rates. With asset values down so far, however, it may be some time before the balance sheets of these over- leveraged households return to normal levels.


[User] Federal Responses One of the most significant government programs to help forestall foreclosures and lessen housing cost burdens is unem- ployment insurance. States paid out $79.6 billion in unemploy- ment benefits over the course of 2009, up from $32.4 billion in 2007. The average weekly unemployment benefit last year was $310, which for many was the only source of income. These payments enabled many families to keep their homes.

[Assistant] The Outlook It will likely take years for the fallout from the Great Recession to abate. The 2000s ended on a sour note, with real household incomes lower than where they had started the decade and the shares of housing cost-burdened households at record highs.


[User] 1 Executive Summary 1 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY SIGNS OF RECOVERY IN THE FOR-SALE MARKET The for-sale housing market remained depressed for much of 2011. House prices in most areas continued to slide, sales were lackluster, and single-family construction hit a record low. With demand reviving and inventories of homes for sale depleted, home prices may well find a bottom this year. Moreover, stronger sales should pave the way for a pickup in single-family construction over the course of 2012. Nevertheless, a number of conditions may keep the recovery in the owner-occupied market relatively subdued. The backlog of roughly two million loans in foreclosure means that distressed sales will remain elevated, keeping prices under pressure. Another 11.1 million homeowners owe more on their mortgages than their homes are worth, which dampens both sales of new homes and investment in existing units. And despite recent declines, the number of vacant homes is still well above normal, limiting demand for new construction in many markets. What the for-sale market needs most is a sustained increase in employment to bring household growth back to its long- term pace. But the persistent weakness in homebuilding has in itself hindered a strong rebound in hiring. From 2006 through 2010, residential fixed investment pulled down growth in gross domestic product (GDP) in all but three quarters, two of which benefited from targeted tax credits. Since 2011 began, however, home construction and improvement spending have made a positive contribution to GDP in four out of five quarters. With multifamily construction already on the rise, even modest increases in the number of single-family starts—together with stronger sales of existing homes and associated investment in improvements—will bolster economic growth and, in turn, the housing sector. THE RENTAL MARKET REBOUND The bright spot continues to be the rental market, where demand has spiked. Indeed, the number of renters surged by 5.1 million in the 2000s, the largest decade-long increase in the postwar era. In part, this growth reflects disproportionate After several false starts, there is reason to believe that 2012 will mark the beginning of a true housing market recovery. Moreover, rental markets have yet to benefit fully from the presence of the large echo-boom generation. The recession helped to dampen the rate at which young people begin to live independently, contributing to a decline in the number of households under age 25—the years when renting is most com- mon. But once the economy recovers and the echo boomers increasingly strike out on their own, rental markets will receive another significant lift. Rapidly rising demand has pushed rental vacancy rates down across the country, sparking widespread rent increases. According to MPF Research, rents on investment-grade multi- family properties outpaced inflation in 38 of the 64 markets it tracks. Of the remaining metros, all but one (Las Vegas) posted at least nominal rent increases in 2011. Adjusting for inflation, San Francisco led the nation with a double-digit rise, but real rents in metros in the Northeast (Boston and New York), South (Austin), and West (Denver) were also up 3.0–5.0 percent. Even in several markets associated with the foreclosure crisis (includ- ing Detroit, Cleveland, and Ft. Myers), real rents are climbing. Rental market tightening has stabilized multifamily property values after a sharp drop rivaling that in the single-family mar- ket. As measured by NCREIF’s Transaction Based Apartment Price Index, prices were up 10.0 percent in the fourth quarter of 2011 from a year earlier and 34.4 percent from the 2009 low. With vacancy rates falling and owners’ financial positions strengthening, multifamily starts more than doubled from the Note: Sales ﬁgures include only single-family homes and are at seasonally adjusted annual rates. Sources: US Census Bureau, New Residential Construction; National Association of Realtors®, Existing Home Sales via Moody’s Economy.com. Hispanics can be of any race. Household incomes are for 2006 and 2010, and adjusted to 2010 dollars by the CPI-U for All Items. Source: JCHS tabulations of US Census Bureau, Housing Vacancy and Current Population Surveys. Despite this drag, recovery in the owner-occupied market could strengthen if positive job numbers and tightening markets encour- age more households to buy. Although young households have increasingly opted to rent in recent years, most still aspire to homeownership. So far, though, the weakness in the economy and continued uncertainty may be deterring many would-be buyers from taking advantage of today’s home prices and low mortgage interest rates. THE PROSPECTS FOR HOUSEHOLD GROWTH Given that the number of new homes added in 2002–11 was lower than in any other ten-year period since the early 1970s, it Age of Household Head ● Under 35 ● 35–44 ● 45–54 ● 55–64 ● 65 and Over Source: JCHS tabulations of US Census Bureau, Housing Vacancy Surveys. Two factors are responsible for this drop: a decline in the rate at which individuals (particularly those under age 35) form inde- pendent households, and a sharp drop in immigration. While a variety of forces contributed to these trends, the severity of the economic recession clearly played a significant role. As 2012 began, the ingredients needed to spark more normal household growth were still not in place. In particular, the unemployment rate remained elevated, and in fact would have been even higher if so many discouraged workers had not exited the labor market. But over the longer run, the most important drivers of household growth are the size and age structure of the adult population. Assuming the economic recovery is sustained in the next few years, the growth and aging of the current population alone— including the entrance of the echo boomers into adulthood— should support the addition of about 1.0 million new households per year over the next decade. The biggest unknown is the con- tribution of immigration to overall population growth. But even assuming net inflows are roughly half the level in the Census Bureau’s 2008 projection, the Joint Center for Housing Studies projects household growth should still average 1.18 million a year in 2010–20. Because the echo boomers are much more racially and ethni- cally diverse than previous generations, a larger share of tomor- row’s young households will be minorities. Indeed, the Joint Center projects that minorities will account for more than 70 percent of net household growth in 2010–20. Both the housing industry and the mortgage market will need to find ways to adapt to this impending shift in housing demand. 5 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY THE INCREASING PREVALENCE OF COST BURDENS The recession took a toll on household incomes but did little to reduce housing outlays for many Americans. While renters accounted for the vast majority of the increase, the number of severely cost-burdened owners also rose by more than as many households locked into expensive mortgages were unable to refinance. Moreover, the recent jump in the number of severely cost-burdened households comes on top of a 4.1 mil- lion surge in 2001–7. For households paying large shares of income for housing, mak- ing ends meet is a daily challenge. Among families with children in the bottom expenditure quartile, those with severe housing cost burdens spend about three-fifths as much on food, half as much on clothes, and two-fifths as much on healthcare as those living in affordable housing. Providing assistance to cost- burdened households not only helps to ensure a decent place to live, but also frees up resources to meet life’s other necessi- ties. In addition, affordable housing makes it more feasible for low-income households to set aside some savings as a cushion against emergencies or as an investment in education, business, or other advancement opportunities. But the prospects for meaningful reduction in housing cost bur- dens remain bleak. As more renters than ever before struggle to pay for housing, the federal response has been limited. Funding for the Housing Choice Voucher Program, one of the principal sources of rental housing assistance since the early 1990s, has increased only modestly since the recession. But with renter incomes falling and rents rising, the amount of assistance needed per renter has climbed—making higher funding impera- tive just to serve the same number of recipients. Note: JCHS low projection assumes that immigration in 2010–20 is half that in the US Census Bureau’s 2008 middle-series (preferred) population projection. Sources: US Census Bureau, Housing Vacancy Survey; JCHS 2010 household growth projections. THE STATE OF THE NATION’S HOUSING 2012 6 THE STATE OF THE NATION’S HOUSING 2012 6 In particular, sales of distressed properties are holding down home prices, and millions of owners are unable to sell because they are underwater on their mortgages. These conditions are impeding a more robust recovery in existing home sales as well as in improvements spending, which usually increases right after a home purchase. Enhancements to the Home Affordable Modification Program, the recently completed National Mortgage Servicing Settlement, and servicers’ own efforts to clear foreclo- sure backlogs may, however, provide some relief by increasing loan modifications and expediting disposition of properties where homeownership cannot be maintained. The greatest potential for recovery in the for-sale market lies in its historic affordability for well-positioned homebuyers. The dive in home prices and record-low mortgage rates have made owning more attractive than in years. But the availability of mortgage financing for young buyers with limited cash, other debts, and less than stellar credit is far from certain. Since the market meltdown, underwriting has become much more restrictive. So far, FHA and state housing finance agencies have served a vital role in supporting low-downpayment loans for homebuyers with all but the lowest credit scores. But even FHA is now raising its premiums to shore up its financial position and to encourage the return of private capital to the market. With key mortgage lending regulations still undefined, it remains to be seen to what extent and under what terms lenders will make credit available to lower-income and lower-wealth borrowers. While restoring the housing market to health will benefit many households, it will also increase the cost pressures on many others. Rising rents have already added to the affordability problems of lower-income families. In addition, even as the recovery takes hold in a broad range of markets across the country, the damage to foreclosure-ridden neighborhoods will take years to heal. At a time when all levels of government are under financial duress, mustering the resources to address these challenges is increasingly difficult. But in making the hard decisions about scarce public funding, policy makers must bear in mind the fundamental importance of affordable housing to the well-being of every individual and the communities in which they live. But the beleaguered single-family market now appears to be turning around, with starts picking up significantly in the sec- ond half of 2011 and standing 16.6 percent above weak year- earlier levels in the first quarter of 2012. Permitting, a leading indicator of starts, was also up 16.9 percent early this year. With homebuilders reporting strong growth in orders and new home sales, residential construction activity appears to be emerging from the deepest, most prolonged downturn in recent history. Indeed, despite the spectacular boom early in the decade, 2002–11 was the worst 10-year period for overall housing production since recordkeeping began in 1974. Making matters worse, the fall-off in demand was even more dramatic than the plunge in housing production, leaving national vacancy rates at elevated levels. The downturn in remodeling has also been sharp and pro- longed, although not nearly as severe as in homebuilding. After a peak-to-trough drop of 28.4 percent (compared with more than 75 percent in new construction spending), home improvement spending increased to 49 percent of residen- tial construction expenditures in 2011. This is the largest share in records dating back to 1993 and well above the 25 percent averaged in 1993–2008. Although real expenditures on improvements were down 1.6 percent in the first quarter of 2012 from year-earlier levels, the Joint Center’s Leading Indicator of Remodeling Activity points to a resumption of spending growth in the second half of 2012. Investment in lender-owned properties should also help to prop up remod- Signs of a housing market rebound have begun to accumulate. Rental demand was up and vacancies down in 2011, leading to a jump in multifamily construction. With the economy steadily adding more jobs, home sales picking up, and new home inventories at record lows, the single-family market may also be reviving. Still, the persistent weakness in existing home prices, the large backlog of foreclosures, and the tight lending environment are restraining the recovery. IMPROVING HOME SALES After hitting a record low of just in 2011, sales of new homes in the first quarter of 2012 stood 16.7 percent above year-earlier levels. While the increase occurred from record lows, new home sales appear to be staging a recovery that, for the first time in this cycle, does not depend on the tempo- rary stimulus of federal homebuyer tax credits. In addition, homes are selling more quickly. The typical new home for sale in March 2012 was on the market for just 8.0 months, compared with 8.7 months in March 2011 and 14.4 months in March 2010. Existing home sales show a similar trend. The National Association of Realtors® (NAR) reports that sales of single- family homes and condominiums increased just 1.7 percent, to 4.3 million, in 2011 as a whole but accelerated in the second half of the year. By the first quarter of 2012, existing home sales were 5.2 percent above year-earlier levels. Underscoring the impact of tight credit conditions on homebuyers as well as increased investor interest in distressed properties, cash purchases made up 30 percent of existing home sales last year. Sources: US Census Bureau, New Residential Construction; National Association of Realtors®, Existing Home Sales; Federal Reserve Board, Flow of Funds. HIGH “OFF-MARKET” INVENTORIES Inventories of new single-family homes for sale fell 20 percent in 2011, sinking to just units in March 2012—the low- est level in nearly five decades of recordkeeping. Even with the feeble pace of new home sales, this level of inventory equates to less than a 6.0 months’ supply for the first time in more than five years. The inventory of existing homes for sale also shrank by some 23 percent in 2011, reducing the supply in the first quarter of 2012 to 6.2 months—also the lowest level since 2006. The 6.0- month supply mark is important because it is considered a rough indicator of market balance, where neither buyers nor sellers have the upper hand in price negotiations. This excess supply is of concern because of its potential drag on the housing recovery. According to the latest Housing Vacancy Survey, the number of vacant units held off the market rose in 2010–11, partially offsetting declines in the numbers of “on-market” vacant homes for rent and for sale. Units held off market now account for 5.5 percent of the housing stock—near- ly a full percentage point more than in 2000–2. This increase implies that, relative to that period, there are more than 1.2 million excess off-market vacant units. When these units come on the market, they could exert even more downward pressure on home prices. For now, though, the decline in vacant units for sale is helping to put a bottom under prices, while the decline in vacant units for rent has begun to spark rent increases in many markets. Price declines at the low end of the market were especially severe. Among the 16 metros covered by the S&P/Case-Shiller index, prices for bottom-tier homes plummeted an average of ● Existing Homes (Left axis) ● New Homes (Right axis) Sources: US Census Bureau, New Residential Sales; National Association of Realtors®, Existing Home Sales via Moody’s Economy.com. While too soon to tell with confidence, the worst may be over. According to the CoreLogic March 2012 Home Price Index, national prices were just 0.6 percent below year-earlier levels. In fact, some areas saw the pace of declines slow in 2011, while others posted nominal increases in the first quarter of 2012. For example, median home prices in Phoenix and Cape Coral regis- tered gains early this year both from the previous quarter and from the year-earlier level. Overall, prices in the first quarter were up in 74 of the 146 metros covered by NAR and 43 of the top 100 metros covered by CoreLogic. EMPLOYMENT GROWTH AND THE HOUSING RECOVERY The vigor of housing demand hinges on the strength of employ- ment growth. In the current cycle, 19 consecutive months of job gains have brought total employment growth since February 2010 to 3.7 million. Relative to the size of the decline, though, the rebound in jobs has been weak. The homebuilding sector has both contributed to and suffered from tepid employment growth. From January 2001 to their April 2006 peak, residential construction and specialty trade contracting together accounted for fully 25 percent of overall employment growth. Since then, however, these sectors lost more than 1.4 million jobs and accounted for fully 35.8 per- cent of the net decline in total employment from April 2006 to December 2011. At the end of last year, the number of home- building jobs alone was down 41 percent from its peak and stood at its lowest level since January 1993. Anemic construction activity, in turn, has been a drag on economic growth until recently. Although representing only a modest share of GDP, residential fixed investment (driven largely by new construction spending) usually helps to lead the economy out of recessions. In the 11 quarters immediately following every recession since 1970, RFI contributed 0.4–0.8 percentage point to GDP growth on average, accounting for 11–17 percent of gains. . 11 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY however, RFI’s contribution has averaged just 0.04 percentage point, adding just 1.6 percent to meager GDP growth during this period. But with the uptick in residential construction in late 2011 and early 2012, RFI posted two consecutive quarters of solid growth and provided its first significant boost to GDP since the end of the Great Recession. IMPEDIMENTS TO A STRONGER RECOVERY While many housing market indicators are headed in a favor- able direction, several forces still stand in the way of a robust recovery. In particular, the persistent weakness of house prices has prevented any significant reduction in the number of own- ers owing more on their mortgages than their homes are worth. In fact, CoreLogic reports that the number of underwater loans rose in the fourth quarter of 2011 to 11.1 million—representing more than one in five mortgages and some $717 billion in nega- tive equity. States that had the most dramatic housing booms and busts are generally faring the worst on this count. Nevada (at 61 per- cent) and Arizona (at 48 percent) still have the largest shares of underwater mortgages, while Florida and California (each with approximately two million) together account for more than a third of all such loans in the country. These loans are at risk of default and could add to the already large number of distressed properties selling for bargain-basement prices. In addition, owners are not in a position to sell their homes without incur- ring a loss and are therefore holding back a stronger recovery in existing home sales that would give a much needed boost to economic activity. Moreover, the protracted process—especially in states with judicial foreclosures—guarantees that the backlog will extend for years to come. As of early 2012, foreclosure inventory rates in the typical state with judicial foreclosures were high and rising, while those in states with non-judicial processes were lower and falling. An additional drag on the recovery comes from the increased dif- ficulty of qualifying for mortgage credit. Not only have high unem- ployment levels eroded credit scores, but lenders have also set higher thresholds for qualifying for loans. In addition, low-down- payment loans are harder to secure. Apart from Federal Housing Administration (FHA) loans, mortgages with downpayments of less than 10 percent are scarce, and even FHA limits such loans to borrowers with higher credit scores. Further evidence of the diffi- cult credit environment is that some 33 percent of NAR’s member brokers reported contract failures in December 2011, compared with just 9 percent a year earlier. These failures occurred largely because mortgage applications were declined or the appraised value of the homes came in below negotiated prices. THE OUTLOOK Despite the many factors restraining the recovery, other trends— including steady employment growth, depleted inventories of for- sale homes, and a surge in sales and construction activity—make the housing market outlook significantly brighter than a year ago. Rental markets have already turned a corner, although the rebound in multifamily construction is modest in absolute terms.

[Assistant] Sharply lower home prices and interest rates, along with improv- ing labor markets, are raising hopes that new and existing home sales will continue to gain momentum. With inventories of for-sale homes so low, a sharp increase in demand could help prices firm. At the same time, however, the overhang of excess units held off market, elevated vacancies within the for-sale stock, and the long pipeline of foreclosures will limit the need for new single- family construction. And three years after the official end of the Great Recession, there are still more than 20 million US workers either unemployed or underemployed, millions of households with negative equity in their homes, and millions more seri- ously delinquent on their loans or already in the foreclosure process. On balance, then, the sheer depth of the downturn and scale of the mortgage debt overhang mean that it will be some time before a robust housing market recovery is at hand. THE STATE OF THE NATION’S HOUSING SLOWDOWN IN HOUSEHOLD GROWTH While specific estimates vary, the main government surveys all agree that household growth, the primary driver of housing demand, has slowed dramatically since the recession. These sources indicate that just –net new households were formed each year between 2007 and 2011, the lowest levels since the 1940s. If annual growth had instead remained in the 1.2–1.3 million range averaged over the four previous years, there would have been at least 1.8 million—and possibly up to 2.8 million—additional US households in 2011. The pace of household growth is set by headship trends (the rates at which people form independent households) and adult population growth (increases in the number of people at the ages most likely to form new households). The Great Recession and ensuing uncertainty in the economy not only lowered headship rates, especially among younger adults, but also led to slower population growth by inducing a drop in immigration. According to this source, the native-born population accounted for about 61 percent of the fall-off, reducing household growth by a total of 1.1 million in 2007–11 relative to the previous four years. Lower headship rates were responsible for virtually all of the slowdown in household formations for this group, with shifts of the population into older age groups providing only a modest offset. Meanwhile, the foreign-born population accounted for the remaining 39 percent of the decline in household growth in Since the Great Recession, fewer young adults are forming new households and fewer immigrants are coming to the United States. As a result, the pace of household growth is unusually slow. Once the recovery gains further momentum, demographic forces should lift the rate of household growth—and, in turn, the demand for housing. Over the longer term, the large echo-boom generation will drive much of this demand, increasing the diversity of the nation’s households. 13 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY 2007–11, or the equivalent of about potential house- holds. Lower headship rates were responsible for slightly more than half of this decline, with the remainder reflecting slower population growth. In addition, all of the drop in household growth among the foreign born was among non-citizens. While the recession undoubtedly played a key role, the recent wave of emigrations and deportations also served to thin the ranks of foreign-born non-citizens living in the United States. Indeed, removals of undocumented immigrants rose by more than 50 percent in 2005–10, while the number apprehended trying to enter the country illegally fell by almost as much. Assuming that much of the drop in household growth is a response to economic conditions, there may be significant pent-up demand in the housing market. While the drop in net immigration may never be made up for in the future, household formations among younger age groups are likely to recover as the economy picks up. Moreover, headship rates tend to rise sharply among adults in their 20s and early 30s, then increase more grad- ually through middle age when they converge across generations. The steady march of the large echo-boom population into older adulthood therefore means that millions of new households will form in the coming years even if age-specific headship rates do not rebound and immigration remains subdued. COMPOSITION OF HOUSEHOLD GROWTH Minorities continue to be the driving force behind household growth, accounting for about three-quarters of the increase in 2003–7 and two-thirds in 2007–11. Nevertheless, minority household growth slowed 42 percent in 2007–11 from the previ- ous four-year period, while white household growth declined just 16 percent. The rate of household growth among Hispanics, the largest source of new minority households, was down 52 percent. This decline reduced the Hispanic share of total household growth from well over a third in 2003–7 to just over a quarter in 2007– 11. Weaker immigration is clearly the reason. After contributing more than half of total Hispanic household growth in 2003–7, foreign-born householders were responsible for only a quarter in 2007–11. As a group, Hispanic immigrants accounted for 21 percent of total household growth before the recession, but just 7 percent afterward. Minorities are increasingly part of the shift toward suburban and exurban living. In percent of minority house- holds lived outside of core cities, up from 41 percent just 10 years earlier. As a result, outlying communities became more diverse over the decade, with the minority share of suburban households rising from 23 percent to 30 percent, and of exurban households from 14 percent to 19 percent. The minority share of households living in the urban core also climbed from 45 percent to 50 percent, indicating that racial and ethnic diversity increased throughout America’s metros in the 2000s. The plunge in housing values was particularly hard on low- income and minority households, both because prices in the low-end market fell the most and because home equity accounted for a particularly large share of minority household wealth when the housing bust began. In percent of low- income households owned homes but just 17 percent owned stocks. Home equity made up 73 percent of net wealth for these owners on average, compared with just 41 percent for house- holds in the top income quartile. As a result, the wealth gap between whites and minorities continued to widen. In 2005, the median wealth of white house- holds was 11 times that of black households. At last measure in 2009, the differential had increased to 20 times. Over the same period, the median wealth of whites jumped from seven times the median wealth of Hispanics to 18 times. CHANGES IN HOUSEHOLD MOBILITY Cyclical factors and overall economic uncertainty have limited the ability of many to buy and sell homes, or otherwise move or form independent households. While a stronger recovery and a reduction in negative equity mortgages would help to stem further declines, demographic forces will keep the pressure on household mobility rates over the next two decades. The aging of the baby-boom generation is a key factor, lifting the share of older households to a record high. Mobility rates drop sharply with age, and adults over age 65 are almost eight times less likely to move in a given year than those in their 20s. Moreover, the vast majority of baby boomers live in owner-occu- pied homes, and owners are far less likely to move than renters. What is more, the recession dampened the already low mobility rates of older homeowners: just 1.9 percent of owner-occupants aged 65–74 in 2011 had changed residences within the previ- ous year, down from about 3.3 percent in 2007. Mobility rates for homeowners aged 75 and over also fell somewhat over the decade, from 1.9 percent to 1.6 percent. Even if mobility rates among older homeowners return to previous levels, though, the vast majority of baby boomers will likely age in place. THE STATE OF THE NATION’S HOUSING THE STATE OF THE NATION’S HOUSING will continue to live independently for at least another 20 years. Furthermore, as medical innovation extends lifespans, house- hold loss rates due to death or infirmity may fall and delay the dissolution of most baby-boomer households beyond 2030.


[User] Over the longer term, trends in population growth and immi- gration should balance out any short-run fluctuations in household headship rates. The oldest of the echo boomers, who turned 25 in 2010, are only now beginning to form their own households. This large cohort will be the pri- mary driver of new household formations over the next two decades.

[Assistant] Meanwhile, the baby boomers will continue to push up the number of senior households for years to come as they replace the much smaller pre-boom generation in the older age groups. While the boomers will eventually release a large number of housing units onto the market, this process will not be a significant issue for another 20 years.


[User] With upwards of two million foreclosures still in process and a rising number of households choosing to rent, further declines lie ahead. Tight credit conditions amid uncertainty in the mortgage market are dampening the recovery in homebuying, while depressed prices are preventing many distressed homeowners from refinancing to more affordable loans. This does, however, represent a sig- nificant slowdown from 2000–5, when 6.5 million owners under age 35 and 2.6 million aged 35–44 were added on net. Moreover, recent growth in the number of younger homeowners was not enough to offset the typically large losses of homeowners aged 75 and over, thereby bringing down the total number. SEEDS OF RECOVERY According to the Freddie Mac Primary Mortgage Market Survey, interest rates on a 30-year fixed mortgage averaged just 4.45 percent in 2011 before sliding below 4.0 percent in early 2012— its lowest level since recordkeeping began in 1971. Together with ongoing house price declines, these historically low rates Source: JCHS tabulations of US Census Bureau, Housing Vacancy Surveys. 19 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY have made homebuying a comparative bargain (Table A-6). Indeed, the NAR affordability index hit unprecedented levels in 2011. With renewed weakness in prices spreading to more than half the states, the ratio of the median existing home sales price to median household income edged down from 3.5 in 2010 to 3.2 last year. Homeownership rates of white and black householders peaked in 2004, and Hispanic rates peaked in 2006. Source: JCHS tabulations of US Census Bureau, Housing Vacancy Surveys. With their cost advantages, more relaxed underwriting stan- dards, and deep government guarantees that appeal widely to investors, loans insured by the FHA, Veteran’s Administration, and US Department of Agriculture’s Rural Development pro- grams have come to comprise a large share of the home purchase market—particularly among borrowers with small downpayments. From fewer than one in ten during the housing boom, these government-backed loans accounted for more than half of home purchase loans in 2009 and 2010. While expansion of FHA lending has received the lion’s share of attention, fund- ing for USDA’s guarantee loan program also increased five-fold between fiscal 2007 and 2010.

[Assistant] THE OUTLOOK Over the next few years, homeownership rates among younger households will remain under pressure. Members of the large echo-boom generation are just beginning to enter the housing market, but primarily as renters. In addition, greater numbers of middle-aged households are delaying homeownership or returning to rental housing. And as millions of distressed home- owners lose their homes to foreclosure, they will require years to repair their tarnished credit records before buying again. As a result, increases in the number of renters will continue to outpace any growth in homeowners. If not for older house- holds, who have high homeownership rates and account for an increasing share of the population, the decline in the national homeownership rate would be much greater.


[User] Young adults under age 25 generally drive the growth in new renter households. Although down from 5.0 million in 2001−6, the number of net new renters in this age group was still a sub- stantial 4.7 million in 2006−11. The recent turnaround in renter household growth was fueled to an even greater extent by 25−34 year-olds, who accounted for fully net new renter households over this period. In contrast, the previous cohort of 25−34 year-olds was responsible for a net loss of renter households in 2001−6. More households aged 35–44 are also renting, reducing the net outflow in their age group from 1.5 million in 2001–6 to just in 2006–11. GROWING DIVERSITY OF RENTER HOUSEHOLDS to own homes, minority households make up a large and grow- ing share of renters. In 2011, minorities accounted for only 30 percent of all households but 46 percent of renters. They also contributed 59 percent of the increase in the number of renter households between the homeownership peak in 2004 and 2011. Blacks accounted for 24 percent, Hispanics 17 percent, and Asians and other groups 18 percent of this recent growth. Although whites were responsible for less than half of renter household growth, their numbers still increased by 2.1 million over this period—a sharp departure from the large declines in the 1990s and early 2000s. An especially noteworthy shift is the rising number and share of married couples that now rent rather than own homes. While still only 36 percent of all renters in 2011, married couples accounted for 50 percent of the growth in renter households over the previous five years. More middle- and upper-income households are also renting. During the first half of the 2000s, Renter household growth surged in 2011, spurred by the decline in homeownership rates across most age groups. With vacancy rates falling and rents on the rise, returns on rental property investments are improving and multifamily construction is making a comeback in many markets. 23 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY most of the increase in renters occurred among households earning less than $30,000 while the number of higher earners fell significantly. After 2006, though, households earning more than $30,000 accounted for just under half of renter growth. In fact, after dragging down renter household growth during the homebuying boom, households earning more than $75,000 con- tributed nearly a fifth of the increase in 2006–11.

[Assistant] Some of the unusual features of recent renter house- hold growth—particularly the sharp increases in older and married-couple renters—may persist as long as foreclosure rates remain elevated. But as household formations among the echo boomers rise and homeownership rates among middle-aged households stabilize, the shares of new renter households that are younger and minority should continue to increase.


[User] While single-family homes have always been popular rentals, the share of renter households living in single-family units increased from 31.0 percent in 2006 to 33.5 percent in 2010. In turn, the share of the single-family stock for rent or being rented expanded from 14.4 percent to 16.1 percent, adding 2.0 million units to the inventory. Even so, the overall rental vacancy rate fell from 10.6 percent in 2009 to 9.5 percent in 2011, the lowest annual posting since 2002. With vacancy rates shrinking and renter household growth strengthening, multifamily development has staged a recovery. In 2011, construction began on units in build- ings with two or more units, up from two years earlier. While still well below the roughly starts averaged each year in the decade prior to the downturn, a continuation of current trends would give multifamily construction a substantial lift this year. RENTAL MARKET TIGHTENING According to the Housing Vacancy Survey, rental vacancy rates in more than two-thirds of the nation’s largest 75 metros fell in 2011. In more than a third of these areas, the decline from the national peak in 2009 exceeded two percentage points. The absorption of excess units in Austin, Dayton, and Phoenix was particularly rapid, pushing vacancy rates down by more than 5.0 percentage points over the past year. At the other extreme, vacancy rates in a few metro areas, such as Orlando and Tucson, remained above pre-bust levels. THE STATE OF THE NATION’S HOUSING Francisco (up 11.0 percent) and San Jose (up 8.8 percent) posted the largest increases. In other high-occupancy metros such as Austin, Boston, New York, and Oakland, real increases aver- aged 3.7 percent or more. In contrast, rents in fully two-fifths of the markets tracked did not keep up with inflation, although the declines were generally modest. Only five markets saw real rents fall more than 1.0 percent in 2011, with Las Vegas report- ing by far the largest decline (3.6 percent).

[Assistant] IMPROVING RENTAL PROPERTY PERFORMANCE Tighter rental markets have bolstered cash flow and returns on multifamily properties. As measured by the National Council of Real Estate Investment Fiduciaries, commercial apartment prices climbed 10.0 percent in the fourth quarter of 2011 from a year earlier, marking a 34.4 percent increase from their fourth-quarter 2009 low. While below the outsized earnings posted in the second half of 2010, these returns exceed the average performance in the first half of the 2000s—not to mention the substantial losses in 2009.


[User] Despite these signs of strength, not all segments of the mul- tifamily market are out of the woods. Of particular concern are properties with loans held in commercial mortgage backed securities (CMBS). According to Moody’s Delinquency Tracker, 14.1 percent of such loans were at least 60 days past due in the first quarter of 2012, down just slightly from the 15.7 percent peak at the start of 2011. These poorly performing loans were generally issued during the boom years when lending standards were much more relaxed. EMERGING RECOVERY IN MULTIFAMILY LENDING Once the recession hit, government lending was responsible for virtually all of the net growth in multifamily loans outstanding. In 2010, agency and GSE portfolios as well as MBS accounted for a $14.8 billion net increase in outstanding multifamily loans, while banks and thrifts contributed a modest $2.0 billion. In 2011, however, the strength of the multifamily recovery bol- stered investment interest, and banks grew their portfolios by $5.8 billion and life insurance companies by $2.3 billion. 25 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY important but often overlooked aspect of the debate over the government’s future role in the mortgage market is whether these guarantees, if continued, should apply to multifamily lending. The government backstop in this market segment was clearly critical during the downturn. With rental demand surging and adding strength to the recovery, policy makers will need to ensure that a restructured mortgage market can provide an adequate supply of capital to fuel expansion of the multifamily stock. SHRINKING SUPPLY OF LOW-COST RENTALS The housing bust and Great Recession helped to swell the ranks of low-income renters in the 2000s, increasing the already intense competition for a diminishing supply of low-cost units. According to the American Community Survey, the number of renters earning $15,000 or less (in real terms) grew by 2.2 million between 2001 and 2010. The number of rental units that were both adequate and affordable to these households, however, declined by over this period. In 2001, 8.1 million low-income renters competed for 5.7 million affordable units, leaving a gap of 2.4 million units. By 2010, the shortfall had more than doubled to 5.1 million units. Moreover, of these affordable units, more than 40 percent were occupied by higher-income renters. THE OUTLOOK Barring a dramatic bounceback in homeownership, renter household growth should remain strong for some time. In the near term, larger shares of younger households are opting to rent while foreclosures are forcing many older households out of homeownership and into the rental market. But even as the economic recovery gains traction and homeownership rates level off, rental demand should get a boost from higher house- hold formations among the echo boomers. With demand growing strongly, multifamily construction should increase in many metropolitan markets. The exceptions may be metros with stubbornly high vacancy rates, many of which are located in states hit hard by the foreclosure crisis. But capital must be available to support this new construction. Lending by banks and life insurance companies has begun to pick up, but federal sources still guarantee a large majority of new loans. If the federal government pulls back from the multifamily market, private lending will have to increase substantially to support this important segment of the housing market.

[Assistant] Note: Return on investment incorporates net operating income and changes in the market value of the property. Source: National Council of Real Estate Investment Fiduciaries, Apartment Property Index.


[User] COST BURDENS ON THE RISE According to the latest American Community Survey, 42 million households (37 percent) pay more than 30 percent of income for housing (moderate burden), while 20.2 million (18 percent) pay more than half (severe burden). Between 2001 and 2010, the number of severely cost-burdened households climbed by a staggering 6.4 million. CHARACTERISTICS OF COST-BURDENED HOUSEHOLDS households, outnumbering owners 10.7 million to 9.5 million. Fully 27 percent of renters are severely burdened, more than twice the share of homeowners. Nevertheless, aside from those in the lowest income group, larger shares of homeowners with mortgages face severe housing cost burdens than renters with comparable incomes (Table A-4). THE STATE OF THE NATION’S HOUSING of severe cost burdens is still highest among blacks (27 percent), both Hispanic and black householders saw a sharp rise in share over the decade, up 6.3 and 5.8 percentage points compared with just 3.8 points among whites. Education level increasingly determines the likelihood of having housing cost burdens. Household heads without a high school diploma had the highest rates and the largest increases in cost- burdened share, up from 21 percent in 2001 to 28 percent in 2010. The share among those with just a high school diploma was slightly lower. In contrast, the share of householders with at least a bachelor’s degree increased from 8 percent to 11 percent. Older age groups are also vulnerable. Shares of severely bur- dened householders aged 55–64 rose from 12 percent to 16 percent over the decade, while the shares of those aged 65 and over edged up from 15 percent to 16 percent. But because the senior population is growing rapidly, the number of older households with severe housing cost burdens jumped from 3.1 million in 2001 to 4.1 million in 2010.

[Assistant] As the baby boomers age, the number of cost-burdened seniors will likely rise sharply over the next 20 years, escalating the need for assisted housing and supportive services for the elderly.


[User] 1 Executive Summary 1 Executive Summary 1 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY THE HOUSING MARKET REVIVAL A broad range of housing market indicators showed marked improvement last year. After modest gains in 2011, existing home sales accelerated to their fastest pace since 2007. New home sales posted their first year-over-year increase since the downturn began, up 62,000 or some 20 percent from 2011’s historic low. With a record-low inventory of new homes on the market to meet strengthening demand, single-family starts shot up 24 percent. Multifamily starts also climbed sharply for the second year in a row, bringing total 2012 starts to . With these increases, residential construction made its first positive contribution to GDP in seven years, adding more than a quarter- point to economic growth. As of December of the 100 metropolitan areas tracked by CoreLogic still reported year-over-year price declines. Just one year later, prices were on the upswing in 87 of these markets. The momentum continued into 2013, lifting the number of mar kets with rising prices to 94. On the strength of these gains, the national median house price was up 11.6 percent in March 2013 from a year earlier. Multiple factors have bolstered house prices, including record- low mortgage interest rates and steady, if not spectacular, employment growth. Low inventories of properties for sale are also a key driver, with supplies of both new and existing homes well below the six-month level that traditionally indicates a balanced market. Institutional as well as mom-and-pop invest ments in distressed single-family homes have also served to firm prices in certain markets, particularly Phoenix, Las Vegas, and Atlanta. The influence of investors is also evident in the different rates of price appreciation across submarkets. In met ros where investors have been most active, prices for homes in the bottom tier were up 22 percent in March 2013, while those for homes in the top tier rose 13 percent, according to the S&P/ Case-Shiller index. A sustained rebound in house prices will soothe many of the housing market’s ills. Rising home equity provides owners a greater sense of security about spending, especially on big-ticket items such as home improvements. Even modest price apprecia The long-awaited housing recovery finally took hold in 2012, heralded by rising home prices and further rental market tightening. While still at historically low levels, housing construction also turned the corner, giving the economy a much-needed boost. But even as the most glaring problems recede, millions of homeowners are delinquent on their mortgages or owe more than their homes are worth. Worse still, the number of households with severe housing cost burdens has set a new record. So far, many young adults prevented by the Great Recession from living on their own have still not formed independent households. As unemployment rates rose during the downturn, the share of young adults living independently dropped signifi cantly even as the population under age 35 climbed. As a result, the number of households headed by young adults remained stable. As the economy continues to recover, however, expand ed job opportunities should help to release some of the pent-up housing demand within this age group. But monthly housing costs have rarely been more favorable for homebuyers. When combined with the sharp drop in home prices, today’s low mortgage interest rates have made owning a home more affordable than at any time since the 1970s. So far, though, these conditions have failed to boost first-time home buying. But with steady job growth helping to bolster household finances and rising home prices signaling a market turnaround, 2013 may well be the year that homeownership rates stabilize.

[Assistant] A key issue is whether tight credit conditions will continue to limit the ability of would-be homebuyers to take advantage of today’s affordable conditions.


[User] Note: JCHS low (high) projection assumes that immigration in 2010–20 is 50% (100%) of the US Census Bureau’s 2008 middle-series population projection. Sources: US Census Bureau, Housing Vacancy Survey; JCHS 2010 household growth projections. According to the Office of the Comptroller of the Currency, servicers implemented loan modifications in 2012—about a quarter of them through the Home Affordable Modification Program (HAMP). But the vol ume of modifications was down nearly 50 percent from the 2010 peak while serious delinquencies fell only 22 percent and home forfeitures (including foreclosures and short sales) just 16 per cent. In recognition of the compelling need for remedies short of foreclosure for the millions of homeowners still struggling to retain their homes, the Treasury Department has extended HAMP through the end of 2015. CONTINUED STRENGTH IN RENTAL MARKETS The rental housing recovery that began in 2010 continued to gain steam. Fueled by the growing share of households opt ing to rent, the national rental vacancy rate fell for the third straight year to 8.7 percent in 2012, the lowest level since 2001. As measured by the consumer price index, rents rose 2.7 percent for the year, slightly outpacing overall inflation. Market conditions for professionally managed apartments were even stronger, with MPF Research reporting average vacancy rates of 4.9 percent and rent increases of 3.7 percent in this market segment. The tightening in the apartment market does, however, appear to be losing momentum. According to national mea sures from MPF Research, rent increases decreased each quarter after the 2011 peak, in tandem with slower absorption of new units. Given the long lags from planning to completion of apartment buildings, supply could outstrip demand when this new housing is ready for occupancy. But with the gener ally healthy level of demand, it is also possible that these new units will be absorbed without a substantial rise in vacancies. THE SPREAD OF HOUSING COST BURDENS In a decade of enormous ups and downs in the housing mar ket, one fact remains constant: the number of households with housing cost burdens continues its inexorable climb. At last count in 2011, over 40 million households were at least moderately cost burdened (paying more than 30 percent of their incomes for housing), including 20.6 million households that were severely burdened (paying more than half of their incomes for housing). The latest increases in the number of severely burdened households represent a jump of Source: JCHS tabulations of US Census Bureau, New Residential Construction. What is remarkable on the owner side is that the incidence of cost burdens has not fallen much more dramatically, given the substantial decline in home prices and low interest rates. Indeed, the share of severely burdened owners rose from 12.1 percent in 2007 to 12.6 percent in 2011. The lack of progress reflects the difficulties that many owners locked into excessive mortgage debt face in attempting to refinance and the still- weak state of the economy. In fact, the overwhelming majority of underwater homeowners continue to make payments on mortgages that exceed the present value of their homes. While increasingly prevalent at all income levels, severe hous ing cost burdens are much more common among households with the lowest incomes. Nearly seven out of ten households with annual incomes of less than $15,000 (roughly equivalent to year-round employment at the minimum wage) are severely burdened. With income inequality worsening over the past decade, the share of households with these low incomes has continued to grow. While the number of low-income households eligible for federal rental assistance has been growing, the number of assisted units has not. According to recent HUD estimates, only one in four of those eligible for rental assistance obtain this help. Funding for the Housing Choice Voucher Program has increased, but with rents rising and incomes falling, the subsidy needed per renter has also increased—leaving the number of assisted households almost unchanged. Other pro grams—including public housing, the HOME program, and the Community Development Block Grant program—have faced outright cuts. And at a time when the need has never been greater, federal budget sequestration will further limit the number of households receiving rental assistance. Gaining access to assisted housing has important implications for quality of life. Low-income households with severe housing cost burdens have little left over each month to pay for other necessities. According to the latest Consumer Expenditure Survey, severely burdened families in the bottom expenditure Notes: Severely cost-burdened households spend more than 50 percent of pre-tax income on housing costs. Incomes are in constant 2011 dollars, adjusted for inﬂation by the CPI-U for All Items. Source: JCHS tabulations of US Census Bureau, American Community Surveys. LOOKING BEYOND THE INITIAL RECOVERY While evidence of a housing market recovery continues to accu mulate, significant fallout from the downturn remains. Chief among these concerns is that millions of borrowers are still seri ously delinquent on their mortgages. Given this continued need, HAMP—the federal program supporting nearly one in three loan modifications that have kept many troubled loans out of foreclosure—has been extended through 2015. In addition, more than 10 million owners owe more on their mortgages than their homes are worth. More gener ally, both market and regulatory uncertainties surrounding the mortgage lending business have kept credit standards tight and prevented a more robust housing market recovery. These decisions have direct bearing on the types, costs, and availability of future mortgage products. In making these choices, policymakers must reconcile the goal of reducing the systemic risk at the root of the Great Recession against the goal of allowing a broad range of lower-income and lower-wealth households to access mortgage financing. The outcomes have implications for rental markets as well, given that the govern ment guarantees an enormous share of multifamily loans. Of particular concern is the availability of long-term, fixed-rate financing for affordable housing developments—funding that is rarely available without federal backing. On top of these immediate pressures is the persistent spread of housing cost burdens. As it is, housing assistance reaches only a small share of those eligible while targeting the most vulner able Americans—the disabled, the elderly, and single-parent families with very low incomes. Meanwhile, the foreclosure crisis has exacerbated the distress in many low-income neigh borhoods, spreading blight and straining the ability of local governments to invest in these areas. Indeed, governments at all levels face difficult choices between bringing budgets into balance in response to short-term economic woes and address ing longer-term structural challenges. In making these choic es, however, policymakers cannot lose sight of the important role that housing plays in ensuring the health and well-being of the nation’s households and communities. The rebound in residential construction was widespread, with 91 of the top 100 metropolitan areas reporting increases in sin gle-family permits in 2012. Moreover, permitting activity esca lated over the course of the year. Nevertheless, single-family permits in each of the 100 largest metros lagged below annual levels averaged in the 2000s. On the multifamily side, permitting increased in three-quar ters of the top 100 metros. Marking its third year of growth, multifamily construction is well ahead of single-family con struction on the path to recovery. While still below average annual levels in the 2000s in the majority (66) of metros, multi family permitting in several areas exceeded this pace—in some cases, substantially. Indeed, Austin, Raleigh, and Bridgeport each issued permits for more new multifamily units in 2012 than in any year dating back to 1988. But given the low levels of permitting in the late 2000s, even in these cases multifam ily production over the last five years is only back in line with historical averages. HOMES SALES ON THE REBOUND According to the National Association of Realtors® (NAR), exist ing home sales increased 9.4 percent in 2011–12, to 4.66 million units. This was the largest percentage increase since 2003–04 and the fastest pace since 2007. And for the first time in seven years, new home sales also increased in 2011–12, rising nearly 20 With sales picking up, low inventories of both new and existing homes helped to firm prices and spur new single-family construction in 2012. Multifamily markets posted another strong year, with construction activity up sharply in response to tightening conditions. Rising home prices, along with steady job gains, helped to reduce the number of seriously delinquent borrowers and underwater homeowners, while also providing more owners the means to invest in discretionary improvement projects. THE STATE OF THE NATION’S HOUSING 2013 8 percent to units. This rebound, however, is from 2011’s low base so that the pace of new home sales in 2012 was still the third lowest (after 2010 and 2011) in records dating back to 1963. Still, sales continued to gain momentum in early 2013, with April marking the 19th consecutive month of year-over-year increases. Additional good news is that distressed sales are on the decline. CoreLogic estimates that the share of distressed property sales dropped from 26.4 percent in 2011 to 23.3 percent in 2012. And within this category, lender-owned (REO) sales were down 18 percent while short sales (where the mortgage holder agrees to a sales price that is less than the outstanding loan balance) were up 26 percent and rising steadily over the year. Given that short sales typically carry less of a discount than REO sales, this shift helped to lift overall house prices and reduce REO inventories, especially in hard-hit markets. Investors had a significant market presence in 2012, accounting for one in five sales nationwide according to NAR, although the shares in several metros were much higher. CoreLogic reports that home sales to non-owner occupants (a proxy for investor and second-home sales) made up approximately 30 percent of sales in Riverside, 26 percent in Sacramento, and 25 percent in Phoenix. Many of these sales were to institutional investors, who moved aggressively into formerly high-growth but recently high-distress cities such as Atlanta, Las Vegas, and Phoenix last year. In these metros, institutional investor sales rose from about 14–18 percent of investor sales entering 2012 to 20–26 percent by the end of the year. The importance of investors in driving home sales is evident in the high share of all-cash transactions, which hovered around 30 percent throughout 2012—well above the 20 percent share averaged as recently as 2009. At the same time, NAR data also indicate that first-time buyers have yet to emerge as a strong source of demand, with their estimated share of annual sales only edging up from 37 percent in 2011 to 39 percent in 2012. Sources: US Census Bureau, New Residential Construction; Bureau of Economic Analysis, National Income and Product Accounts; National Association of Realtors®, Existing Home Sales. FALLING VACANCY RATES The number of vacant units declined sharply in 2012. Unlike in recent years, most of the decline came on the for-sale side, where vacancies tumbled 18 percent units). As a result, the average number of vacant for- sale homes in 2012 was lower than in any year since 2005 and some units below the 2008 peak. While the number of vacant rental units fell just 6 percent, this still amounted to a substantial drop for the year. This brought the total decline in the number of vacant for-rent units since the peak to . HOUSING PRICES ON THE RISE After across-the-board declines in 2011, all major house price indexes—CoreLogic, S&P/Case-Shiller, Zillow, and FHFA—regis ● Existing Homes (Left scale) ● New Homes (Right scale) Sources: National Association of Realtors®, Existing Home Sales; US Census Bureau, New Residental Sales. Median sales prices, which track the price of the typical home sold, rose even more sharply. By December 2012, the price of a typical existing home sold had climbed 10.8 percent and that of a typical new home fully 18.2 percent from a year earlier. For new homes, adjusting for constant quality, sales prices were up 6.4 percent year-over-year in the fourth quar ter of 2012. At the same time, however, CoreLogic estimates that as of the fourth quarter of 2012, slightly more than two out of every five owners with negative equity had mortgages that were more than 25 percent larger than what their homes were worth. Owners with negative equity obviously have little incentive to sell because they would be unable to pay off their loans, but those with low equity are also generally reluctant to sell because they would lack sufficient resources to buy other homes. These con ditions have slowed the housing market recovery by constrict ing both the supply of homes for sale and the pool of potential homebuyers (given that sellers often buy again). Growth in RFI helped to lift real GDP in all four quarters, adding 0.3 percentage point to gains for the year. Given that real GDP expanded just 2.2 percent in 2012, RFI’s contribution amounted to a healthy 12 percent of the total increase in the economy. All three major categories of residential investment made head way last year. Multifamily construction spending, while making up only 8 percent of the total, grew the most in 2012—up 42 percent from 2011 levels. Single-family construction spending increased much more modestly, but accounted for 47 percent of overall RFI growth in 2012. Much of the strength also came from homeowner improvement spending, which contributed more than 45 percent of total residential investment expenditures in 2012—well above the 25 percent share averaged in the decades before the housing crash. THE OUTLOOK After several years as a drag on the economy, the housing sec tor contributed positively to GDP in 2012. The rebound in sales drove down inventories of homes on the market to near-record lows, spurring new construction and strengthening home prices in metropolitan areas across the nation. But even with these gains, real spending on single-family construction, the largest component of residential investment, remained deeply depressed in 2012. Since starts have such a long way to go to reach normal levels, the housing sector has plenty of room to improve on last year’s contribution to economic growth. However, a sudden rebound in demand to more normal levels, combined with continued growth in multifamily construction, could challenge the capacity of homebuilders and materials suppliers to ramp up quickly. Given the depth of the housing market downturn, several chal lenges to a strong and sustainable recovery remain. Demand is closely linked with jobs and incomes, which are taking longer to rebound than in any previous cycle. While trending downward, the numbers of underwater homeowners, seriously delinquent loans, and excess vacancies are still in the millions. It will take several years for market conditions to return to normal. Until then, the housing recovery is likely to unfold at a moderate pace. THE STATE OF THE NATION’S HOUSING HOUSEHOLD GROWTH ON THE UPSWING Household growth emerged as a bright spot for housing in 2012. Indeed, annual household growth approached the 1.0 million mark for the first time since before the Great Recession. According to the Housing Vacancy Survey, the number of households increased by —up significantly from the increase a year earlier. The Current Population Survey reports even stronger growth of more than 1.0 million. At a basic level, changes in the number of adults and the rates at which adults head independent households determine household growth. On the plus side, the number of adults aged 18 and older rose by 18.1 million from 2005 to 2012 and fully 2.4 million in the past year alone. The echo-boom generation (born after 1985) fueled much of this growth, helping to boost the number of adults in their mid-20s—the group most likely to form new households.

[Assistant] But while the young adult population has been growing, the rate at which members of this age group head their own households has declined. Going forward, though, even if today’s low household formation rates persist, the aging of the large echo-boom cohort into their 30s will raise household head ship rates because of lifecycle effects. Indeed, one out of every two 30–34 year-olds heads an independent household, com pared with just one in four 20–24 year-olds. Since household headship rates continue to rise (albeit more slowly) through older adulthood, the rates for the echo boomers will likely increase for years to come.