[User] SIGNS OF STRONGER HOUSEHOLD GROWTH While the three major Census Bureau surveys disagree on the exact number, household growth has held in the – range since 2008—far below the 1.2–1.4 million annual average of previous decades. Measures of household growth continued to show only modest increases for much of 2014. As the year came to a close, however, the Housing Vacancy Survey reported a marked pickup that brought the pace of growth closer to its long-run potential. While the magnitude of the sudden increase is suspect, other data—such as the increase in rental unit absorptions over the past year—also suggest that household growth is beginning to revive. 15 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY and 2013. Assuming these young adults had formed inde pendent households at the same rate as their predecessors in 2003, this increase would imply the addition of 1.8 million households. Instead, the housing crash and Great Recession reduced household growth among this age group to just —fully 1.2 million fewer than population growth alone would suggest. But with the economy recovering and the labor market making steady gains, employment of younger adults is on the rise. In the first quarter of 2015, the unemployment rate for adults in their late 20s and early 30s was a full percentage point lower than a year earlier, and the number of employed adults in this age group was 1 million higher. This is good news for housing demand, given that employed younger adults are 50 percent more likely than unemployed younger adults to head indepen dent households. Full recovery in incomes, however, remains a long way off. And given that recent income growth has not been shared equally, the setbacks for some age groups have been larger than for others. For example, real incomes for households aged 25–34 are back to mid-1990s lev els, while those for households aged 35–44 are at mid-1980s levels. Worse still, real incomes for households aged 45–54 are at their lowest level since the late 1960s. The depressed incomes of households in general and of racial/eth nic minorities in particular reflect a shift in the income distribu tion. Even after accounting for inflation, the number of households earning under $25,000 rose 18 percent over the decade while the number earning $75,000 or more was up only 4 percent. Part of the increase in the number of lower-income households reflects the 14 percent rise in the number of people living alone between 2004 and 2014. Last year, single persons accounted for just 6 percent of households in the top income decile, but fully 58 percent of those in the bottom decile. In contrast, nearly three-quarters of households in the top income decile included two or more earners. Of these top-income households, over 80 percent were married couples. HOUSING EQUITY AND HOUSEHOLD WEALTH With house prices on the upswing, home equity is again con tributing to household net wealth. According to Federal Reserve Board flow of funds data and taking inflation into account, aggregate home equity was up 8 percent in 2014 and a whop ping 60 percent since 2010. By comparison, household net wealth rose 3 percent in 2014 and 22 percent since 2010. DECLINING MORTGAGE DEBT Homeowners continued to pare down their mortgage debt in 2014. The Federal Reserve Board’s flow of funds data show that real aggregate mortgage debt totaled about $9.4 trillion last year, a 2 percent decline from 2013 and a 13 percent drop from 2010. While reflecting in part the ongoing decline in homeownership, the outstanding mortgage balance of the typical owner also fell in 2013, down to or 4 percent below the recent peak. Older homeowners are one group for which high mortgage debt is still a concern because they are entering their retirement years with declining incomes. More than a third (38 percent) of owners aged 65 and over had mortgages in 2013, up from a little over a quarter in 2001. Moreover, the median amount of debt they carried doubled over this period in real terms. At the same time, the real median equity of older owners in 2013 was down to — lower than in any year since 1998. Having less equity and large mortgage payments late in life is a troubling prospect for house holds on fixed incomes. STUDENT DEBT ON THE RISE Even as households shed mortgage debt, consumer debt bal ances continued to climb last year. According to the Federal Reserve Bank of New York, non-housing debt climbed 6 per cent to $3.0 trillion in 2014—a 12 percent increase from 2004 in real terms. Another concern is the substantial growth in the number of young households with student debt but lacking a degree. Over half of households in their 20s and 30s with student loan debt in 2013 did not have four-year college degrees, and fully 15 percent were in the highly burdened category. Moreover, households are more likely to carry student loan debt later in life. Between 2001 and 2013, the share of households in their 40s still saddled with student loans increased from 11 percent to 23 percent, while the share in their 50s increased from 4 to 9 percent.

[Assistant] THE OUTLOOK Even if the low household formation rates of 2011–13 persist, changes in the size and age distribution of the adult population imply growth of about 1.2 million households per year in 2015– 25. Over this period, the median millennial will move from the 20–24 year-old age group (where just one in every four persons has formed an independent household) to the 30–34 year-old age group (where half of the population lives independently). By 2035, given headship rates similar to those of previous genera tions, the millennials are expected to form more than 30 million new households. In the near term, though, high student loan debt loads and weak income growth will constrain the ability of these younger households to afford housing, whether they choose to rent or buy.


[User] NEIGHBORHOOD LOSSES Of the nearly 50,000 census tracts for which consistent data are available, roughly one-tenth saw at least a 10 percentage- point drop in homeownership between 2009 and 2013, with the average neighborhood in this category posting a 14 percentage- point decline. Although starting out slightly above the national average, homeownership rates in these neighborhoods ended the period at just 54 percent. As a result, these 5,000 or so communities accounted for nearly 95 percent of the decline in homeowner households in 2009–13. THE STATE OF THE NATION’S HOUSING Communities with the largest losses of homeowners were for merly similar to the typical US neighborhood. For example, the high-distress areas had only slightly higher average vacancy rates (12.2 percent vs. 10.9 percent), slightly lower median household incomes ($54,000 vs. $59,000), slightly lower median home values (vs. and identical shares of sin gle-family homes (69 percent). The biggest difference, however, is that these neighborhoods had a significantly higher share of minority residents. Given the concentration of risky lending and foreclosures in these neighborhoods, it is no surprise that minority communities suffered the most severe losses in home ownership after the downturn. Meanwhile, the growing minority share of the population is exerting a downward pull on the US homeownership rate because of their lower rates of owning. In addition, homeowner ship rates among minority households fell much more sharply after the housing market crash, reversing some of the modest progress made toward closing the white-minority homeowner ship gap since the early 1990s. As of 2014, the homeownership rate for minorities as a group remains 25.5 percentage points Source: JCHS tabulations of US Census Bureau, Housing Vacancy Surveys. 21 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY lower than that of whites. Nonetheless, despite falling home ownership rates in recent years, the numbers of Hispanic and Asian/other households owning homes have continued to rise as their shares of all households have climbed. But many young adults are under severe financial pressure. The real median household income of 25–34 year olds in 2013 was down 5 percent from 2004. At the same time, nearly half of rent ers in this age group face housing cost burdens and almost as large a share are saddled with student loan debt, making it next to impossible to save for even a modest downpayment.

[Assistant] Now that the millennials are adding to the populations of several cities, there is some evidence that more young adults will continue to prefer urban settings and be less likely to buy single-family homes than members of previous generations. The higher rentership rates among young adults and more rapid growth of core counties in metropolitan areas relative to rates from a decade ago are consistent with this view. But no distinct trend toward urban or higher-density living is evident among households buying homes for the first time. In fact, recent buying patterns are roughly consistent with those of a decade ago, with nearly half of first-time buyers purchasing homes in Source: JCHS tabulations of US Census Bureau, Housing Vacancy Surveys.


[User] THE STATE OF THE NATION’S HOUSING suburban areas and 31 percent buying homes in center cities. Moreover, the vast majority (91 percent) of first-time buyer households purchased single-family homes. Based on the NAR standard that mortgage payments cannot exceed 25 percent of income, the median household could afford the median home in all but 10 metros in 2014. Moreover, as of the end of the year, Trulia estimates indicate that the cost of owning was cheaper than renting in all of the 100 larg est metro areas. With the help of these refinancings, the average mortgage inter est rate reported by owners declined from 6.0 percent in 2009 to 4.7 percent in 2013. According to Freddie Mac’s Refinance Report, the average refinancing in the fourth quarter of 2014 meant a 1.3 percentage point reduction in the mortgage interest rate, cutting the borrower’s monthly interest by 23 percent or $104 for every borrowed. But even though the interest rate on a 30-year fixed-rate mort gage was below 4 percent throughout 2012 and into the first five months of 2013, about a third of owners with mortgages in 2013 still paid rates above 5 percent. Many of these households would benefit from refinancing. Indeed, 38 percent of owners with mortgages that have moderate housing cost burdens, as well as 43 percent of those that have severe burdens, pay rela tively high interest rates. And despite the availability of assis tance through the Home Affordable Refinance Program (HARP), 40 percent of owners with negative equity also pay more than 5 percent interest on their mortgages. Since lending to borrowers with top scores declined much less, the share of loans going to this segment increased from 44 percent in 2001 to nearly 62 percent in 2013. Of course, the fallout from the recession—declining incomes, impaired credit, and mount ing student loan debt—has also served to dampen demand for home loans over this period. Hispanic households may be of any race. Moderate (severe) cost burdens are deﬁned as housing costs of 30–50% (more than 50%) of household income. Source: JCHS tabulations of HUD, 2013 American Housing Survey. THE STATE OF THE NATION’S HOUSING In the wake of these changes and the ongoing recovery in home prices, credit constraints may be loosening modestly. Alternatively, an Urban Institute index relies on the esti mated probability of default for newly originated loans, which indicates the degree of risk that lenders are willing to tolerate. By this measure, loans originated in the first three quarters of 2014 posed about a 5 percent risk of default—well below the level evident in 2001–03 before the riskiest lending practices took hold in the market. In fact, the degree of risk in 2014 was even lower than in 2010–13, suggesting that credit by this measure continued to tighten last year. Yet another yardstick of mortgage credit availability is the denial rate on loan applications reported under the Home Mortgage Disclosure Act (HMDA). Although denial rates reflect borrowers’ willingness to attempt to obtain loans as well as lender underwriting, they do provide some indica tion of which borrowers have a more difficult time securing financing. According to 2013 HMDA data, 12 percent of appli cants for home purchase loans were denied financing. The rate was especially high (20 percent) for African-American applicants—nearly twice that for white borrowers. Hispanics fared slightly better, with a 17 percent denial rate. Meanwhile, low-income borrowers were denied purchase loans 2.5 times more often than upper-income borrowers.

[Assistant] Although most want to own a home someday, younger renter households perceived a variety of financial barriers ahead. Among those aged 18–39, 92 percent expected to buy homes eventually, but 62 percent thought it would be difficult to get a mortgage. The main obstacles they anticipated to obtaining home loans include insufficient savings to make a downpay ment and pay for closing costs (42 percent) and an insufficient credit history (47 percent).


[User] Given the consistently strong preference for owning, future trends in the national homeownership rate will depend on whether households have the means to achieve this goal. Demand for homeownership should pick up as the economic recovery continues, but whether mortgage credit will be widely available to satisfy stronger demand remains to be seen. And as long as homeownership remains the primary vehicle for low-income and minority households to build wealth, it will be vital to provide opportunities to keep home buying within reach of those with both the desire and ability to succeed at this goal. RENTAL HOUSING 5 25 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY RECORD GROWTH IN DEMAND Although estimates vary, the major Census Bureau surveys agree that 2014 marked the 10th consecutive year of robust renter household growth. By the Housing Vacancy Survey’s count, the pace of growth accelerated to an average of annually in 2010–14. Part of the extraordinary growth in rental demand has come from households in certain age, income, and family groups that are traditionally more likely to own. While younger adults are most likely to rent their housing, the number and share of older renters have risen significantly over the last decade with the changing age distribution of the population. Within the 55–64 year-old age group, population growth drove more than half of the increase in renters while declines in homeownership were responsible for the remainder. Within the 65-and-over age group, however, population growth alone accounted for all of the growth in renter households. The income distribution among renter households is also shift ing. After a net decline in 1994–2004, households in the high est income quartile accounted for almost one in five net new renters in 2004–14, and nearly one in three net new renters in 2011–14. While some of these upper-income renters may have faced economic challenges that prevented them from attaining or maintaining homeownership, more were simply opting to rent rather than own their housing. Even so, only 11 percent of renters were in the top income quartile in 2014, and nearly 40 percent were in the bottom income quartile. While single persons still make up the largest share of renter households, the numbers of renters of all family types rose over the decade. The reasons for these increases differ, however. For example, growth in the number of single-person renters primar ily reflects growth in the overall number of single-person house holds. In contrast, growth in the number of married-couple renters—particularly those with children—is due primarily to higher rentership rates. Regardless of the reasons, though, all The share of US households that rent their housing now stands at a 20-year high. While most of the recent increase in the stock has come from conversion of owner-occupied single-family homes to rentals, multifamily construction has also picked up pace. Meanwhile, falling vacancy rates have lifted rents, improving the financial performance of rental properties but straining the budgets of millions of households unable to find units they can afford. CONTINUED STRENGTH OF MULTIFAMILY CONSTRUCTION With rental housing demand still on the rise, construction of multifamily units continued to ramp up last year. From a his toric low of just under in 2009, the number of multifam ily starts rose steadily to nearly units in 2014—more than in any year in the 1990s or 2000s. And in a marked shift, more than 90 percent of multifamily units started last year were intended for the rental market, up from less than 60 percent in the mid-2000s.

[Assistant] Meanwhile, the number of rental units completed last year was well below the number of starts, at just . With the long lag between starts and completions, the pipeline of new rental housing will continue to fill over the next few years. As a result, the number of new rental units brought to market will continue to rise even if starts level off.


[User] EXPANDED ROLE OF SINGLE-FAMILY RENTALS Single-family rentals have absorbed an increasingly large share of renter household growth since the mid-2000s. Indeed, after averaging just 73,000 units annually in the 1990s, growth in the number of occupied single-family rentals accelerated to units per year in the early 2000s. According to the American Community Survey, the number of renters in single- family detached homes increased by 3.2 million on net between the homeownership rate peak in 2004 and 2013, accounting for nearly half of the gain in rentals. In contrast, large multifamily buildings (with five or more units) housed about one-third of net new renters over this period, while attached single-family Source: JCHS tabulations of US Census Bureau, Decennial Censuses and Housing Vacancy Surveys. JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY 27 units and small multifamily structures (with two to four units) accounted for another 13 percent. TIGHTENING MARKETS Rental markets tightened again in 2014 as the national vacancy rate fell by nearly a full percentage point to 7.6 percent—its low est point in two decades. Data from MPF Research show that the vacancy rate for professionally managed properties with five or more apartments was even lower, averaging 4.6 percent for the year and running at a rate not seen since before the housing market downturn. Rental markets are particularly tight at the low end. According to JCHS tabulations of Housing Vacancy Survey data, the num ber of vacant units with rents under $800 per month dropped some 12 percent between 2013 and 2014—contributing more than 90 percent of the decline in rental vacancies. At the end of 2013, new apartments were coming on line at an annual rate of units, essentially matching the pace of growth in tenants. By the end of 2014, though, new apartment additions increased to units a year while net growth in tenants hit . With demand rising and vacancies declining, rents came under increasing pressure last year. The consumer price index for contract rents climbed 3.2 percent in 2014, the largest increase since 2008 and double the overall inflation rate of 1.6 percent. Rents for professionally managed properties were up even more sharply, with the annual increase rising from 3.0 percent in 2013 to 3.8 percent in 2014. Indeed, rent increases picked up pace in the fourth quarter, hitting a 4.6 percent year-over-year rate even as overall inflation cooled.

[Assistant] Net operating income is deﬁned as gross rental income plus any other income less operating expenses. Source: JCHS tabulations of National Council of Real Estate Investment Fiduciaries (NCREIF) data.


[User] Apartment prices, as measured by Moody’s/RCA Commercial Property Price Index, also rose 15 percent in 2014—the fifth consecutive year of strong growth.

[Assistant] These consistent price gains make 2011–14 comparable in strength to 2004–05, the height of the last real estate cycle. Based on changes in net operating incomes as well as property values, the annual rate of return for commercial-grade properties came in at 10 percent last year, much the same as in 2013. Strong market fundamentals and low interest rates helped to drive growth in multifamily lending, pushing the Mortgage Bankers Originations Index up 15 percent for 2014 as a whole and 39 percent in the fourth quarter alone. Total loans out standing (including both originations and repayment/writeoffs of existing loans) rose by $60 billion, led by a $35 billion jump in loans held by banks and thrifts. While this increase brought the bank and thrift share back to its pre-crisis average of 30 percent, federal sources still hold or guarantee fully 44 percent of mortgage debt outstanding.