After the housing market bubble burst, what markets recovered the fastest? What does that mean for affordable housing? What policy changes would best impact the need for affordable housing?
Experts weighed in at a recent conference on affordable housing in Texas, held at the Federal Reserve Bank of Dallas.
John Duca, vice president of the Dallas Fed, began the discussion by talking about the national economy. Currently, with inflation near target rates, interest rates low (but normalizing) and output near U.S. potential, Duca said he looked at national affordability by factoring in all of that as a backdrop.
To suss out national trends, he said, he looked at general patterns in housing activity — like strong price appreciation, but limited construction; the role of demand factors; the role of supply factors; potential housing policy options; and housing affordability.
The homeownership rate, he said, is sagging. “Rents, low income and co-residency rates suggest rent affordability is also an issue.”
Duca said that while U.S. housing prices have boomed, new-home construction recovery is actually lagging behind sales of existing homes.
“Normally higher prices of existing houses will stimulate new construction, but we haven’t quite seen the normal housing construction recover,” he said.
Multi-family construction (which we will talk about tomorrow) recovered around 2013, Duca said.
“Housing valuations are high and rising,” he said. Price to rent ratios had a huge uptick in subprime boom, then the bust happened, and then they partly recovered on interest rates and appreciation.
“Interest rates adjusted for house price appreciation drove valuations before the subprime boom,” he said. “What’s going on now is that affordability is reflecting this swing.”
Demand is also a factor in this upswing in home prices. Inventory of single family homes is tight, Duca said, which is consistent with house price appreciation.
“Inventories are tight partly because supply response to prices has been muted,” he said, adding that zoning, lack of new infrastructure to support construction, and other regulatory issues can restrict and limit construction.
“The national housing market has not recovered from the great recession,” said James Gaines, the chief economist at the Real Estate Center at Texas A&M University, adding that single-family home construction was “really just now getting back to the average.”
“We have a long way to go before we get to the peak we had in 2005.”
Gaines agreed with Duca — labor costs, land and development costs and construction costs are all part of a “rapidly eroding” supply side.
“These higher barriers limit incentives to build starter homes,” he said. And without that starter home inventory, home ownership affordability sags. In fact, according to National Association of Home Builders and Wells Fargo’s Housing Opportunity Index, home affordability has been sagging since 2012, when it peaked at almost 80 percent. It is now below 60 percent.
“The rise and fall of homeownership rates are very pronounced among younger families,” Duca said. “What we’re seeing here is a big drop in homeownership,”
Gaines told the room that part of the lag in home purchasing has to do with a change in ideals.
“Renting is no longer a stigma,” he said. “Before, we couldn’t wait to buy a house — that’s no longer the case necessarily.”
Duca agreed. “Housing was viewed as a savings vehicle,” he said. “You bought it, paid the loan down, retired and lived in your house.”
During the subprime boom, it was easy to get a house. “Basically anybody that could fog a mirror could get 110 percent financing,” Gaines said.
But post bust, banks have become more circumspect about lending — and wages have not kept apace with housing costs. And as the previous backbone of the American housing market — people making around $50,00 a year — suddenly finds that it cannot afford to buy a home, renting has become more of a reality.
“Anybody who has a job right now making $40,000 to $50,000 a year doing repetitive work is an endangered species of homeowner,” said Gaines. “It’s not the spotted owl, or the horned frog. It’s those people.”
Even in the rental market, it is becoming harder to afford a home. “Real median household income has fallen relative to rents,” Duca said, adding that since 1999, rental prices have outpaced incomes.
“Median income of younger households has stagnated,” he said. “Baby boomers are doing fine, not so much other age groups.”
This disparity in wages versus home affordability has resulted in an increase in adults living with parents, too, Duca said.
“We have seen this shift up in the late 70s and early 80s,” he said. “We parents call this purgatory.”
In 1990, around 12 percent of all adults lived with their parents, Duca said. Now, upwards of 16 percent do. Real median household income has increased since 1999, but when deflated according to rent prices, it’s actually dropped almost 16 percent.
Gaines pointed to record home sales in Texas in 2017, and predicted more of that for 2018. “I think 2018 is going to do even better, percentage-wise,” he said.
What is interesting in the Texas housing market, Gaines said, is that the rate of owner-occupied homes is decreasing. In 2006, 65 percent of all homes were occupied by their owners. In 2016, that number fell to 61 percent. Owner-occupied units dropped from 64 percent to 58 percent with a mortgage, and went up to 42 percent from 36 percent without a mortgage.
Median home prices are up 207 percent – three times the rate in 1990. Median incomes are up 108 percent, two times the average in 1990.
This disparity, combined with projected population increases could spell even more trouble for the affordable housing needs of the state. From 2010 to 2050 (40 years), Texas will add between 22 and 30 million people, it’s estimated. For contrast, from 1970 to 2010, the state saw an increase of 13.9 million people.
Gaines said that more troubling is the demise of new homes priced under $200,000 — a benchmark of affordability. “In 2011, 70 percent of homes were under $200,000,” he said. “By 2017 it was 30 percent.”
“Texas is fast losing its competitive housing advantage to the rest of the country,” Gaines added.
And with wages slow to match those housing price increases, Gaines said even the smallest increase can put home ownership out of reach for many Texans.
In the lowest home price brackets, 30,000 Texas households cannot afford even a $1,000 price increase, making even things like property tax rate increases something that can be a barrier to home ownership.
Gaines also expects interest rates to increase. “This year, we’re expecting some things to happen,” he said, adding that experts believe that at least three rate increases will be expected this year, “possibly as much as five.”
Rates could climb to 4.5 percent to 5 percent by the end of 2018.
But that’s not to say that all is lost. Home building is increasing. “We’re expecting home construction to pick up in Texas this year,” he said, but he anticipates a decline in multi-family building.
“It’s sliding down a little bit,” he said. “There’s already some concern about overbuilding in Dallas area, Houston area. I’m expecting that to really level off and come back down.”
Gaines said the capital market isn’t as bullish on multi-family as it once was, and financing and capital for multi-family development is harder to come by unless you’re an established developer.
What is still a good investment — with some caveats — is the single-family housing market.
“We think it’s probably still a pretty good investment,” Gaines explained. “It’s more of a timing issue. If you buy a house and sell it in three years, you’re probably going to lose money. If you hold on long enough, your property going to appreciate.”
But part of the other issue, he says, is that the single-family rental market has exploded as families want out of apartment life, but can’t afford to buy. “The single-family rental market has exploded since 2007, 2008, and hedge funds now buy up single-family homes and compete with people who would like to buy the affordable housing priced under $250,000 to live in.”
Although it seems like much stands in the way of creating a stronger affordable housing market, policy changes could change that trajectory, both said.
Duca said that policy options geared toward boosting the supply of housing (including keeping an eye on transportation options) would be important to address the need.
“Raising the income prospects of poorer families could be particularly effective in addressing affordability,” he added.