Within the last month I was fortunate to be able to attend and listen to an important presentation on housing, including both a national and local focus, by Arthur C. (Chris) Nelson of the University of Utah. It was entitled “The Future of the US Housing Market With Implications for Santa Fe”. I will show his career titles and positions at the University at the end of this post, and if I may say, I was more than impressed. The primary value in the presentation was the absence of emotion and the focus on facts and hard data. When you hear someone talk about housing these days, it is rare to be able to gain information that is not subjective and/or flavored with the personal agenda of the speaker. The experts that write and publish are often burdened with a vested interest in the direction of the “recovery” of the housing segment of our economy. They might include the chief economist of the National Association of Realtors, who speaks for a large constituency of Realtor professionals that stand to gain as sales increase and our housing market gets healthier. And others are truly objective and are able to look at and report on what they are seeing without bias, however subtle. I am not saying that real estate experts that write and speak about our favorite subject are dishonest or manipulative. I am just saying you should factor in their ability to remain objective and you might lean toward sources that are independent of a profit motive.
On with the show! Dr. Nelson presented slides and spoke with the intention of showing existing and developing trends in housing. These trends were, for the most part, well established and are not predictions of what might happen, but more statements of obvious results given current facts.
For example, his presentation included a look at the approximate percentage of Americans that are homeowners. Over the last 15 years, the percentage of homeowners increased steadily, reaching its peak in 2005 with 69% of Americans as established homeowners (and their families, of course, too). This is the highest percent ever measured and happens to coincide with the peak of the housing bubble, when substantial numbers of would be buyers were able to purchase homes with little or no money down and average or even poor credit ratings. Most all that have written or spoken on this peak of home ownership seem to agree about the following: many home buyers in the first half of the last decade were not necessarily ready to buy, did not understand the risks of adjustable rates, were persuaded to take on a debt burden they did not have the ability to handle, counted heavily on continual appreciation and felt as if their employment and health would only get better over time. It did not require all of those things to go wrong for homeowners to find they couldn’t pay, or did not want to pay for a home that was worth less than their mortgage balance. In some instances, everything collapsed; personal loss situations combined with large rate adjustments combined with overstocked market inventory to bring homeowners to their knees begging for forgiveness.
The trend line is headed lower now. Percentage of home ownership in our country is back to where it was before the housing bubble became a newsworthy tag line, in the 68% range now, and headed lower. The trend is highly likely to continue downward for reasons I will address in following paragraphs. Well, you might think one percentage point is not a large enough number to matter that much. One percent of 300,000,000 is still 1 million, and if there are 2 people per household (you might supply the number you want to see in that statistic), that is a half million fewer homes being purchased each year. This is not a quirky phenomenon. This is momentum with statistical data showing which way the masses are moving. The shift is away from home ownership now, for a myriad of reasons, some of which will be mentioned in this post. Please understand this is not a mass exodus, but a continual reduction in numbers that will accumulate into a large effect over several years. Fewer homes being purchased means lots of things. How about more renting? How about more shared dwelling arrangements? There is a long list of what this trend could mean for us.
Household size (number of people per dwelling) continues to shrink, which is a trend that has been in existence for decades. Completely unrelated to the housing bubble and its demise, the number of people per household has been going down steadily and is now the smallest is has been since anyone has kept statistics on it. Of course, as we moved from farmers to city dwellers, we had space limitations and did not need as many hands to work the crops and livestock. That started early during the last century as people migrated from rural settings, working farms and small towns, into the bustling and money changing cities. Family size has been shrinking, we know that already. But the trend accelerates with fewer people marrying, and those that marry having fewer children. Single parent households are on the rise whether by choice or by force of failed relationships. Smaller family units indicate that a smaller home will suffice. Does that put pressure on home builders to downsize new homes? Only if they want to sell them. The more that household sizes shrink, the more need for smaller homes, which often means shared walls, shared wells, multi unit design and construction, and proximity to services and amenities that a big home in the country does not offer. If one lives alone are they as likely to go directly home after work or find a venue to socialize in and meet others for activities? Would they commute 45 minutes to a home that is empty of others and a long way from their social network? There are elements of economics for a builder to build either a 2800 square foot single family detached home or a duplex with 1400 square feet on each side, with all the comforts of home, but less land, smaller rooms and common walls. Maybe the builder would rather build what they already know: that 2800 foot home on a one acre lot. But if the market is calling for smaller homes, should the builder find a way to adjust?
The ramifications of trends toward fewer household members in smaller homes, with a likely decrease (or at least no increase) in numbers of home buyers, brings one to some potential conclusions that force a rethinking of the future of real estate. Rentals are almost certain to grow in demand with another trend that is developing now. The end of the low and no money down loan package appears to be at hand. Movement is underway to limit mortgages underwritten to governmental specifications (Fannie and Freddie as popularly known) to buyers that have at least a 20% down payment. This matters because Dr. Nelson’s studies show that over 65% of homeowners that purchased in the last 15 years put less than 20% down when they purchased. Allowing for some that could have put more down but chose not to, if 60% (or lets get really conservative and say 50%) of new homeowners are not able to buy a home due to tighter financing restrictions, does that keep a damper on our much desired housing recovery? How will we be able to deal with the excess inventory of homes for sale if fewer people will qualify to buy them in the future? This raises the ugly image of homes sitting vacant and unattended, falling prey to all manner of invasive pests and the lower end of humanity that would plunder those homes for salvageable materials, or just move in as squatters. If you are homeless and destitute, do you think about the morality of breaking into an abandoned home to squat there under shelter while you can get away with it? Are your ethics in question or is your survival instinct in charge?
There is a school of thought that lenders are purposely moving very slowly to deal with their large numbers of past due mortgages, fearful of taking on more problems than they can deal with at one time, and delaying and spreading out the financial losses they will suffer when they get back vacant and abandoned homes that need work prior to resale. Resell to whom, exactly? Who is going to buy those homes? On the other hand. do lenders, also known as banks, make enough profit to be making loans to stable adults that might not repay those loans? A business headline this week proclaimed how bank reported profits were soaring. Can we trust them to do what is right for the greater good or will they focus on increasing their shareholder’s returns?
Back on track, have we seen the worst of it? How do you perceive where we are now; have you seen the bottom yet? I don’t know how to call a bottom to the downward pressure on values and prices of homes without solid information on the “shadow inventory” of future foreclosures and homes that will someday be owned by mortgage lenders. In supply and demand law (pretty much something you can count on in perpetuity), an oversupply puts a lid on prices or drives them lower. Lack of supply allows prices to rise and move out of reach for many. Where is the information that we are actually reducing inventory of homes for sale, other than seasonal fluctuations, that would lead one to say we have already bottomed out and are on our way back up? Things have improved, to be sure, since the absolute worst of it, say the fall of 2008 just to pick a time frame. We are seeing more sales and activity now than we saw then.
But what to make of it all? The most sobering things in my view are the longer term trends that indicate less demand for homes by buyers, smaller households needing smaller homes, and the tight mortgage lending standards that will shrink the home buying ranks substantially. The aging of the population also comes into play when you study trends. Nationally and historically, home buying decreases substantially as people reach retirement age (the range of 62 to 70). That might be obvious to you, I don’t know. The net is there are more hopeful sellers than hopeful buyers once they reach that age range. Older folks (I will be joining that demographic soon enough!) are likely to move into smaller homes and dispose of vacation and second homes as they consolidate their assets and lose their physical energy for water skiing or taking the Snowbird flight to Florida. Maybe they are more likely to sell the home up North and MOVE to Florida. Who is going to buy that home up North? Haven’t the big cities in the Northeast been losing population? There might be a trend there to investigate!
Enough already! Even if I could believe all this stuff, it might happen so far into the future that it won’t affect me or my family or my friends or my career or my house or my future retirement or my big screen TV or my golf vacations, or will it? I submit that the changes these trends will force are already beginning to show. There is more! Do you want more? Let me know if you do.
I had promised the Doctor’s qualifications and props so here they are… I sincerely hope I did him justice in my reporting on his findings and his presentation. You are welcome to look into his numerous publications. He was kind enough to grant permission of my use of his material with attribution.
Arthur C. (Christian "Chris") Nelson, Ph.D, FAICP Presidential Professor of City & Metropolitan Planning Director, Metropolitan Research Center College of Architecture + Planning Adjunct Professor of Finance David Eccles School of Business UNIVERSITY OF UTAH 375 S 1530 E RM 235 AAC Salt Lake City, Utah 84112 e firstname.lastname@example.org