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Reshaping Metropolitan America
Development Trends and Opportunities to 2030
By Arthur C. Nelson ISLAND PRESS
Copyright © 2013 Arthur C. Nelson
All rights reserved.
ISBN: 978-1-61091-222-8
CHAPTER 1
Major Market Trends and Demographic Changes
In recent years, home ownership has become a feature of the American Dream. This was not always the case. Historically, the American Dream was characterized as people being rewarded fairly for their effort and each new generation being better off than the prior one (Adams 1931). The dream has evolved to include home ownership for reasons that are not entirely clear (Rohe and Watson 2007). Fulfillment of that part of the dream has been largely achieved. Since the end of World War II, home ownership in the United States rose from 55 percent in 1950 to 69 percent in 2004. By 2030, however, it will may be less attainable or even desirable. Reasons for this include rising energy costs, falling incomes, lagging employment, shifting wealth to upper classes, and tighter mortgage underwriting requirements. Added to these reasons are market trends including key population and sweeping generational changes, the rise of a new housing market, and important nonresidential trends. These trends and changes will lead to a new America in 2030.
RISING ENERGY COSTS
One key reason for the rise in home ownership has been the vast supply of inexpensive land available for home building outside cities. Another reason is that the cost of driving to work and other destinations was inexpensive because of cheap gasoline prices. This has changed.
Since the early 2000s, energy prices have been rising steadily (Energy Information Administration 2012), which makes supporting a home more expensive. It also makes locations far away from work, shopping, and other destinations more expensive because of vehicle fuel costs. For instance, from the early 2000s to the early 2010s, the national average price of a gallon of gasoline rose about 10 percent per year, compounded. At this rate, gasoline prices will exceed eight dollars per gallon by 2020 and more than twenty dollars per gallon by 2030. Higher gasoline prices might be offset by more fuel-efficient vehicles, but they are more expensive than conventional vehicles.
Steadily increasing gasoline prices dampen the attractiveness of suburban fringe and exurban areas for home buying. For instance, a study for the Federal Reserve Board by Molloy and Shan (2011) showed that, after a four-year lag, a 10 percent increase in gasoline prices decreases the demand for homes by 10 percent because of longer average commuting times relative to locations closer to jobs, a highly elastic outcome. On the other hand, homes closer in are usually more expensive to purchase. Without new approaches to mortgage underwriting, the overall effect of rising gasoline prices will be fewer households able to both buy homes and pay for gasoline (see chapter 7).
FALLING INCOMES
Incomes are falling in real terms. For instance, median household incomes for all age groups in each income category ended the 2000s lower than in 2000 (Harvard Joint Center for Housing 2011, 15). Along with falling incomes, America's household wealth in 2010 had fallen to levels not seen since the 1990s. Indeed, the Federal Reserve Board (2012) reported that median family net worth wealth fell from $126,400 in 2007 to $77,300 in 2010. In constant 2010 dollars, family net worth was at about the 1992 level.
Moreover, the poverty rate increased from 11.3 percent in 2000 (Dalaker 2001) to 15.1 percent in 2010 (DeNavas-Walt et al. 2011). The rate of increase appears to be fastest in the suburbs. Over the period 2000–2008, suburbs accounted for nearly half the increase in the population in poverty (Kneebone and Garr 2010). In contrast, primary cities accounted for just over 10 percent of the increase. Suburbs may be especially hard-hit because of rising gasoline prices (see above) and lagging employment (see below). These trends may further alter housing demand over the next several decades (McKeever 2011).
LAGGING EMPLOYMENT
It is not just that the unemployment rate spiked during the Great Recession of 2008–2009 and remained high well into the 2010s, but that the structure of the nation's labor force makes it prone to higher unemployment. A key feature of employment and income is preparedness based on education. Unfortunately, black and Hispanic students lag behind white students in reading and mathematics; indeed since the 1990s the gap has not been narrowed. As minorities increase their share of the nation's labor force, the nation could be challenged with developing enough talent to compete in the global market. The implication also is that the ability of workers in the future to afford homes may be compromised. Indeed, during the 2010s, whites will make up just 12 percent of the growth in the nation's labor force, followed in increasing order by Asians (16 percent), blacks (18 percent), and Hispanics (54 percent). As the nation's future labor force becomes less prepared through shortcomings in the education system, wages may be lower and unemployment rates higher by historical standards.
SHIFTING WEALTH
The nation's wealth has been shifting steadily to a smaller percentage of more households. In the 1980s, about 80 percent of the nation's wealth was held by the wealthiest fifth of America's households. By 2009, nearly 99 percent of America's wealth was held by the same quintile. The Great Recession and its aftermath can be blamed for reducing much of the wealth of the middle and lower classes. Historically, a large share of wealth in American households has been the equity in their homes. However, much of this was removed by the Great Recession, as homeowners lost a third of their equity. Moreover, on average, homeowner equity has fallen steadily since 1945, from about 85 percent to about 40 percent. The reason is the advent of highly leveraged home purchase opportunities that became widely available during the past generation. The Great Recession changed this, however, making buying homes more difficult.
WANING INSTITUTIONAL SUPPORT FOR HOME OWNERSHIP
The Great Recession of 2008–2009 was caused in large part by the bursting of the "housing bubble" of the mid-2000s. Some banks and other financial institutions were closed forever, millions of homes were foreclosed or "sold short" to avoid foreclosure, and home equity saw its biggest decline since the Great Depression of the 1930s. How did this happen? One factor (others will be discussed later) was "subprime" mortgages, in which people with insufficient credit could still buy a home, often with no money down and sometimes with money back, such as buying with no money down a $200,000 home that appraised for $250,000. Most of these subprime mortgages came with very low initial rates on adjustable rate mortgages, often around 3 percent, that would rise every six to twelve months until parity was achieved with a target index, often the London Interbank Offered Rate (LIBOR), plus two points (a 6.5 percent mortgage pegged to a 4.5 percent LIBOR). The trouble is that mortgage payments often doubled, or more, rising beyond the ability of households to afford them. But it was not just credit-challenged households; the low rates of adjustable rate mortgages attracted millions of existing home owners to refinance, only to fall into a similar predicament.
In the wake of this financial disaster have come numerous changes. In response to the recession, lending institutions initially increased their underwriting requirements, thereby reducing the number of people who could qualify to a buy a home. Since then, the financial market for mortgage underwriting has undergone a sea change. Home buyers who would have formerly qualify for conventional mortgages are facing higher credit score, work history, and down-payment requirements. The move to make the 20 percent down payment once-again standard for conventional mortgages issued by lending institutions regulated by the federal government draws this concern from the National Association of Home Builders:
Requiring a high down payment would disproportionately harm first-time home buyers, who have limited wealth and on average account for 40 percent of home-buying activity. It would take an average family 12 years to scrape together a 20 percent down payment. Borrowers who can't afford to put 20 percent down on a home and who are unable to obtain FHA financing will be expected to pay a premium of two percentage points for a loan in the private market to offset the increased risk to lenders, according to NAHB economists. This would disqualify about 5 million potential home buyers, resulting in 250,000 fewer home sales and 50,000 fewer new homes being built per year. (italics added)
For context, about two-thirds of all American households with mortgages in 2009 put less than 20 percent down for their home. Clearly, higher down payment requirements will reduce the number of households that can afford to buy a home. The home ownership rate may fall.
Between the mid-2000s and mid-2010s, American real estate lost more than six trillion dollars in value, or almost 30 percent. Up to one in five American homeowners found themselves owing more on a mortgage 0than what their home was worth. Analysis of the value of homes reported by the National Association of Home Builders shows that between 2000 and 2011, the average value of all homes in the United States fell in real terms. Although home ownership remains an important element of the nation's economy, there is also an emerging sense among prospective homebuyers to be cautious. For instance, the National Foundation for Credit Counseling summarized results of a 2009 survey it commissioned as follows (Cunningham 2009: 1): "The lack of confidence in consumers' ability to buy a home, improve their current housing situation, or trust homeownership to provide a significant portion of their wealth sends a strong message about the impact of the housing crisis. It appears that whether a person was directly affected or not, Americans' attitudes toward homeownership have shifted."
The survey also found that:
• Almost one-third of those surveyed do not think they will ever be able to afford to buy a home.
• Forty-two percent of those who once purchased a home, but no longer own it, do not think they will ever be able to afford to buy another one.
• Of those who still own a home, 31 percent do not think they will ever be able to buy another home (upgrade existing home, buy a vacation home, etc.).
• Seventy-four percent of those who have never purchased a home feel that they could benefit from first-time homebuyer education from a professional.
The combination of tighter mortgage lending and disillusionment in home ownership as a sound investment seems likely to push ownership rates down. National home ownership rates peaked in the mid-2000s and have declined since, and are expected to continue to fall, with the only question being how far. For instance, the Urban Land Institute (McIlwain 2009) projected that the home ownership rate in 2020 would range between about 62 percent and 64 percent.
The rate of home ownership is largely a function of household income and the ability to make a down payment. Home ownership was pushed to its limits in the mid-2000s, reaching an all-time high of about 69 percent in 2004. This was achieved through subprime loans, allowing people to buy homes without qualifying for them in the traditional sense; "Alternative-A" loans, allowing people meeting marginal qualification standards to buy a home; and extensive use of "jumbo" loans, allowing people to borrow more than the Federal Housing Administration limits. These modes of financing are either gone or highly restricted. Conventional home financing, reminiscent of the period from the 1950s into the mid-1990s, is now about the only way to buy a home, and may likely be the case in the coming decades. The effect will be to push down home ownership rates and increase demand for rental housing. Changes to the ability to buy homes will especially hit hard on minority households. Here is why:
Between 1965 and 1995, the median home ownership rate was about 64 percent. This was a blended average based on a society composed mostly of white households. Between 2000 and 2010, however, the home ownership rate did not change much. The overall rate stayed at 67 percent, and for whites it stayed at 74 percent. For blacks it went down from 47 percent to 45 percent, while for Hispanics it rose slightly from 46 percent to 47 percent. It may be unlikely that those rates will change much.
If we assume the home ownership rate for all major racial and ethnic groups in 2010 remains the same until 2030, the nation's ownership level will fall to about 64 percent because of increasing shares of minority groups. If home ownership falls to about 64 percent, then the demand for rental housing may increase at a faster pace than population growth. Indeed, rental housing will account for about 55 percent of the growth and owner housing for about 45 percent. However, holding 2010 home ownership rates constant to 2030 may be optimistic, given the underwriting trends reviewed earlier. If the home ownership rate for each racial and ethnic group is just 5 percent lower in 2030 than in 2010—moving from 74 percent to 70 percent for whites, for instance—the nation's overall home ownership rate will fall to about 61 percent, the same it was in the 1960s. Rental housing will account for about 75 percent of the new housing demand with owner housing accounting for just 25 percent.
The bottom line is that between 2010 and 2030, (1) fewer people may be able to buy homes, (2) those who own homes may not be able to refinance to help pay the down payment on a new home for their children, and (3) fewer home buyers may further drive down demand and thus prices, which may further erode equity.
As an element of the American Dream, home ownership may be reverting to the lesser role it played before World War II (Kamp 2009).
KEY POPULATION TRENDS
The makeup of America's population in 2030 is going to be vastly different compared to 2010. To show this, I use the Woods & Poole Economics (2011) projections to 2030 (table 1.1) for the nation, the census regions and divisions showing this. There are few surprises. States and metropolitan areas located in the South and West census regions will see the greatest share of growth, accounting for about 80 percent of the nation's growth. What may also be surprising to some are key aging, minority and dependency trends.
Aging Trends
Nationally, the number of children (under eighteen years of age) will increase by 17 percent, but it will be seniors, principally Baby Boomers, whose population will grow the fastest—nearly 80 percent, as shown in table 1.2. Seniors as a share of total population will increase from about 13 percent in 2010 to 19 percent in 2030. They will comprise nearly half the share of population change over this period—32 million of the nation's increase of 65 million in population.
Minority Trends
Even more dramatic will be the change in the nation's racial and ethnic composition. Table 1.3 shows that the minority population will grow by more than 50 percent and will account for 86 percent of America's overall population growth. Moreover, in the New England, Mid Atlantic, and Pacific census divisions, thirteen states, and dozens of metropolitan areas, minorities will account for all or nearly all the population change (see the detailed demographic tables at www.ReshapeMetroAmerica.org).
Dependency Trends
America will also become more "dependent." A concept called the "dependency ratio" compares the share of population in the work force (aged sixteen to sixty-five) to children (those under eighteen years of age), seniors (those sixty-five and older), and both groups. The higher the ratio, the more workers are needed to support dependents. Table 1.4 shows the dependency ratio trends over the period 2010 to 2030.
In most areas of the nation, the dependency ratio for children will increase, albeit slightly. This is because more children will be born during these twenty years than during prior decades, which itself is attributable to Gen Y and early Millennial persons moving into child-bearing and child-rearing age. The significant change in dependency ratio will be with respect to seniors, because of Boomers turning sixty-five between 2011 and 2029, increasing 62 percent nationally and about that across all geographic units.
(Continues...)
Excerpted from Reshaping Metropolitan America by Arthur C. Nelson. Copyright © 2013 Arthur C. Nelson. Excerpted by permission of ISLAND PRESS.
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