A very succinct analysis of our present housing woes appeared on MarketWatch, and was written by Amy Hoak. Though reporting on a nationwide study, it is especially applicable to our local real estate market here in Bend Oregon.
CHICAGO (MarketWatch) — With the job market in dire straits, household incomes declining and foreclosures dragging down home values, the housing market may take years to recover, according to the annual State of the Nation’s Housing report released Monday by Harvard University’s Joint Center for Housing Studies.
What’s required for a housing rebound now: jobs.
The jobless rate is one of the biggest drags on the housing market today, according to the report. And many economists predict unemployment will remain high as discouraged workers head back into the labor force and job gains come slowly.
“If history is a guide, what happens with jobs will matter the most to the strength of the housing rebound,” said Eric S. Belsky, executive director of Harvard’s Joint Center for Housing Studies, in a news release. Jobs keep homeowners out of foreclosure and help others feel confident enough to form households.
Another problem: Affordability issues are still lingering, said Nicolas P. Retsinas, the center’s director. According to the report, 40.3 million households spent more than 30% of their income on housing in 2008, and 18.6 million spent more than half of their income, up from 13.8 million in 2001.
“Notwithstanding the fall of prices (Bend Oregon Price Drop Leads Nation) and tempering of rents, there are serious affordability challenges,” Retsinas said.
Real median household incomes are poised to end 2010 lower than they were in 2000, according to the report. The household median income was $49,800 in 2008, down from $52,400 in 2000, the report said, citing the most recent data available.
Meanwhile, an estimated one in seven homeowners has a home worth less than they owe on their mortgage, and 5 million need their home price to rebound by 25% before they’re again above water.
The Harvard report compiles data from various sources to create a snapshot of the state of the U.S. housing market. This most recent edition finds that even if the worst housing correction in 60 years appeared to turn a corner in 2009, it still was a painful year — and the pain isn’t over yet.
Despite somewhat of a comeback (Bend Appreciation Forecast) in home sales and housing starts last year — thanks to improved affordability for first-time buyers and a dose of government intervention — foreclosures continue to hammer homeowners and the neighborhoods in which they live, increasing inventory and depressing prices, according to the report.
On the flipside, Ted Gayer, senior fellow at the Brookings Institution, said he’s also concerned how a weak housing market is working to affect the broader economy.
“There is a lot of evidence that people who are underwater in their homes are less mobile, less likely to move,” he said. “They’re tied to their home,” and it’s harder for people to sell their homes and relocate for a job.
Will Gen Y buy?
Household formation has slowed during this recession, partly because uncertain or jobless workers chose to live with their families or roommates instead of living on their own. But in the future, demographics should start working for the overall housing market’s favor, according to the Harvard report.
The echo-boom generation is already larger than the baby boomer generation, and the baby-bust generation born between 1966 and 1985 is nearly as large. Add immigration projections, and household growth should approach 15 million from 2010 to 2020, according to the report.
Still, unemployment might need to fall to 7% or 8%, from almost 10% now, before household formation really begins to pick up, said John McIlwain, senior resident fellow for housing at the Urban Land Institute.
Moreover, there may be a shift in the type of housing that new households seek, with a greater demand for renting over buying a home — especially for young Americans, he said.
Members of Generation Y will want to be able to move for jobs if need be, and many have also had the misfortune to enter the job market during a recession: “When you enter the job market in a recession, it takes 10 years or more to make up for the lost income,” McIlwain said.
That’s not to say Gen Y won’t want to own homes, but that they might do so later in their lives than previous generations, McIlwain said.
“It’s going to be deferred,” he said. While home builders are waiting for the job market to come back to health, thinking that young workers are going to move out of their parents’ basements and buy a home, it could be five to 10 years before that generation plunges into homeownership, he said.
Millions of foreclosed homes
Often the housing market leads economic recoveries, but not this time.
“We haven’t seen a housing boom and bust like we have these past few years,” Gayer said. Low interest rates usually spur home buying and renovating, which in turn creates more jobs, he said.
In 2010, there are hints of a rebound in remodeling activity, Retsinas said. That’s partly due to the number of homeowners who decided — or have been forced due to financial reasons — to stay in their current home instead of moving.
Some of the increase in remodeling also comes from the pickup in existing home sales and the decline in interest rates, the report said, because people often remodel soon after buying a home, and they may need to borrow to fund the project.
But this time around, job creation is needed to stunt foreclosures, which will in turn limit the amount of inventory on the market, Gayer said.
Retsinas agreed. “The new variable that we had this time is these levels of foreclosures, not that we built too many homes,” he said. “The real inventory problem is these millions of foreclosed homes,” which drives down overall prices in the marketplace, helping to kill consumer confidence and making for a sluggish housing recovery.
What remains to be seen is whether owning a home will still be as desirable in the future as it was to previous generations.
While there has been a bias toward homeownership in the U.S., this housing crisis has created an “awakening that renting is a viable option,” Retsinas said.
“People are going to take a second look at it, and not assume that [buying a home is] the right thing to do. They won’t be embarrassed that they’re renting,” he said. “In many markets, renting was the smarter thing to do.”
