Affordable Housing Institute : US

By: David A. Smith 

 

“Ben!  What are you doing about the economy?  “

“Mr. President, I’m doing what I told you I would.”

– not overheard on a non-wiretapped line

 

“You can’t accuse me of inconsistency.”

 

You have to forgive Politico for seeing only the politics of the most recent not-rainy-enough pronunciamento from Ben Bernanke, and hence missing the larger significance:

 

Bernanke dashes Dem hopes
By: Ben White
August 27, 2010

 

Voters?  Voters?!?

 

I can answer that – he’s waiting for the economy to strengthen itself enough that he can raise interest rates.  But the economy is still far too weak for that, at least as long as the Chinese and others keep buying our debt and propping up the dollar.

 

The job of Fed chairman is as close to truly apolitical as our system allows – the Fed’s constituency is the economy as a whole.

But the Federal Reserve chairman stopped far short of hitting the panic button and saying a double-dip recession was imminent. He did not pledge any immediate, dramatic steps to goose growth and suggested the bank’s remaining tools might not work very well anyway.

Chairman Bernanke is right.  Interest rates are near zero, a deliberate strategy by the Fed to replenish bank capital (because the banks are making wide spreads between the low rate they are offering and the microscopic rates they have to pay). 

 

“Mr. President, have pity on the little people.”

 

As I predicted in January, 2010:

 

By nature Chairman Bernanke is cautious.  Yet like his predecessor Alan Greenspan, he is given to being clear now and then.  Six months ago, he wrote that he intends to pursue an ‘exit strategy’ from the Fed’s intervention in the markets, and made plain that will mean raising interest rates: 

  

Each of these policies would help to raise short-term interest rates and limit the growth of broad measures of money and credit, thereby tightening monetary policy.  

  

Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period [written July, 2009, just before Mr. Bernanke's renomination – Ed.].  

 

We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.

 

A model of clarity: Chairman Bernanke will push interest rates up and up as fast as he can without stalling the fragile economic recovery.

 

Once I’m safely confirmed, that is

 

The pace of his belt-tightening will depend on the outcome of our next prediction:

 

Mr. Bernanke’s problem is simple: the economy is too weak to allow him to push up interest rates at all, but he’ll be damned if he’ll make things worse. 

 

But my press clippings are so good!

 

Printing money by itself, without an economic purpose, would delay the economy from clearing, worsening our budgetary and trade deficits with no meaningful increase in economic activity.  Chairman Bernanke has already done as much as he can:

 

Traditionally, the nation’s central bank reduces its target for short-term interest rates to encourage lending and economic growth, but rates are already near zero, and the bank has pledged to keep them there for the foreseeable future.

“You want rates below zero, Madam Chair?”

 

In our excessively immediate age, we demand that any unpleasantness we experience be cured equally quickly, even when some things simply take time to mature – longer than the event horizon of officials who will be facing the voters in November, and who, desperately needing political capital, are clamoring for political vaporware.

 

Just assemble these pieces, and presto!  Political capital

 

 

If you’re an incumbent, that is

“I don’t think we have a double-dip ahead, but we do have a very slow recovery right now,” said David Kotok, chief investment officer at Cumberland Advisors. “That means 1-2% growth, not 3-4% growth and a higher risk of heading closer to zero.”

Kotok’s conservative

 

The previous stimulus legislation having worked out so well, the country is in no mood for another large-scale spending package.

Even with Democrats in control of the White House and both houses of Congress, there’s no political will for a quick-start stimulus package.  

 

“The longer they talk, the less I’ll have to say.”

 

“Broad financial conditions, including monetary policy, are supportive of growth, and banks appear to have become somewhat more willing to lend. … Importantly, households may have made more progress than we had earlier thought in repairing their balance sheets, allowing them more flexibility to increase their spending as conditions improve,” he said.

Translation: You broke the economy’s bones, that takes time to heal, and I’m not going to push excessive weight on it right now.

 

Stay off these for a while

 

Bad ratios, folks

 

The Fed’s toolbox also includes so-called “quantitative easing,” or using its balance sheet to purchase Treasury bills, as well as securities backed by mortgages and other assets in order to increase the flow of credit into the financial system.

This is basically printing money, and as I predicted in January, 2010:

 

Starting in September, 2008, Treasury bought GSE securities, in large volumes (over $1.425 trillion so far).

 

 

Aside from giving the global financial markets confidence that treasury was standing firmly behind Fannie and Freddie – confidence further buttressed by the year-end lifting of funding caps – it also had the secondary effect, a probably-intended consequence, of holding down interest rates by essentially printing money.

 

By March, Treasury will stop buying GSE securities. 

 

Treasury did stop, and now some hope it will restart:

Some Federal Reserve officials had hoped to reduce the bank’s balance and to focus on keeping inflation in check.

 

Meaning, selling the treasuries it holds, taking money out of the supply, and starting to push up rates.  But this tool, which Chairman Bernanke must be itching to use, has to remain idle for now:

 

 

“Interesting idea, Mr. President, but … No.”

“One risk of further balance sheet expansion arises from the fact that, lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings on financial conditions,” he said.

Translation: At some point the capital markets lose confidence in us, and we lose the ability to control our economy.  I won’t risk that.

 

“The world’s largest economy requires special care.”

 

Absolutely none of this should be the slightest surprise to anyone who has read Chairman Bernanke’s comments, both after his confirmation and even before his renomination.  In January of this year, I posted a multi-part series [Part 1,  Part 2, Part 3, Part 4, and Part 5, Part 6, and Part 7 – Ed.] on the biggest invisible stories of the decade, including this one:

 

2009, August: President Obama’s reappointment of Ben Bernanke

 

Last August, in the middle of an otherwise sleepy summer haze, President Obama did a startling thing.  Calling an impromptu press conference, tieless and with his tieless nominee, he pledged to appoint Federal Reserve Chairman Ben Bernanke to serve a second term:

 

I’m focused on continuity with Ben

 

The President was under no deadline pressure.  The nomination could not be formally submitted until December and Mr. Bernanke will not be reconfirmed until January. 

 

[Snip]

 

Expected aftermath.  Long, long ago, an investment professional in whom I’ve always had confidence told me, Adjusted for inflation, no government bond has ever yielded above par.  That is, no matter what rate the government pays you on its bond, the value of those future payments is less than the cash you started with.  The reason is simple – government influences the inflation rate.  So while it may pay you the stated interest, it has always deflated the value of those payments faster. 

 

Chairman Bernanke is way too smart and too well informed not to know this, and in fact to be quietly counting on it.  He’s lying low now – all the descriptions are affable, mild-mannered, non-confrontational – because like his predecessor Alan Greenspan, he knows the Fed chairman’s world is divided into two periods: when one is seeking appointment, and the rest of the time.  In the former, one plays nicely with the other children and does nothing to offend or call attention to oneself.  In the latter – which is most of the time – one acts as one thinks best with neither warning nor justification. 

 

Chairman Bernanke wants to preserve not just his job, but also its clout – meaning the Fed’s independence.  Once he has that, I believe he will set out to raise interest rates, and inflation, as the sole means of curtailing our overextended government:

 

Those are CBO projections, meaning non-partisan and probably a tad optimistic

 

As we know, Mr. Bernanke was reconfirmed, financial reform passed, and the Fed’s independence was not curtailed. 

 

“All is proceeding as I have foreseen.”

 

Now resettled in his chair, with a term longer than the President’s, Mr. Bernanke will continue to keep the US’s long-term economic health in view:

Paulsen argues that the recent grim housing figures were largely the result of the expiration of a federal tax credit and the high unemployment claims were due to the return of temporary Census workers to the labor force.  

 

That’s the problem with short-term fixes – they end.

 

“There is nothing all that alarming about this one compared with past recoveries,” he said.  ” All recoveries ebb and flow.”

 

So do political majorities.

 

Meet your next Senator

 

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By: David A. Smith

 

[Continued from yesterday's Part 2, and the preceding Part 1.]

 

After two parts, our grim homeownership demographic forecast interpreting Dowell Myers and Sung Ho Ryo’s December, 2008 paper, Aging Baby Boomers and the Generational Housing Bubble: Foresight and Mitigation of an Epic Transition (published in the Journal of the American Planning Association,  Volume 74, Issue 1), we’ve offered a very grim prognosis for the Upper Midwest, and scarcely a cheer for the Northeast.  Is there no hope, no hope at all?

 

Why didn’t I sell my house and invest in pop art?

 

The authors think so:

 

Yet there are a number of ways to plan in advance both to mitigate symptoms and to address the root of the problem.

 

4. Prices are in for a long-term slide in real terms … or are they?

 

Throughout this analysis, the authors have presumed that:

 

1. American households will stay the same size, and not get smaller (meaning more households per capita).

2. Homes will remain the same size, so people will not need to consume bigger/ more expensive ones.

 

In fact, both trends, although interrupted by our current unpleasantness, already have a half-century’s duration and will resume their price-upward march after we clear out the oversold inventory [Easy enough for you to say! – Ed.]

 

The predicted price slide is complicated by several factors.

 

A. As time passes, consumers will want larger, newer, better houses.  Just as demand is elastic, so too is production (though more slowly).  A a ‘buyer shortage’ could be absorbed by households consuming more housing, so that three-bedroom home becomes a two-bedroom-plus-home-office, or those two roommate renters each deciding to buy a modest home.

 

Housing markets depend on the ability of the young to buy homes, but they face greater challenges in some parts of the nation. Figure 2 shows, for each of the states, the ratio of the median value of all owner-occupied homes to the median income of households with heads between the ages of 30 and 34 in 2000 and 2005.7 

 

“Ratios of median home values to median incomes of household heads aged 30 to 34 in 2000 and 2005, by state: Sources: U.S. Census Bureau (2003a, 2005a).”

 

That chart demonstrates two things:

 

1. Relative to income, homeownership became more expensive during the first half-decade 2000 to 2005

2. Before the runup, ownership was affordable in the Midwest (ratios below 2.5); average it, homeownership was expensive verging on unaffordable in the West (ratios from 3.0 to the aforementioned 9.0 in Hawaii).

 

Yet this household-fission is less intuitive than you might think:

 

A study of changing homeownership rates among young adults in the 1980s and 1990s found that in states where prices had increased substantially, homeownership rates declined very little or even rose, whereas in states where prices had declined markedly, homeownership rates plunged by 10 to 20% (Myers, 2001).6

 

I suspect it’s because young people buy houses with their parents’ help, and their parents won’t help them buy into a declining neighborhood, whereas the parents think that rising prices today mean rising prices forever.

 

We used population projections for future periods to calculate when we expect home sellers to begin to exceed home buyers in each state, and Figure 8 summarizes the results. Six states have already entered long-term buyer shortages, with seven more to follow in the next decade.

 

“Period in which sellers exceed buyers in each state: Note: Shaded states are in the Northeast. Buyers and sellers are owner-occupants, and do not include investors or those buying or selling second homes.”

 

For 30 states, we do not expect the number of buyers to fall below the number of sellers until well after 2025.

 

By which time we’re well past our projection horizon; goodness knows what will happen by then – especially as housing supply is also dynamic, albeit on a much slower timetable.

 

Reasonable observers might view the problem thus:

 

…in the long run at least, contraction in the real estate industry may mitigate any impacts of overall decreases in housing demand. The question appears to be whether the impacts of the demographics will result more in industry contraction or in declines in value.14

 

B. Increasing development restrictions will inhibit new supply.  Real estate development is slow, but compared with demographics it moves at lightning speed, and it’s consciously influenced by factors such as growth restrictions:

 

Entering our zoned community

 

A number of economists have recently addressed the price effects of regulations that restrict new construction (Glaeser, Gyourko, & Saks, 2005; Green, Malpezzi, & Mayo, 2005; Quigley & Raphael, 2005).

 

I’ll boil down their evidence to a single finding: Economists don’t like them for they produce perverse effects.

 

Ed Glaeser swears place-based incentives are bad for you and your city

 

Local activism to protect the environment and protect local livability has caused many communities to add development restrictions since 1970 (Fulton, Shigley, Harrison, & Sezzi, 2000). This was especially true in California, where population grew rapidly in large metropolitan areas, but surrounding water and mountains set physical limits to urban expansion and were protected as resources.

 

Everything you know about sprawl is wrong, including its effects on overall urban density and economic competitiveness.  Yet development restrictions have one benefit – in places with slow growth, they more or less assure there will be no growth, and that may retard drops in housing prices.

 

Shiller (2007) stresses the importance of supplier responses in ending housing booms. Though past failures to appreciate the competition from other new construction have often led to oversupply, he asserts that large development companies today possesses better information and behave more rationally than in prior decades, as McCue and Belsky (2007) agree.

 

No doubt about it, they could hardly have been less rational  before: Belsky

 

In fact, in the post-2005 housing market, when sales fell and inventories grew, builders exhibited a disciplined response, scaling back production only 6 months behind the decline in sales (Harvard Joint Center for Housing Studies, 2007).

 

Young lady, I told you not to accumulate inventory

 

C. The boomer generation is deeper in debt than its predecessors.  Now we hit a new problem: as we boomers age, extending our retirement of play for much longer than our parents did, we’re about to discover we have much less of the ready than we need.

 

No sweat, I can juggle the money

 

Members of the baby boom generation themselves who are homeowners could be losers. As home values decline, so will home equity, shrinking retirement savings. For example, Nothaft and Chang (2004) recently reported that home equity—the difference between the home value and the amount of mortgage debt on the property—comprised at least 50% of net wealth for one-half of all households.

 

Even allowing that this statistic is made more ominous by its phrasing – half of households have half of their net worth in housing – it bespeaks the baby boomer ethos: the home is the piggy bank, and money invested in the home returns itself later in life.

 

You live in it and it appreciates

 

Home equity is not only the single largest component of net wealth for most families, but it is also held by a broader cross section of families when compared with other assets. (p. 2)

 

Equity in owned homes is a major capital source for new business formation.  Or it has been for the boomers, but not for Gen X.

 

 

Analysis of recent trends indicates that many more of the soon-to-be-elderly will be heavily encumbered with debt late in life than has been the case in the recent past (Masnick, Di, & Belsky, 2006). A 25% reduction in home values could erase half the equity of homeowners with large mortgages.16

 

Again, although the statistic is double-loaded, we are teaching Gen Y that owning a home is no picnic.

 

We need the yellows to want to buy homes …

 

… and they don’t

 

People who intend to retire using these means of extracting income from their wealth must maintain or increase the value of their homes.

 

Evidently owning a home will not be the rider to a comfortable retirement that we have come to expect it to be.

 

D. The American dream means most to the newest Americans.  Still the global melting pot, America’s lure of the dream of prosperity brings new immigrants – and they want to own homes.  That immigration – mainly into the warm, wet, and western places – is creating ongoing upward price pressure on American homes.

 

The foreign-born share of the increase in homeowners [The increase in households, not households themselves – Ed.]  has roughly doubled each decade since 1980, rising from 10.5% in the 1980s, to 20.7% in the 1990s, and 40.0% in the period 2000 to 2006 (Myers & Liu, 2005, Table 2).18

 

Even conceding that we’re dealing with the percentage of the change, not the percentage of ownership, that’s an enormous influx of aspirant, ambitious households, whom we are turning to Americans and into American homeowners.

 

Two flags: where you came from, and who you are now

 

These shares are even higher in several states, exceeding 60% in California, New York, New Jersey, Massachusetts, and Illinois –

 

Fortunately, these are among the states most in need of new households to buy the boomers’ selloffs.

 

– and they will climb much higher after the baby boomer sell-off commences. It is immigrants who will lead many markets out of the current downturn in home sales and prices.

 

As I previously posted in The United Cities of America, immigrant gateways are among the nation’s fastest-growing areas – and will continue to be in the next decade.

 

They’re coming to America

 

5. Market responses: home prices lag, apartment rents rise

 

What does it mean for real estate?  In most of America, homes are overpriced relative to rentals, and over the upcoming half-decade homes will appreciate more slowly than inflation, even as apartment rents gradually catch up, as illustrated by the Irvine Housing Blog:

 

I won’t go through the arithmetic

 

To bring the ratio back into balance, either homes will appreciate slower than inflation, or rents will rise faster than inflation, or both.

 

While home prices skid, rents trundle upwards

 

A. Home pries will drift.  The decline in home prices will be mitigated by the dramatic decline in new-construction homebuilding:

 

The fact that older people outnumber younger people nationally (see Figure 1 and Appendix Table A-1) ensures that most builders will try to serve the former by building housing better suited to their needs than what is already on the market.

 

Although the older population will be selling more homes than they buy, better than 1% of them will still buy homes each year. And younger people will still buy homes at three times this rate. People may demand new construction in order to get novel design or to locate in growing areas where supply is insufficient, or in locations with better access to jobs and transit.

 

Even so, home prices will drift downward relative to rents and to income.

 

As long as we have a pad, we can drift along

 

B. Apartment supply and real rents will be rise.  What’s really going to grow is the apartment stock:

 

After decades of neglect, apartment construction is resurgent in many central cities (Birch, 2002), meeting preferences for housing that is higher density and more centrally located.

 

I’ll bet that’s rental

 

Moving back to the cities, and building workforce rental housing to accommodate this new urbanization, will grow our economy.

 

Fishman (2005) has declared this a new “fifth migration” that will focus residential growth in coming decades toward the centers, not peripheries, of metropolitan areas. To date, however, there is little evidence of any net shift of total or elderly population toward central cities (Englehardt, 2006; Frey, 2007).

 

Actually, there is (at least in 2010, if not in 2008) – the elderly, and we anticipatory elderly boomers, are reclaiming the city, and allowing immigrants and growing families to move outward.

 

Some are already warning of decline in early post-WWII suburbs (Lucy & Phillips, 2006), but planners should monitor supply and demand conditions in outer suburbs as well.

 

The bigger suburbs won’t turn into the next slum, but they may need remaking to accommodate new businesses and revenue models, including the permanent flexible workforce.

 

Can you find the jobs in this picture?

 

C. The elderly market will grow, and fragment into specialties.  Anytime a market becomes sufficiently large, it fissions into distinctive submarkets.  For the elderly, it’ll divide along service lines – fully active, live-in health care (via attached dwelling units?), congregate living, assisted living, or more – as well as by income levels.

 

Frey (2007) has emphasized that most people will age in the same state or metropolitan area where they have lived, though not necessarily in the same community or house. Communities should retain their elderly residents as long as possible to slow the flow of houses for sale. This makes it imperative to develop elderly friendly, vital communities (Achenbaum, 2005).

 

Like home-sharing, intergenerational, generation-skipping housing is just the next step in intergenerational communities.

 

Rather than encouraging segregation of the elderly in separate retirement institutions, urban designers should foster their social integration into more lively communities, whose essential features include community activity centers for seniors, close-by retail services, and small, easy-access parks for midday socializing.

 

Cities that better accommodate the elderly will be net winners, because the elderly will sell the cold old home, and buy a new one-level warm retirement apartment.  Home is where the mind is.

 

One large building with many long flat corridors:

An elderly-only apartment complex

For elderly-oriented properties, service enrichment could be the fifth utility (after broadband, the fourth utility) – not a luxury, a necessity.

 

The new movement toward planning healthy cities for active living can also help planners attract and retain elderly homeowners (Frank & Engelke, 2001), as can homeowner maintenance programs, dial-a-ride transportation services, and mobile meals services (Gilderbloom & Rosentraub, 1990).

 

We have thought of transit-oriented development as reducing carbon footprint and creating more affordable workforce opportunities, but if history is any kind, is major beneficiaries will be – you guessed it – us narcissistic baby boomers, who’ll use the network to reduce our transportation costs as we move from suburban automotives to urban pedestrians.

 

Communities in the United States face an historic tipping point. After decades of stability, we expect the ratio of seniors to working-age residents to grow abruptly, increasing by roughly 30% in each of the next two decades.

 

The exit of the baby boomers from homeownership could have effects as significant as their entry, though with different consequences.

 

You aren’t kidding.

 

Just wait ’til we crack immortality!

 

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By: David A. Smith

 

[Continued from yesterday's Part 1.]

Yesterday, as we were completing Part 1 of our projection of American housing in 2010, Dowell Myers and Sung Ho Ryo, authors of Aging Baby Boomers and the Generational Housing Bubble: Foresight and Mitigation of an Epic Transition (Journal of the American Planning Association,  Volume 74, Issue 1 December 2008), were pronouncing a sentence of housing doom:

 

Demand for housing [by Baby Boomers – Ed.] will begin to contract, and then will decline at an accelerating rate.

 

Where will we live?

 

Is it that bad? 

 

Will the homestead lose all its value?

 

2. Aging households will move west, warm, and wet … and to smaller housing

 

America is an enormous country, and the shifting demographic demand for housing will affect places differently.

 

Although growth in the population of seniors in most states results mostly from people aging in place (Frey, 2007), a few states are retirement destinations, likely causing them to have higher rates of home buying among older age groups than other states.

 

We all know where people will move: west, warm, and wet.

 

Shun the cold, lose the snow – move to sun and sea

 

Now compare the preceding map, which I posted in 2005, with this one reflecting 2009 data.

 

If people are moving warm, wet, and west – why all the foreclosures?

 

It’s visually apparent that the high foreclosure rates are occurring in precisely the states that have been experiencing continuous internal emigration.  [Exception, as always, for poor Michigan – Ed.]

 

Conversely, states with cold climates or more congested living environments may find their elderly residents selling homes at earlier ages to escape unpleasant living conditions.

 

If they can afford to do so, that is – if the house is underwater, the owner may be house-locked.

 

I’d move but I’m chained to my house

 

We compare buying and selling in the following states (each shown with its 2005 ratio of median housing prices to median household income among adults ages 30-34 from Figure 2):

 

Arizona, a retirement state (4.13)

Ohio, a midwestern state, low-cost but cold (2.75)

New Jersey, a high-cost eastern state (5.00)

California, a western, very-high-cost state (8.65).

 

As predicted above, Arizona stands out for its exceptionally high buy rates, especially at older ages, which reflect its rapid population growth and high retirement in-migration (see Figure 4).

 

 “Average annual percent of persons buying homes in each age group, for selected states, 1995 to 2000.”

People aged 60-64 love to buy in Arizona … if you buy in New Jersey, you’re likely 30-34.

 

For most of the modern American lifespan the rates of buying and selling are closely related, because most of those who sell a home then replace it by buying another.

 

Most people buy their first house at about 30 – thereafter, each purchase of a new house is matched by the sale of the old one, so they are net =0, until late in life they sell and move into a non-owned-home (rental, back with children, elderly facility, or under the earth).  Thus the age pyramid more or less defines consumption of owned homes as follows:

 

Age 0-29: =0, no home owned.

Age 30-39: +1, a former renter/ child becomes a homeowner

Age 40-64: =0, sale of one implies purchase of another.

Age 65+: -1, sale of the last owned home and migration to another tenure.

 

Thus, if we’re measuring aggregate homeownership, we care about the numbers of thirty-somethings versus the numbers of 65-somethings. 

 

They were thirty-something … 23 years ago!

 

We also care about this state-by-state, and that is influenced by employment growth and housing prices:

 

The already high-cost states of California and Hawaii became nearly twice as expensive between 2000 and 2005, with median housing value increasing to roughly 9 times the median income of young adults.

 

In America, housing affordability normally means 30% of household income for rent, and maybe 35% for homeownership cost all-in (including real estate taxes, utilities, and maintenance).  At such levels, house prices are affordable if they are less than 3.3x annual income [100% / 30%, for those of you divisionally-challenged – Ed.]  Nine times median income is insane.

 

She’s babbling about home prices nine times income

 

A second tier of expensive states, with ratios of 5 or greater, includes Nevada in the West and Massachusetts, Rhode Island, and New Jersey in the Northeast.

 

Thus another factor influencing migration – people selling expensive houses (in the Northeast, like growth-unfriendly Massachusetts) — and moving to cheaper states.

 

A third grouping has ratios greater than 4 in 2005: Arizona, Colorado, Oregon, and Washington in the West, Florida and Maryland in the South, and Connecticut and New York in the East.

 

Much of the nation, however, still had low ratios of housing prices to incomes, even after the boom years.

 

Combine low price-multiples with warm, wet, or west, and we can expect more home-buying.

 

Turning to home selling (see Figure 5), Arizona’s high rates stand out among middle-aged persons.

 

 “Average annual percent of persons selling homes in each age group, for selected states, 1995 to 2000: Note: On average, between 8 and 9% of persons 80 and older sold homes each year in all these states.”

We’ll come to that rising 75-79 tail later …

 

Since sales by those from outside the state are counted in their previous state of residence, these represent sales by repeat buyers in Arizona.13  Arizona has long had some of the highest residential mobility rates in the nation, and so this pattern of high rates of selling and buying is not surprising.

 

Not coincidentally, Arizona has one of the nation’s most expansion-friendly zoning and land-use systems.

 

To understand the future home selling of the giant baby boom generation as they reach age 65, we compare net rates of buying or selling at ages 65 to 69 across the states. Figure 6 displays these rates in a bar graph ranking states within four regions.

 

 “Net annual percent of persons aged 65-69 buying or selling homes, by state and region.”

Bars right of zero mean more old buyers than sellers

Bars left of zero mean more old sellers than buyers

 

While it takes a little interpretation to grasp what the chart is displaying, once you see it the results are stark. 

 

The states range from Nevada, with a net buying rate of 1.56% per year, to Connecticut with a net selling rate of 1.02% per year.

 

The surprise isn’t that old people are net sellers nationwide – on average, they are, and all Northeastern states are net oldster-sellers – but rather that in a few states they are net buyers. 

 

In general, very substantial net selling prevails among people of this age across the states of the Northeast and Midwest. In the South, only Maryland and Louisiana have similar rates of net selling, while Florida has very substantial net home buying at ages 65 to 69, far ahead of its closest southern rival, South Carolina.

 

Even in California, people over 65 are net housing sellers, whereas in Nevada and Arizona (ground zero for foreclosures, remember!) they are net buyers. 

 

In the West, only California and Alaska have substantial net home selling among people aged 65 to 69. Most of the other western states, led by Nevada and Arizona, have net home buying among people of these ages.

 

Well, there’s a lot of unsold condos available in those states, guys …

 

Gotta hand it to Life: they state a self-captioning picture

 

Add it up and the housing demand picture’s strong for the retirement destinations, and worrisome for the country’s north and center, where more of the housing stock is older, smaller, and physically obsolescent.

 

Old, small, and unsold — Detroit

 

3. America will need more rental, more smaller, and more service—enriched housing

 

Like the Sphinx’s man, who walks on four legs in the morning and three at night, our tenure configurations shift with age. 

 

You sure I’ll live long enough to be a net seller?

 

Of greatest relevance to this analysis are the interactions between age and homeownership (Chevan, 1989). Homeownership rates rise with age, and do not generally peak until after age 65.

 

Below age 50, buying is more common than selling, and net homeownership rates rise to this point. When people enter their late-50s and early-60s, as the leading edge of the baby boom generation has now done, buying and selling are in balance. Among individuals in their mid-60s sellers come to outnumber buyers before selling dominates among those in their 70s and beyond.

 

Except for those who move to the congregate-living facility in the sky, people who move out of houses they have owned merely shift their tenure and become renters. 

 

Among people of the same age, sellers come to exceed buyers at about age 65 nationwide, but this varies markedly by state, as shown below.

 

As people go past 65, they choose to become renters, because the burdens of ownership outweigh its benefits.

 

More leisure, less maintenance = renters

 

The older we get, the less we need homeownership, and the more we need rental.

 

First we assumed that home buyers were also previous home sellers, after adjusting for the estimated share that are first-time homebuyers (as derived from the American Housing Survey). We assigned their sales to the states where they had reported residing 5 years earlier, whether or not that was where they had purchased a new home. In addition, for those over age 60, we compared the number of homeowners in 2000 to the number of homeowners in the same cohort when it was 10 years younger in 1990. We considered this difference to be a measure of all the home sales that were not followed by purchasing another home, but by renting, moving to a retirement home, or death.

 

Figure 3 displays the annualized, age-specific rates of buying and selling homes per 100 people we calculated for the nation as a whole.

 

“Average annual percent of persons buying and selling homes in each age group, for the United States, 1995 to 2000: Note: On average, 8.8% of persons 80 and older sold homes each year.”

A young population is a net buying population;

An aging population is a net selling population

 

The highest buying rate (3.6 purchases per year per 100 persons) occurs between ages 30 and 34. From this peak, rates of buying homes gradually decline at later ages. Readers may find it surprising that the per capita rate of home buying remains as high as it does among the elderly. Over 1% of people aged 75 to 79 buy new principal residences in any given year.

 

Usually, I suspect, because they’re moving to retirement, either near children or near sunshine.

 

Nonetheless, the likelihood that a person in this age group will sell an owner-occupied home is more than three times higher than the likelihood that they will buy a home. At age 80 and above the annual rate escalates to nearly 9 home sales per 100 people.11

 

We can further expect this to stretch out as life-spans extend.

 

Now for the crunch – the point of all this demographic and gerontographic analysis.  Which states will have trouble first, and which last?  Not necessarily what you think:

 

We begin our analysis of the timing of the baby boomers’ impact on the housing market by finding the age at which selling typically begins to exceed buying in each state, shown in Figure 7.

 

“Crossover points: ages at which selling exceeds buying for each state: Note: Shaded states are in the Northeast. Buyers and sellers are owner-occupants, and do not include investors or those buying or selling second homes.”

The Northeast has net sellers early

 

In some states the elderly are such active buyers that their growing numbers will not lead to an excess of sellers. In others states, however, the buyers fall behind the sellers at an early age. In six states, the number of sellers begins to exceed buyers at ages 55 to 59, while in seven states sellers exceed buyers at ages 60 to 64.

 

Five of the states that reach this point before age 65 are located in the Northeast and five are in the Midwest, with Alaska, California, and Maryland rounding out the group.

 

The statistics lead inexorably to the same conclusions we reached five years ago:

 

Thus, it is a mix of the coldest, most congested, and most expensive states, rather than high-growth states of the South or West, which we expect to lose older homeowners most rapidly.

 

In short, those unsold condos in Vegas, Phoenix, and Miami?  Snap ‘em up, because they’ll rise in value long-term.  Conversely, if you live in the cold and congested, sell now before it gets worse:

 

We already know that aging homeowners do less to maintain their homes (Galster, 1987; Myers, 1984), and under the scenario we anticipate there may be many more such homeowners who are unable to sell.

 

If you live in 856 (southwest New Jersey across from Philadelphia), sell!

 

If they rent their homes or sell them to investors at a discount, neighborhoods once largely owner-occupied will have more renters.

 

While the term disinvestment is overused, shifting from owner-occupants to absentee investor landlords in a neighborhood of stagnant population growth and a dwindling economy will result in natural wear—and-tear atrophy leading to a neighborhood that is effectively disinvested.

 

Elm Street, Cleveland

 

During the adjustment process many homes could stand empty for long periods, creating neighborhood nuisances.

 

Beleaguered homeowners will put pressure on local officials to protect their former quality of life.

 

Now is the winter of our disinvestment: Detroit

 

[Concluded tomorrow in Part 3.]

 

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By: David A. Smith 

 

What will be the shape of American housing, 2020? 

 

Will we all live in a world inside?

 

Two years ago, in the scholarly Journal of the American Planning Association,  Volume 74, Issue 1 December 2008, Dowell Myers and Sung Ho Ryo published a lengthy paper, Aging Baby Boomers and the Generational Housing Bubble: Foresight and Mitigation of an Epic Transition. 

 

We argue that the United States is currently [2008 – Ed.] experiencing a short-term housing market bubble that is nested within a longer-term, generational housing bubble of greater magnitude.

 

Unicycling into the unknown future

 

[I came upon it recently because the paper includes some pithy anticipatory comments about the looming capital shakeout that were recently picked up by the larger media … but they're relatively unimportant since by late 2008 the crunch was already well upon us and we all know how the story turned out. – Ed.]

 

Aside from its past-prediction of a housing price crunch – we’ve already had that train wreck, thank you very much – much more important today is the report’s clear vision of what America’s housing requirements will be a decade hence. 

 

The baby boom generation was born over a period of 18 years, and once its sell-off commences, it could dominate the housing market for up to two decades. Planners could lessen the negative consequences of the deflating generational housing bubble by anticipating these long-term trends and initiating pre-emptive programs to retain elderly homeowners, attract young home buyers, and closely monitor additions to the housing inventory to forestall overbuilding.

 

You think we might be overbuilding Miami?

 

The upcoming decade is an interval long enough for us to do something about it – should we choose to believe the vision and make political and financial commitments in that belief. 

 

But first – how much faith should we place in decade-long predictions?

 

It didn’t happen that way

Frank R. Paul’s city of 2001, painted in 1942

 

0. Long-range demographic predictions can be wildly wrong

 

As Niels Bohr joked, so memorably that it’s been attributed to dozens of others, “prediction is very difficult, especially about the future,” and authors Myers and Ho Ryo start with a cautionary tale:

 

The experience of two Harvard economists, one who later became chair of the Council of Economic Advisers, suggests it is dangerous to attempt to predict long-term trends in housing, unless the demographics are well handled. Mankiw and Weil (1990) predicted a 47% decline in house prices during the 1990s, based largely on their modeling of declining demand as baby boomers aged.

 

Mankiw’s an extremely clever fellow, and in fact his prediction contained an enormous conditional:

 

“Where’s that fine print?”

 

“Since the Baby Bust generation is now entering its house-buying years, housing demand will grow more slowly in the 1990s than in any time in the past forty years. If [the key word – Ed.] the historical relation between housing demand and housing prices continues into the future, real housing prices will fall substantially over the next two decades.”

 

Instead, as we know, house price increases outpaced increases in household formation.  Part of this is attributable to the evolving modern house, which over the last fifty years has roughly doubled in size.  Some may have been due to a favorable change in the capital gains tax applicable to primary residences.

 

Instead, we have seen baby boomer demand for housing grow and prices double. Housing economist Karl Case recently called the Mankiw-Weil prophecy “one of the worst forecasts in the history of mankind” [Said 'jokingly' – Ed.].  

 

Uh … a bit off, there

 

Those aiming to anticipate the future of housing markets commonly extrapolate trends obtained by comparing homeownership rates and numbers of homeowners at two different times. Yet these indicators compare housing stocks at different times rather than flows of annual activity.

 

The stock of housing would adjust only gradually even if the annual flows changed abruptly –

 

This critical point is often overlooked.  In addition to its physical immobility, housing is the longest-lived asset most of us ever experience (the house I live in was built in the 1920s).

 

Boston traffic and enforcement about the time my house was built: 1920s

 

Because of this, the real estate in our future cities looks a lot more like past real estate than any other aspect of our future.

 

Hill Valley, 2015, as imagined in 1985

(Note air cars and a price of $40,000.)

 

– and thus is not a very sensitive indicator. In fact, even if the number of homeowners remained constant over time, demand would exist for trading up and trading places.

 

Homeownership rates are insufficient for understanding the future of housing markets, and could be misleading.

 

Meanwhile, the authors provide a compact definition of a housing bubble, which may come in handy … just in case we ever have one again J.

 

Housing bubble defined

(In case we need it again)

 

According to Case and Shiller (2003), the term housing bubble “refers to a situation in which excessive public expectations of future price increases cause prices to be temporarily elevated.” (p. 299)

 

In a housing bubble, expectations of price appreciation feed further escalation of prices; people buy houses for “future price increases rather than simply for the pleasure of occupying the home. And it is this motive that is thought to lend instability to bubbles, a tendency to crash when the investment motive weakens.” (Case & Shiller, 2003, p. 321)

 

By the time you’re old enough to appreciate this post, there’ll be another real estate bubble

 

Enough disclaimer.  Now for the fearless predictions.

 

Okay, buddy, hit me with your best predictions

 

1. Baby-boomer aging will change housing demand profoundly, in both consumption and geography

 

That look like a boom to you?

 

In American housing, it’s all about us baby boomers.

 

Now that we’re in charge, we’re banning aging

 

The giant baby boom generation born between 1946 and 1964 has been a dominant force in the housing market for decades. This group has always provided the largest age cohorts, and has created a surge in demand as it passed through each stage of the life cycle.

 

The baby boomers caused the Sixties upheaval, and invented the swinging-singles apartment complex.

 

Racy, baby!

 

As the authors observed:

 

According to the 2000 Census, only 1.4% of owner-occupied households in the United States were headed by a person under age 25.  Age 25 is also generally regarded as the lower boundary of prime working age, when individuals are most likely to hold secure employment.

 

We drove the growth of suburban homeownership, and the return to the cities:

 

As its members entered into home buying in the 1970s, gentrification in cities and construction of starter homes in suburbs increased.  Their subsequent march into middle age was accompanied by rising earnings and larger expenditures for move-up housing.

 

After 1970, the leading edge of the baby boomers turned 25 and entered the market for homeownership. Figure 1 shows growth in the U.S. population over seven decades, both overall and partitioned into those between ages 25 to 64 and those 65 and older. Figure 1 shows that in all decades save the 1960s, a single age group, the leading edge of the baby boomers, accounts for half or more of U.S. population growth.

 

  

“Growth in United States population age 25 and over for each decade from 1960 to 2030 (in millions): Source: U.S. Census Bureau, 2003b, Tables 12 and HS-3.”

Lacking clear explanation, but the grays are 65+, the darker gray 25–64

 

Despite everything we did to prevent it, deny it, or conceal it, we aged:

 

Mick Jagger, 1970

 

Get that hair color out of a bottle, Sir Mick?

 

Looking ahead to the coming decade, the boomers will retire, relocate, and eventually withdraw from the housing market. Given the potential effects of so many of these changes happening in a limited period of time, communities should consider how best to plan this transition.

 

Table 1 (as large as I can make it) provides the census’s grim reaper tale: in the upcoming decades, the ratio of seniors (65+) to workers (25-64) will nearly double:

 

 

If you have trouble reading the full figures, here are some representative states:

 

 

Today, here in Massachusetts, for every 1 senior (65 or older), there are 4 workers (25-64).  In ten years that ratio will be 1 to 3, and in twenty years it’ll be 1 to 2½.  Florida today is already 1 to 3 (so if you want a view of Massachusetts’ or New York’s future, look at Florida), and by 2030 the ratio will double, to 1 to 1-2/3, or 3 elderly for every 5 workers.

 

Those numbers are mind-boggling in their implications – first for employment, second for housing consumption and tenure.

 

Employment.  As people age, they have more money and less capacity, so they trade money for capacity by hiring people to work domestically for them – as gardeners, repairmen, maids, nurse-practitioners, convenience-store workers, or health-care aides. 

 

4 to 1 today, 2 ½ to 1 in twenty years

 

Keeping the boomers alive, healthy, and tended will increasingly be a full-time job – and remember, for every one of us over 65, there will be only 2½ of them to run the entire economy, including pandering to us, and generating the wealth and inventions and products that will sustain America.

 

For example, from 2010 to 2030, the ratio of seniors to younger adults is expected to rise 59.0% in New Jersey, 64.0% in Ohio, 66.4% in California, and 82.4% in Arizona, a magnet for retirement migration.

 

This will take air out of the pricing balloon.

 

Appreciation up in smoke?

 

Housing value and tenure.  The older we get, the less we need a large, detached, owned home – and the more we need to tap the equity that has (we hope) accumulated in that large, detached, cluttered, owned home.

 

Percentage of elderly (60+) women living alone: dark red is 35% or more.

 

Boomers will dominate the housing market, as they have through their entire adult lives, when the ratio of seniors to working-age adults soars by 67% in the next two decades. This tilt toward age groups that are net sellers of housing is historically unprecedented, and it challenges planners to foresee and forestall adverse impacts.

 

We have never seen this much of an aging shift.

 

Elderly man living alone, from My Dog Tulip

 

The numbers of young adults in the population and their home-buying behavior are especially important in driving these price trends. They make up the principal reservoir of new demand in the marketplace, a pool of first-time home buyers poised to enter the market or not, depending on perceived conditions. When market fundamentals drive housing prices up, word of mouth and the fear that rising prices will make future purchases unaffordable amplify the trend.

 

Paradoxically, because of the investment incentive, homeownership generally rises when housing prices are rising rather than when housing is becoming more affordable.

 

Bubble demand is cyclic and self-amplifying. 

 

There can be big swings in housing prices

 

A surplus of young people hungry for homeownership drives a housing bubble; a surplus of old people living in old houses too big for them to maintain drives a housing deflation.

 

Their demand for housing will begin to contract, and then will decline at an accelerating rate.

 

Sell at the top?

 

Is it really that bad?

 

Cheer up, sweetie, there’ll be another post tomorrow

 

[Continued tomorrow in Part 2.]