Affordable Housing Institute : US

Pendulums swing back, don’t they?

 

Where do interest rates figure in the equations?

 

In 2006 the US homeownership rate was up to 68.8%, a two-and-a-half percentage hike from the rate only eight years earlier, before subprime and adjustable rate financing zoomed into the marketplace, when the US homeownership rate was 66.3%.  Nor was that the crest; at the height of the subprime-influenced market, some informal reports had the homeownership rate cresting above 69.5% in 2007.

 

Pushing up homeownership rates since 1998!

 

Might these people have been homeowners in name only – that is, titular but not economic equity holders who did not pay and never could have paid their mortgages?  Were they, in effect, renters in disguise?

 

What  makes you think I’m not a homeowner?

 

That’s the question invited by a recent New York Times article with a curious title, Rise in Renters Erasing Gains for Ownership:

 

Maybe pushing homeownership up was a mistake

 

WASHINGTON — Driven largely by the surge in foreclosures and an unsettled housing market, Americans are renting apartments and houses at the highest level since President Bush started a campaign to expand homeownership in 2002.

 

In 1998, according to the census, there were 35.1 million rental apartments occupied and 67.1 million owned homes occupied.  By 2006, the figures were 75.4 million occupied homes, an increase of 8.3 million, and 34.2 million occupied apartments, a decrease of 900,000.  This happened even as the US population was growing rapidly, from about 271.6 million in 1998 to 2006 population of 298.7 million.  Obviously, more than a million renter families moved into homeownership. 

 

Had it been real, that would have been a good thing – and many people, from the Administration to the GSEs to the real estate industry to the HFAs to the punditocracy, trumpeted it as a good thing.

 

Homeownership’s up!

 

Now, with the speed of whiplash, the rates have reversed.

 

Many of the new renters, meanwhile, are struggling to get into decent apartments as vacancies decline, rents rise and other renters increasingly stay put. Some renters who want to buy homes are unable to get mortgages as banks impose stricter standards.

 

Which, as we’ve seen, might not be a bad thing, since the worst lender is the one who lends knowing you cannot repay.

 

Others remain reluctant to buy, anxious that housing prices will continue to fall.

 

Perhaps the reason, but a falling price is meaningless to someone who bought to inhabit and who pays the mortgage.  Perhaps they’re simply afraid they can’t repay.

 

Are you selling me snake oil?

 

 “We’re not going to see homeownership rates like that for a generation,” said Mark Zandi, the chief economist at Moody’s Economy.com, a research company.

 

For many minority and lower-income families who viewed homeownership as a stepping stone to building wealth and passing it on to their children, the transition from owning to renting has been the unraveling of a dream. Burdened now by debt and bad credit, some of these families are worse off than they were before they bought.

 

As I’ve often written, many people are better off being renters.  Homeownership has responsibilities, not just financial but also budgetary and operational. 

 

No landlord to call

 

Homeownership incurs costs and reduces mobility.  It works well for post-formed households, but not those in formation. 

 

Just as every nation has a ‘natural’ unemployment rate, every nation therefore has an ‘optimal’ homeownership rate, one that balances population growth, rates of household formation and dissolution, labor and employment mobility, and large-scale demographic shifts.  We don’t know what that rate is, and it can shift over time. 

Looks good – what happened next?

 

Viscerally, people want to own their homes; the desire is universal every place I’ve been.  It’s also entirely understandable: among the many reasons people seek homeownership is security of tenure; going to sleep at night knowing you cannot be evicted in the morning.  For obvious reasons, we conflate ownership with tenure security, and rentership with tenure insecurity, yet both are stereotypes:

 

Renting a permanently affordable apartment (such as one developed using the LIHTC) is the height of security.

Owning a home you cannot pay is the height of insecurity.

 

We had forgotten the insecurity of uneconomic homeownership; now a million families are rediscovering it.

 

 

 “The bloom is off of homeownership,” said William C. Apgar, a senior scholar at the Joint Center for Housing Studies at Harvard University who ran the Federal Housing Administration from 1997 to 2001. “We’re seeing more dramatic growth in renters and a decline in the number of owners. People are beginning to understand that homeownership can be a very risky venture.”

 

Taking nothing away from homeownership, I observe that rental has underperformed as an asset class over much of the last decade, and the reason probably has much to do with the shift of marginal households from rental to ownership. 

 

Mr. Apgar said the Joint Center had predicted an increase of 1.8 million renters from 2005 to 2015, given expected population trends. Instead, they saw a surge of 1.5 million renters from 2005 to 2007 alone. In the first quarter of this year, 35.7 million people were renting homes or apartments, census data show.

 

“Even though we’re only looking at a short period, these trends are pretty powerful,” Mr. Apgar said.

 

With the subprime reversals, we should expect professional rental now to outperform other segments.

 

Nationally, rents have increased about 11% since 2005, when homeownership rates started to decline, though that growth is slowing, according to the Bureau of Labor Statistics. In 2005, vacancy rates for rental properties in Cleveland hovered around 10%, according to the Northeast Ohio Apartment Association, which represents landlords in the Cleveland area. Today, the rate stands at 5.2%.

 

The pendulum has swung back.

 

Take away the foreclosure risk!  Take it away, I tell you!

 

The new renters include people like Tina Williams, a 43-year-old medical assistant who lost her three-bedroom colonial in Cleveland to foreclosure in March after her adjustable rate mortgage spiked and she struggled to find work.

 

Ms. Williams slept at a homeless shelter and at the homes of friends after five apartment complexes rejected her, citing her bad credit and history of foreclosure.

 

Undertaking homeownership and then failing is more financially damaging than never undertaking it.

 

Finally, someone offered to rent her the third floor of their house. Her new $300-a-month rental has a bedroom, a living room and a bathroom, but no kitchen.

 

As I wrote more than two years ago, housing demand is elastic:

 

Housing supply is highly inelastic.  Housing takes a long time to build — even longer because localities throw up road blocks like building permits, zoning, and development moratoria (or water/ sewer, which accomplishes the same thing less overtly).   Each individual housing widget is expensive.  Once placed, you can’t move it (except mobile homes, and even they normally become sessile). 

 

If you build it wrong, they won’t come.

 

Meanwhile, although supply is inelastic, demand is very elastic.  Not because of population change (excepting immigration, that takes longer to change than homebuilding), but because of changing household size.  What constitutes a ‘household’ is constantly mutating:

 

When housing is cheap, households expand (fewer people per household).  Young adults leave home.  Roommates pack fewer to a suite.  Homeowners trade up and get a family room, a media room, or a home office.  Some buy second (or even third!) homes.

 

Some day I won’t have to share my toothbrush with the other blokes.

 

When housing is costly, households shrink.  Young adults move back with their parents.  Starving artists consume less space.  Parents put two children per bedroom instead of one.  People who were using an extra bedroom as a study move into a smaller apartment and work from the kitchen table.

 

In fact, the only elasticity in housing supply is in tenure.  It’s quite easy to convert apartments to condos and unsold condos back to apartments.  As I wrote a long time ago:

 

A robust housing ecosystem with healthy communities thus has: 

 

Multiple configurations possible!

 

Multiple physical configurations

Multiple tenure options

Diversity of configuration and tenure within neighborhoods and metropolitan areas

 

As a result, among the valid public-policy reasons for new affordable housing production is specifically to create configuration and tenure diversity and options within a large and ever-changing evolutionary complex system.  That’s an even stronger argument for preserving existing affordable housing. 

 

It turns out that people adapt readily to new reduced circumstances:

 

“People say, ‘Tina, how are you living?’ ” said Ms. Williams, who has cobbled together the semblance of a kitchen with a microwave, a mini-refrigerator and an electric frying pan.

 

“I say, ‘I’m living on God’s grace and mercy,’ ” said Ms. Williams, who had dreamed of passing on her first home, bought in 2001, to her two grown daughters.

 

“My daughter says I’m living in a hole in the wall,” she said. “But I can eat every day. I have a roof over my head. When I found this place, I started shouting for joy.”

 

Security of tenure is a psychological benefit of incalculable price.

 

Debbie Suber, 46, who lost her home in Cleveland last year, said she and her husband were lucky to find a landlord who was willing to consider their income, not their credit scores.

 

Rental is a much easier credit decision to make; if you don’t pay, you move out.  Homeownership is a harder credit decision because the owner must foreclose, a lengthy judicial process. 

 

From the New York Times

Debbie Suber outside the house in Cleveland she and her husband had for 11 years. After foreclosure, they now rent nearby.

 

The same person whose income is not good enough or not visible enough to secure credit for homeownership can secure it for rental.

 

“By the grace of God, that’s why I have a place,” she said.

 

By the grace of the superior credit-decision flexibility of rental, sayeth the hardheaded banker.

 

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