The coming housing calamity

The great senior sell-off, rising household sizes, dropping homeownership, tighter lending standards, and other reasons why the next decade will be a disaster for homebuilders

Robert Steuteville, New Urban Network

The building industry is in deep depression, with housing starts at their lowest levels since data have been kept during the past half-century. Pulte Homes, one of the nation’s largest builders, reported losses of more than a billion dollars for 2010. Signs of a turnaround for the industry, one of the primary engines of growth for the US economy for two or three generations, have been sought since 2009 but are always over the horizon.

Arthur C. Nelson, one of the nation’s most prescient housing market researchers, says the worst is yet to come. The industry faces demographic and economic forces that will apply unrelenting downward pressure on the market for the next decade, Nelson told a group of journalists at the Forum on Land and the Built Environment in Cambridge, Massachusetts, jointly sponsored by the Lincoln Institute of Land Policy, the Harvard Graduate School of Design, and the Nieman Foundation for Journalism at Harvard University. He called his presentation “The Decade of Calamity.”

Nelson, professor of city and regional planning at the University of Utah, reported prior to the housing crash that the US faced a massive oversupply of large-lot single family houses and an undersupply of multifamily units — and he warned that Fannie Mae and Freddie Mac would confront deep troubles. All of these views have held up — one reason why Nelson has credibility now. The other reason is that Nelson’s views are based on solid research — some presented for the first time at the symposium in mid-April.

Holding the current demographics constant — that is to say, isolating and examining the change in the populace between 2010 and 2020 — reveals much about the demand for new housing. Ninety percent of the increase will be households without children, and 47 percent will be senior citizens (the latter resulting from the rising tide of Baby Boomers who started turning 65 last year).

Great senior sell-off

Both of these demographic groups lean toward multifamily and away from large-lot sprawl. The impact of so many new households without children is obvious, but readers may not find it immediately apparent why senior citizens favor multifamily housing. Nelson explains: When those 65 and older move, 80 percent vacate single-family houses, but only 41 percent move into single-family units. The rest — 59 percent — move into multifamily buildings for a variety of reasons such as low maintenance and proximity to services. That’s a huge shift coming from the decade’s fastest growing demographic group. “At 65, people tend to sell houses,” says Nelson. “That’s going to impact society in a very big way starting roughly five years from now.” He calls this effect “the great senior sell-off.”

Another big shoe to drop is household size — which declined from 1950 to 2005. “Rising population and declining household size — that’s a homebuilder’s dream,” notes Nelson. But something happened in the middle of the last decade. Instead of dropping from 2.59 people per household to 2.52 per household as predicted, the national average rose to 2.63 people per household by 2010. That turnaround may not seem like much, but it translates to a difference of 5 million housing units. “We overbuilt by 5.3 million housing units,” Nelson says. “[Rising household size] is the reason, among other reasons.” Driving that trend are more multigenerational households — e.g. kids moving back with parents as adults, the elderly moving in for care — and the rising percentage of minorities, who tend to have larger families.

Homeownership is declining and will continue to decline. It peaked at 69 percent in 2005 and it is now at 67 percent. The National Association of Home Builders, an organization that has an incentive to be optimistic about housing, predicts a further decline to 64 percent. An Urban Land Institute report in March 2010 forecast that homeownership would fall to the low 60s in the coming years, said Bruce Katz, director of the Metropolitan Policy Program at the Brookings Institution, in an April 13 speech in Michigan.

New rules affect homeownership

More stringent rules for mortgages, proposed in March to prevent another mortgage crisis, will push this rate down further, says Nelson. The rules include a 20 percent down payment for most mortgages, tougher loan qualification standards, and a requirement that banks keep 5 percent of the loans that they bundle and sell — which will make officers more careful. “With these rules proposed a month ago, we could be looking at a 60 percent homeownership rate by 2020, if not lower,” Nelson says.

The new rules may be adjusted prior to adoption, but whatever the final version, they will adversely affect homeownership rates, Nelson says. The proposed standards are dubbed the “qualified residential mortgage.” Moreover, banks are voluntarily tightening standards in advance of new regulations — most people who have bought or sold a house or taken out a home loan recently are aware of more scrutiny. “About two-thirds of households put down less than 20 percent as of 2009,” he says. “If we now require 20 percent, do the math. Where it is going to shake out, we don’t know.”

One certainty is that a drop in homeownership of the magnitude that Nelson, ULI, and NAHB predict translates into millions of fewer homes sold.

White homeownership could easily drop from 73 percent to 66 percent, and minority homeownership likely will decline from 49 percent to about 44 percent, Nelson says. Hopes that African-Americans and Hispanics will see rising homeownership are not supported by educational gaps between whites and minorities, which have not narrowed in two decades, Nelson points out. Less education means lower income and reduced ability to buy a house, he explains.

“Put it together and we will probably see fewer homes owned in 2020 than in 2010” despite rising population, says Nelson. Most or all of the new demand for housing will be in rental units, he says. “A lot of owner-occupied homes will flip to renter-occupied homes to meet the demand,” he says.

Multifamily McMansions?

Additionally, many McMansions on the urban fringe — the backbone of the building industry for two decades but which have dropped dramatically in value — will be chopped up into multifamily units, Nelson believes. These houses are designed in such a way that a switch to multifamily would be easy, he notes. Large finished basements, for example, can be retrofitted with a kitchen to create an apartment. Zoning and homeowners association rules stand in the way, but Nelson anticipates that rules will change or the retrofits will be made “informally.”

He asks: “Who is going to be enforcing these rules? Will police come out and take blood tests” to determine whether household members are related? “I don’t think so.”

The last half of the 20th Century and the first half of the last decade were characterized by a series of aligned trends that supported the housing industry, including increasing population, declining household size, rising homeownership, easier credit, ever bigger houses with more features, and back-to-back generations that sought suburban living — especially during child-raising years.

Population will keep rising. The census bureau expects it to reach 341 million by 2020, up from 308 million in 2010. But all of the other trends are in reverse.

Despite the general bad news for the housing industry, some sectors will flourish — especially transit-oriented development, rental units, and multifamily and small lot housing. Some new urban development will support the continued revitalization of cities, but much will be in the suburbs, Nelson says. How and why these sectors will flourish will be covered in Part 2 of this report.

Editor's note: This article was revised to include all three sponsors of the Cambridge symposium.

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