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June 22, 2009

First-Time, Minority Buyers Still Facing An Uphill Battle

By Amilda Dymi

NEW YORK-Despite some signs of improvement, the worst housing downturn in generations continues, hitting hard first-time home buyers and low-income minority households, according to the annual Harvard report.

The 2009 State of the Nation's Housing Report, released by the Joint Center for Housing Studies at Harvard University, concludes that housing demand has withered under the weight of job losses, house price deflation and tighter credit standards. Higher mortgage interest rate predictions for June as the economy continues to contract show "a sustained recovery for housing still faces an uphill climb."

"For now, markets remain under considerable stress," said JCHS executive director Eric Belsky.

According to director Nicolas Retsinas, "Although there are some signs of improvement or at least steadiness in new construction and sales, housing starts stand near 60-plus-year lows and any life in home sales is coming from distressed foreclosure sales, temporary first-time buyer tax credits and low interest rates that moved higher in recent weeks."

If in the spring the market saw "some stabilization" in homebuilding and home sales, in the first quarter of the 2009 real home price depreciation and higher foreclosure rates continued in most areas.

One of the most affected market segments is that of first-time homebuyers who now are struggling to meet much stricter underwriting guidelines.

The report finds household growth "is well below long-term trends," in times when immigration, the main generator of first-time buyers and renters, has slowed. The result is "near-record levels in the share of homes for sale and vacancies" the report finds, even though there have been significant decreases in housing production.

The report indicates the housing downturn hit low-income minorities especially hard.

For example, since unemployment rates are sharply higher among minorities, "minority households are more likely than others to spend more than half of their incomes on housing." The fact that higher shares of minorities live in neighborhoods now dilapidated or with elevated foreclosure rates also shows that these homeowners are suffering comparatively more losses in home equity and facing higher house price declines.

At the national level, higher unemployment rates especially during 2008 and 2009 helped increase the number and share of households spending more than half their incomes on housing. Also due to the economic crisis in 2007 the number of households with such severe housing costs was 18 million, up from 14 million in 2001.

The report found that "although renters are more cost burdened than homeowners, the most rapid growth in households with housing burdens, during the decade, occurred among owners."

"The best that can be said of the market is that house price corrections and steep cuts in housing production are creating the conditions that will lead to an eventual recovery," Mr. Belsky said.

In conclusion, the report estimates "the demographic moorings of future demand remain strong," despite recent housing challenges such as foreclosures, millions of homeowners with mortgages much higher than the current value of their home and falling rental property values.

Immigrant households will continue to drive housing demand, the report finds. "Even if immigration slows considerably, minorities will still account for about three-quarters of household growth."

Data show this trend will hold strong as "the largest generation in American history" reaches young adulthood in the next decade. Consequently, even conservative household projections that expect annual immigration to decrease to 40% below the average of the 2000-2005 to just half of U.S. Census Bureau immigration projections, "household growth from 2010-2020 should still rival the solid performance in the 1995-2005 period."

These growth characteristics are bringing about a new type of demand for housing and home improvement.

According to the dean of the Harvard University Graduate School of Design, Mohsen Mostafavi, demographics such as the echo baby boom "driving demand for starter homes and apartments and the baby boom powering demand for homes suited to older Americans" is fueling another industry trend.

If so far there has been a national movement to help increase the production of more "green" or environmentally friendly housing, the aforementioned demographics will increase demand for more age appropriate, technologically advanced designs that are both aesthetical and functional. "Housing needs of a new, more diverse younger generation are different from those of a generation in need of home modifications to help them age more safely and healthfully in place," he said.

The report shows the crisis has highlighted "the potential to reduce domestic energy consumption by making the existing housing stock more energy efficient" using tools such as energy upgrade incentives for property owners. For example, bringing the efficiency of the existing housing stock up to that of homes built since 2000 could save as much as 20% of residential energy consumption.

The report also recognizes that while more compact mixed-use urban developments that help cut vehicle miles traveled substantially, they are a challenge since local regulations often discourage compact and developments.