Delayed maintenance on aging housing stock adds to inventory concerns
Maintenance and renovations aren't keeping up with the nation's aging housing stock, creating an influx of obsolete properties that's adding further strain to an already tight inventory of homes for sale.
The houses themselves aren't aging quicker per se, but as the overall housing stock gets older, a larger number of homes are falling into disrepair to the point where they're unlivable. What's more, the frequencies of upkeep and renovations have plummeted. Now, fewer maturing homes get the care they need to remain in usable condition and getting cycled out of the housing stock sooner than in the past.
As homes continue to age, their repair needs become greater and the gap between renovation costs and expected increase in home value widens. Housing experts are concerned the home equity lost during the Great Recession made homeowners reluctant to take on renovations if repair projects cost more than the expected gain in home value. Basically, the juice wasn't worth the squeeze.
As a result, properties are being doomed to a vicious cycle of decay, explained David Dworkin, a former Treasury Department housing policy advisor who's now the president and CEO of the National Housing Conference, an association of mortgage lenders, homebuilders, affordable housing advocates and other industry stakeholders.
"That's the ironic underside of the housing affordability crisis — the top's not affordable and the bottom's not restorable," he said.
Data about the scope of residential housing obsolescence is limited and imprecise. Industry analysts and academics rely on changes to overall inventory levels and the age distribution across the housing stock to identify trends.
The median age of owner-occupied homes was 37 years in 2015, up from 31 years in 2005, according to a National Association of Home Builders analysis of Census Bureau data. But that's largely due to the precipitous drop in new home construction during and after the Great Recession.
Homebuilders constructed a scant 6.1 million single-family units over the 10-year stretch from 2008 to 2017, only slightly more than the 6.04 million houses built from 2004 to 2007, according to the Census Bureau.
On average, more than 1 million housing units fall out of the overall inventory every year for a variety of reasons, including multiunit properties that are consolidated or structures that are converted to nonresidential uses.
The Department of Housing and Urban Development estimates 43% of all properties that fell out of the housing stock between 2011 and 2013 were lost due to demolition, disaster, damage or condemnation. That's up from 30% of units lost for those reasons between 1997 and 1999.
To be sure, this trend can be inconsistent. For example, the data shows sharp increases following Hurricanes Katrina and Sandy when hundreds of thousands of housing units were destroyed or lost.
But new construction is only part of the ongoing housing inventory squeeze that's sent home prices soaring and put a damper on mortgage volume. Existing homes account for about 90% of the roughly 6 million home sales that happen each year, according to data compiled by the National Association of Home Builders.
It's inevitable for the nation's housing stock to continue to age because new construction will never produce enough units to maintain a constant average age of homes, said Laurie Goodman, vice president of housing finance policy at the Urban Institute.
And even if the rate of obsolescence remains constant, as the housing stock grows, the number of actual homes that fall out of usability keeps going up.
"If the average unit is 37 years old, next year it will be 38 years old. However, about 0.75% of the nation's 135 million housing units will have exited the housing stock," Goodman estimates. "To keep the housing stock at 37 years old, you need to add 3.6 million units."
The problem is builders aren't creating enough homes to keep up with the pace of new household formation, let alone the growing replacement rate. While there were 1.4 million new households in 2017, builders completed only 1.15 million single-family and multifamily units and manufactured housing shipments totaled 93,000, according to the Census Bureau.
Among its many casualties, the Great Recession swallowed up homebuilders and the labor around it. The acute shortage of workers, combined with increased land and lumber costs contributed to the underproduction of homes, said Sam Khater, chief economist at Freddie Mac. It's going to take a significant increase in homebuilding to reverse this multiyear trend. Demand for buying has picked up in recent years, but supply hasn't kept pace.
"It's led to continued price growth and limited inventory. Home sales have legs to grow this year as long as inventory conditions improve enough to meet demand," he said.
Mortgage lenders can feed this growing demand by expanding financing options to builders, as well as existing and prospective homebuyers.
Already, lenders and the government-sponsored enterprises have added new low down payment options and taken other steps to improve access to credit. But there's more room for lenders to grow without taking excessive risk, Dworkin said.
"The lenders can seek the extra volume responsibly, learn from the crisis, and be appropriately cautious in stretching the credit envelope," Dworkin said.