Unaffordable Housing In America - Housing Headwinds

The Joint Center for Housing Studies of Harvard recently released the 2017 version of its "State of the Nation's Housing" report.  Buried in the pages of this very thorough report, we find some interesting data regarding the affordability of housing in the United States and how many households simply cannot afford housing now and perhaps ever, a factor that will ultimately have a negative impact on the housing market.

Let's start by looking at some background data.  The late 2000s collapse in the U.S. housing market is still being felt throughout many parts of the United States.  While national housing prices have finally surpassed the highs last reached in 2006 as shown here:

...in real terms (inflation-adjusted), national home prices remain 15 percent below their previous peak meaning that homeowners have yet recoup their lost housing wealth.  Of the 100 largest housing markets in the United States, housing prices in only 41 of those metropolitan markets now exceed their previous peaks and prices in 32 metropolitan markets are still 15 percent or more below their 2006 peak.  As well, the 5.6 percent year-over-year price increase during 2016 is the lowest growth rate since 2010 - 2011, suggesting that, despite the Federal Reserve's lengthy experiment with near-zero interest rate policies, the housing market could well be reaching another peak.

Despite the increase in housing prices across the nation, there are still 3.2 million households that are underwater on their mortgages.  This is down from 4.3 million in 2015 but still represents 6.2 percent of all homeowners.  The percentage of underwater homeowners varies widely across the nation from highs of 16.1 percent in Miami, 15.5 percent in Las Vegas and 12.6 percent in Chicago  to a low of 0.6 percent in San Francisco.  The number of households with low equity also fell from 9.5 million to 7.7 million on a year-over-year basis.

Here is an interesting map showing how real home price appreciation (between January 2000 and December 2016 has varied across the United States:

As you can see, markets located along the East and West Coasts have seen inflation-corrected home values increase by more than 40 percent since 2000 whereas metropolitan areas throughout much of the formerly industrial Midwest and South have experienced decreases in real home prices.

So, while the U.S. housing market looks reasonably healthy, millions of Americans are left out in the cold when it comes to affordability, an issue that has led to some interesting variability in the health of the national housing market.  Let's look at some statistics:

1.) Renters and Affordability:  On average, 45 percent of renters across America's metropolitan areas can afford the payments on a median-priced home in their markets, however, that share ranges from less than ten percent in Pacific Coast markets to roughly 70 percent in the Midwest and rural parts of the South.  Here is a map showing how the share of income that renters pay for housing grew and remained at historically elevated levels after the Great Recession:

The share of renters with severe housing cost burdens varies from a low of 18.4 percent in El Paso, Texas to a high of 35.4 percent in Miami, Florida.  Even with moderate rents, households in low income regions find that they have severe housing cost burdens.

High rents in some metropolitan areas are also delaying household formation among younger adults as shown on this graphic:

2.) Housing Cost-Burden:  Using a "30 percent of income" affordability cutoff, the number of housing cost-burdened households fell from 39.8 million in 2015 to 38.9 percent in 2015.  Households that are severely burdened (those that are paying more than 50 percent of their income) also fell from 19.3 million in 2014 to 18.8 million in 2014.  Of these severely burdened in 2015, 11.1 million were renters an increase of 3.7 million since 2001, and 7.6 million were owners, up 1.1 million since 2001.   This is fascinating given that 30-year fixed mortgage rates have done this since 2000:

3.) Disparity in Price Appreciation and Affordability:  The gap between housing affordability in low- and high-cost markets continues to grow as shown in this figure:

Back in 2000, the median home price in the most expensive market was 6 times higher than the least expensive market; by 2016, this differential had increased to more than 11 times.  In 2016's ten highest-cost housing markets, real median home prices increased by 63 percent to $574,460 over the decade and a half since 2000.  In sharp contrast, in 2016's lowest-cost housing markets, real median home prices increased by only 3.6 percent since 2000.  As well, in 19 markets located mainly in the Midwest, real home prices in 2016 were actually lower than they were in 2000.  So much for the wealth effect of housing!  What is particularly concerning is that, over the period from 2000 to 2016, real housing prices in low-income neighbourhoods in the ten highest-cost metropolitan areas were up by a whopping 150 percent on average, outrunning the 109 percent increase in high-income neighbourhoods in these same metros.  This obviously means that it is becoming increasingly difficult for low-income families to afford homes in their traditional neighbourhoods.

4.) Growing Economic Segregation:  From 2000 to 2015, the number of people living below the federal poverty line grew by 41.1 percent to 47.7 million.  As such, the number of high-poverty neighbourhoods (a poverty rate of more than 20 percent) increased by 59 percent and the poor living in these neighbourhoods increased by 76 percent.  The number of people living in neighbourhoods with concentrated poverty (a poverty rate of more than 40 percent) doubled to 6 million people from 2000 to 2015.  Over the past decade and a half, the number of people living in poverty has increased markedly in suburban and exurban communities as shown here:

While 34 percent of America's poor live in high density neighbourhoods, data suggests that the largest and fastest increase in poverty has been experienced in areas outside of urban core areas, unlike the pattern established in the 1960s and 1970s.

5.) Homeownership Rate:  Here is a graphic showing the homeownership rate going back to 1985:

As you can see, the homeownership rate continued to fall for the 12th consecutive year in 2016, reaching 63.4 percent, 5.6 percentage points below the peak in 2004 and 0.6 percentage points below its level back in 1994.  The drop in the homeownership rate since 2004 varies widely by race/ethnicity:

White - peak 76 percent, 2016 rate 71.9 percent

Hispanic - peak 48.1 percent, 2016 rate 46 percent

African American - peak 49.7 percent, 2016 rate 42.2 percent

Looking at the 50 largest metropolitan areas, home ownership rates also varied geographically from a low of 47.9 percent in Los Angeles to a high of 69.2 percent in Pittsburgh.  Between 2006 and 2015, homeownership rates dropped in all 50 of the largest metropolitan areas from a decline of 1.6 percentage points in Buffalo to a decline of 9.0 percentage points in Las Vegas. 

I think that's enough housing statistics to digest for one posting.  As you can see, the health of the housing market in some parts of the United States is still showing signs of the weakness that developed during 2006.  Thanks to the Federal Reserve's ultra-low interest rate policies, some markets, particularly in California, have shown house price appreciation that has left many families out in the cold when it comes to affordability.  Other markets are still showing limited "real" improvement, a trend that is concerning given that we are now eight years into the most recent economic expansion.  Given the fact that millions of households are suffering from severe and growing housing cost burdens suggests that as the Fed continues its policy of normalizing interest rates, they will continue to be shut-out of the U.S. homeownership dream, a factor that will have a negative impact on the demand for housing in the future.