Through at least 2030, the housing market will depend on the desires and fortunes of two generations: baby boomers and a group primarily made up of their offspring, echo boomers, according to a recently released report prepared for the Washington, D.C.-based Bipartisan Policy Center.
The current housing market suffers from a "doubling up" phenomenon among young adults, high vacancy rates, reduced incomes, higher poverty levels, a high share of seriously delinquent mortgages, and declines in homeownership, particularly among minorities, the report said.
Nevertheless, between 2010 and 2050 the nation's population is projected to jump by nearly 93 million people to 403 million, and, with it, housing demand.
"It is safe to assume that these people will need at least 43 million more housing units than the nation currently has, and probably more just to accommodate household growth," the report said.
"The crisis has not changed the underlying drivers of housing demand. As the baby boomers age and as the population of young adults diversifies and grows, the need for senior housing will increase with the intergenerational handoff of millions of homes each decade."
The report highlighted six key demographic trends that will drive the housing market for at least the next two decades:
1. Growth in the senior (65 and older) population will create new demands for affordable, accessible housing: In 2011, the first of the baby boomers, those born between 1946 and 1965, turned 65. Over the next two decades, baby boomers will add 30 million people to the senior population, which the U.S. Census Bureau projects will make up 20 percent of the national population by 2030.
The projected increase of the senior population will mean a higher demand for accessible and affordable housing. Many seniors prefer to "age in place" in their own home, but most older seniors are also affected by disability, the report said. A quarter of people 65 to 74 report some difficulty with vision, hearing, mobility or activities related to personal care or independent living; that share jumps to more than half (54 percent) for those 75 or older and about a third of seniors 85 and older have moderate or severe memory impairment, the report said.
The vast majority of senior renters, 70 percent, spend least 30 percent of their income on housing costs. A substantial share of senior homeowners also struggle with affordability: about 3 in 10 spend at least 30 percent of their income on housing; 17 percent pay at least half their income, the report said.
In 2010, seniors had a homeownership rate considerably higher than the national rate: 77.5 percent compared with 65.1 percent for the population overall.
2. Seniors will contribute increasingly to housing supply: In general, seniors release many more housing units than they absorb. Accordingly, as baby boomers become seniors, housing supply will swell.
Seniors will release a net of approximately 11 million units between 2010 and 2020 and roughly 15 million units between 2020 and 2030, according to the report.
Whether the homes released fit the needs of younger generations is an open question, however.
"Despite potential increases in new construction, most of the houses that seniors will release in coming years were built when energy was inexpensive, nuclear families were the rule, incomes were increasing for most Americans, and mortgages were generally predictable and easy to obtain," the report said.
"Most observers expect the next 20 to 30 years to depart from this historic picture, with more expensive energy; growing diversity in race, ethnicity and in household structure; and more intense international economic competition. All of these factors will likely reduce demand for large single-family homes on large lots far away from established centers of employment and entertainment.
"Meanwhile, increasing uncertainty also applies to mortgage lending. In combination, these trends could limit the ability and desire of younger generations to buy some of the housing seniors will release in the next two decades."
In addition to these limiting factors, geography may also constrain the extent younger buyers will absorb housing released by seniors, particularly in the Northeast and Midwest. Young adults, particularly post-1980 immigrants and their children, are more unevenly spread geographically than the baby boom population. Between 2009 and 2010, the Northeast and Midwest lost 130,000 and 223,000 people, respectively, to domestic migration, while the South picked up 200,000 people and the West 153,000, the report said.
Between 2000 and 2010, almost as many seniors left homeownership as young households entered in Michigan, West Virginia, Ohio, Pennsylvania, Rhode Island, Louisiana and Mississippi. By contrast, in Nevada, Arizona, Utah, Idaho and Texas, "the release of owner-occupied houses in these states added up to less than 35 percent of the increase in housing supply needed to accommodate the entry of young households into homeownership between 2000 and 2010," the report said.
Click chart to enlarge.
3. Echo boomers represent a long-term opportunity for housing market recovery, but are struggling in the economic crisis: Echo boomers, those born between 1981 and 1995, constitute nearly 65 million people. Those belonging to this generation are also known as millennials or Generation Y. By contrast, the "baby bust generation," or Generation X, numbers 61 million. That generation's smaller size compared to the baby boom contributed to sharp a decrease in multifamily housing construction and therefore to a present shortage of rental units.
"Echo boomers, facing ... tight rental markets and significant economic uncertainty, have reduced the rate at which they are forming households: Many have never left home or have moved back in with older relatives. In addition, immigration rates have slowed as this generation has started to come of age, further reducing the number of new families entering the housing market," the report said.
Nearly half, 47 percent, of echo boomers between 18 and 28 live with at least one family member, including their parents, compared with 43 percent of those in the baby bust generation and 39 percent of boomers when they were in the same age range. Only 21 percent of echo boomers between 18 and 28 were married in 2009, compared with 29 percent of Gen Xers and half of boomers.
Echo boomers are more educated than previous generations (54 percent of those 18 to 28 have at least some college education), but they were hit hard by the recession. In 2010, more than a fifth of those between 18 and 24 lived below the poverty line.
Almost half of those 25 to 34 who "doubled up" with family or friends to save money would otherwise have lived below the poverty line, the report said.
4. Over the next two decades, the U.S. housing market will depend on echo boomers: The rate at which echo boomers form households will determine housing demand for the next 20 years, according to the report.
"Regardless of the economy and policy, echo boomers will account for between 75 and 80 percent of the owner-occupied housing absorbed by people under 65 before 2020," the report said.
But how many units are absorbed will depend on the state of the economy and how it affects echo boomers in particular. While high levels of education are in their favor, echo boomers are also plagued by high credit card and student loan debt, which could affect their purchasing power.
"A strong recovery with favorable housing market conditions would translate to substantial growth in echo boomer households. Resulting demand would help absorb houses that are currently vacant or being withheld from the market, and would accelerate a return to conditions that are conducive for residential construction," the report said.
"A weak economy and job market, by contrast, would substantially depress household formation and homeownership by this important segment of the population."
The report's authors developed three scenarios to estimate future housing demand. Under their "low" scenario, a weak recovery would mean only 9.7 million new households would form between 2010 and 2020, and about 40 percent of those new households would own their homes.
Projected change in households, 2010 to 2020:
Source: "Demographic Challenges and Opportunities for U.S. Housing Markets"
Under the "middle" scenario, which assumes a moderate recovery and somewhat least stringent down payment requirements, 12.3 million new households would form between 2010 and 2020 and 55 percent would own their own homes.
In their "high" scenario, which assumes economic growth similar to that in the 1990s and increases in mortgage availability and affordability, 14.9 million new households would form between 2010 and 2020, and 67 percent would own their homes.
Projected growth in owner-occupied and renter-occupied households, 2010 to 2020:
Source: "Demographic Challenges and Opportunities for U.S. Housing Markets"
In the 2020s, the number of homes baby boomers release into the housing market will jump further, the report said.
"Under the low scenario, new owners would absorb only 300,000 more owner-occupied units than seniors would release. This near parity at the national scale would mean that many local markets would be deeply oversupplied; established homeowners who sought to move (or their heirs) would presumably adjust by lowering their expected sales prices, converting their dwellings to rentals, leaving them vacant (potentially for seasonal use), or abandoning them," the report said.
"As is already the case because of the housing crisis, many non-senior homeowners who wish to move would be unable to do so because of 'underwater' mortgages.
"In the high scenario, by contrast, new owners would outnumber seniors releasing dwellings by more than 10 million. Even in the 2020s, echo boomers will play an important role in generating demand for existing and new housing; they account for about 45 percent of new homeowners under all three scenarios."
While homeownership projections for the 2020s vary under all three scenarios, none indicates that the U.S. homeownership rate will fall below 60 percent before 2030; the lowest projection is 60.6 percent in 2030, according to the report.
5. Rental housing demand is likely to climb in coming years: Asking rents have been rising and rental vacancies have been falling over the past two years. As echo boomers come of age, there will be continued demand for rental housing.
Immigration rates will also play a role in rental demand. Immigrants are more likely to rent than own and tend to concentrate in certain "gateway" metropolitan areas such as Los Angeles, New York, Miami and Houston.
"Given the size of the echo boom (the other major new renter group), a rebound in immigration would be likely to result in either very tight and unaffordable rental markets, or a renaissance in new apartment construction in gateway cities," the report said.
The three scenarios mentioned above suggest between 5 million and 6 million new renter households will form between 2010 and 2020. The 2020s will likely see smaller growth in rental housing demand because echo boomers are expected to have largely joined the ranks of homeowners by then.
6. Black and Hispanic Americans have suffered significant setbacks in homeownership: In 2010, blacks had a homeownership rate of 44.3 percent, nearly 28 percentage points below that of non-Hispanic whites; Hispanic homeownership lagged that of whites by 25 percentage points.
Changes in homeownership by race/ethnicity, 1990 to 2010:
Source: "Demographic Challenges and Opportunities for U.S. Housing Markets"
The median wealth of black and Hispanic households declined by one-half to two-thirds between 2005 and 2009, largely due to home value declines, while that of whites fell just 16 percent, the report said.
Median wealth by race/ethnicity, 2005 to 2009:
Source: "Demographic Challenges and Opportunities for U.S. Housing Markets"
Overall median household wealth was $70,000 in 2009, down 28 percent from 2005. Broken down by race and ethnicity, huge differences in median wealth emerge. Non-Hispanic whites held about $113,000 in assets in 2009; Asians, about $78,000; Hispanics, $6,300; and blacks, $5,700.
"This variation both reflects and reinforces homeownership disparities, since so much wealth is held in home equity and since wealth allows households to secure homeownership," the report said.
Younger generations are more diverse than older generations. Fifty-five percent of all U.S. children are non-Hispanic white; 22 percent are Hispanic. Meanwhile, 80 percent of those 65 and older are non-Hispanic white and only 7 percent are Hispanic.
Diversity by age group, 2009:
Source: "Demographic Challenges and Opportunities for U.S. Housing Markets"
Among echo boomers, about 60 percent are non-Hispanic white compared with 70 percent of those 30 and older. One-fifth of echo boomers are Hispanic; 14 percent are black; 5 percent are Asian; and 1 percent are "other," including multiracial, the report said. A quarter of echo boomers are either foreign-born (14 percent) or U.S.-born with at least one immigrant parent (11 percent).
"Together they represent the highest share of 'second generation' individuals since the 'Silent Generation' -- children born to parents who arrived during the immigration wave of 1890 to 1910," the report said.
At least partly due to immigration reforms in 1965 and 1986, more than 33 million people immigrated to the U.S. between 1965 and 2010, nearly making up for the population drop of the baby bust generation. There is some evidence that immigration peaked in 2001, however, and declined significantly during the economic downturn. There were about 12 million unauthorized immigrants in the U.S. in 2007, the report said, citing estimates from the Pew Hispanic Center. By 2009, that number fell to 11.1 million and rose by only 100,000 in 2010. In 2009, a net 855,000 immigrants entered the U.S., according to Census Bureau estimates.
"Prolonged weak economic conditions in the U.S., coupled with continued stalemate over immigration reform and improving economic conditions in Mexico and Asia (the main sources of legal and illegal immigration to the U.S.), will likely depress net immigration levels for several years," the report said.
The Hispanic population is expected to grow from 14 percent of the U.S. population in 2010 to more than a fifth of the population in 2050, regardless of immigration levels.
According to projections from the U.S. Census Bureau, assuming constant immigration of 1 million people per year, Hispanics will make up 28 percent of the population in 2050, non-Hispanic whites will make up 50 percent (from 67 percent in 2010), and the share of non-Hispanic blacks will remain roughly flat at 12 percent.
Assuming zero immigration in the four decades, Hispanics would rise to 21 percent of the population in 2050 and the non-Hispanic white population would drop to 58 percent.
According to a separate report released last month from the San Diego-based National Association of Hispanic Real Estate Professionals (NAHREP), the
2011 State of Hispanic Homeownership, one of every six persons in the U.S. is Hispanic and Hispanics will account for 40 percent of an estimated 12 million net new households in the next decade.
"The era of the Hispanic homebuyer is upon us. Thanks to youth, rapid population growth, rate of household formation, income and education gains, and high desire, Latinos are poised to have an exponential impact on housing and the U.S. marketplace," the report said.
"Accommodating this mega segment of new buyers will benefit the U.S. economy, provide local economic stimulus in areas that have been broadly impacted by the foreclosure crisis, and create new jobs. Creating an environment that welcomes first-time homebuyers will set the nation on an upward trajectory that revitalizes the market."
The U.S. homeownership rate was 66.3 percent in third-quarter 2011. Hispanics accounted for 53 percent of the total growth in homeownership during that quarter, absorbing 288,000 of a total of 545,000 new household units. At the same time, white homeownership grew by only 18,000 units, and black and Asian homeownership grew by 190,000 and 66,000 units, respectively. The Hispanic homeownership rate was 47.6 percent in the third quarter.
Click chart to enlarge.
Hispanics have had the highest labor force participation rate in the country for well over a decade, according to the report.
"Currently, 66.7 percent of all working-age Latinos are employed, nearly three percentage points higher than the rest of the U.S. population. Of the 2.3 million jobs added to the economy in 2011, 1.4 million, or 60 percent, were filled by Latinos. By 2025, Hispanics are expected to make up 50 percent of all entrants into the labor market," the report said.
While the housing downturn "offset the real homeownership gains made by Hispanics in recent years prior to the crisis ... we believe that the exponential forces of population growth, employment and income gains, purchasing power and desire of an emerging Hispanic mega-market have potential to supersede this painful chapter," the report said.
"This will take some time, however, before this trend shifts while foreclosures are still occurring and young householders are still renting."
NAHREP, which has 20,000 members in 48 states, made several policy recommendations it believes will encourage homeownership among Hispanics, including: improved access to affordable mortgage finance via government support of the mortgage market system; and the avoidance of any new taxes, fees, tax deduction eliminations or regulations that would increase the cost of housing.
"The most significant challenges to homeownership today include: the high levels of unemployment, the large number of homes with mortgages underwater, and the new mortgage credit environment, which generally requires larger down payments, more income, and higher credit scores," the report said.
"FHA-insured mortgage programs, which are renowned for their low down payment provisions and consistently successful loan performance, have also tightened credit requirements and raised costs.
"Due to these more stringent credit standards, many Latino creditworthy families who would have qualified before for well-structured and well-underwritten mortgage loans stand to lose a golden opportunity to make their dreams of homeownership come true."
The trade group also called for increased diversity among suppliers of real estate services; improved management of distressed real estate that favors owner-occupiers rather than investors; increased financial education for first-time homebuyers; and immigration reforms that include secure borders, increased legal immigration, and a path to citizenship or residency for some undocumented individuals and their children.
"Ultimately, government and private sector officials must realize the obvious: You can't sell to people who don't exist, and people who can't or won't buy goods and services or invest in businesses and human capital cannot spur the economy," the report said.
The report written for the Bipartisan Policy Center did not make any specific recommendations for housing policies, but did say housing policies would likely impact people's "decisions about whether, when and with whom to form households."
"Even more, the housing policies that emerge by the end of the 2010s will influence whether many households buy or rent, where they decide to live and whether houses currently owned by baby boomers are sold, rented or leave the housing stock entirely," the authors said.
"Whether for newly forming households or long-established ones, therefore, housing policies that emerge by the end of this decade have the potential to affect significantly the wealth portfolios of tens of millions of American families."
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