Housing markets in the United States are in a state of turmoil. As the economy recovers, markets will stabilize but the old “normal” will not return. New trends will emerge as major drivers, creating markets in new places. Those who fail to understand these new trends will miss opportunities or find themselves building what is no longer in demand. This is the analysis presented in a paper by John McIlwain, Senior Resident Fellow at the Urban Land Institute, presented at the ULI Trustees’ Meeting in January, 2010. The paper provides an in-depth analysis of the current state of the housing market in the United States in three major parts.
Part One reviews the current state of the market. As home prices begin to stabilize in many parts of the country, overwhelming challenges remain. Projections are that housing prices will fall another 10 percent this year until they stabilize in the second half of the year or in early 2011. This assumes that job losses come to an end in the next few months and unemployment begins to decline this year. McIlwain asserts that the biggest challenge to housing markets today is the growing number of homes with mortgages that are “underwater,” those with principal balances higher than the current values of the homes which secure them. McIlwain predicts that by the end of this year some 40 percent of all mortgaged homes will be “underwater.”
Part Two looks at the need to re-establish the private market residential finance system which is now virtually supported by the federal government through the Federal Reserve, Fannie Mae, Freddie Mac, or the Federal Housing Administration (FHA). Fannie Mae and Freddie Mac need to be reformed or replaced and the manner in which mortgages are originated and securitized changed before investors will come back.
Part Three of the paper looks at long term trends that are emerging. After the recession, demand for housing will increase. There are four large demographic groups that will drive housing markets for the next decade, each of which faces a unique set of challenges:
- Older Baby Boomers who will become seniors in unprecedented numbers;
- Younger Baby Boomers many of whom will be unable to sell their current suburban homes to move to new jobs;
- Generation Y who will be renting far longer than past generations; and
- Immigrants and their children who will want to move to the suburbs but may find them too expensive even after current drop in housing prices.
Workforce housing will also remain a challenge. The age of suburbanization and growing homeownership is over. The outer suburbs will have the least expensive housing but the cost in time and money of long commutes will eliminate any savings. Many who live there will do so not by choice but by necessity.
However, McIlwain maintains that these shifts in markets present opportunities for those who understand the trends. Over time a new mode of metropolitan development will emerge presenting opportunities and stiff challenges. The most difficult issue to predict is the impact of the current housing crisis on those who have suffered the most from it. Six million or more households will have been forced out of their homes by the current wave of foreclosures by the end of 2010 with more to come in 2011. This translates into over 15% of all households with mortgages, impacting 12 to 15 million people, including young families with children. Their credit will be impaired for the next ten years and their housing options limited. The emotional impact on these families as well as their disillusion about the “joys” of homeownership will be intense, meaning that new attitudes to homeownership and the “American Dream” will emerge. The need for housing assistance is already greater than the federal government can meet. State and local governments are cutting budgets and reducing services as tax revenues decline especially in areas of high foreclosures. The impacts of this crisis will extend well into the future.
To read the report in its entirety, go to:
http://www.uli.org/sitecore/content/ULI2Home/News/MediaCenter/PressReleases/2010%20archives/Content/~/media/Documents/ResearchAndPublications/Fellows/McIlwain/HousinginAmerica.ashx