Thursday, June 16, 2011

Why the Housing Market is (Still) Collapsing

Last week the federal government proposed stricter limits on mortgage lending. For anyone over the age of 50, the new rules sound a lot like the old rules: a 20 percent down payment to get the best mortgage rate, and total debt payments not to exceed 36 percent of household income. The new regulations will be good for the housing market of the future. Unfortunately, they will further destabilize the structurally unsound housing market of today.    

A little bit of history. Beginning in the mid 1990s, the United States experienced a unique confluence of events: a housing market that was growing because of the aging of the baby-boom generation into the peak home-buying age groups and relaxed mortgage lending rules. If only the regulators had let well enough alone and allowed boomer demand to drive homeownership to historic heights. But that wasn't good enough for some, so the market was juiced with easy credit. Kaboom! Homeownership rates and housing prices soared, creating a housing market with the structural integrity of Tinkertoys. It was bound to collapse and it did. But, like a game of Angry Birds, the collapse is not yet complete. A greatly weakened housing market is straining to stand but destined to fall because of the demographics. To be blunt, there is no good news for housing in the demographic trends. Let's examine them generation by generation.

Millennials: Not Buying. The large millennial generation has now filled the 30-to-34 age group, when homeownership becomes the norm. If housing had not been juiced with easy credit, millennials would be buying homes and stabilizing the market. But falling prices, unemployment, and job insecurity are driving them away, undermining the foundation of housing. According to the Census Bureau's latest geographic mobility report, the number of people who moved because they wanted to own rather than rent fell by a whopping 53 percent during the past five years--from 3.7 million in 2004-05 to 1.7 million in 2009-10. Between 2004 (the year the homeownership rate peaked) and 2010, the homeownership rate of householders aged 30 to 34 declined more than any other--down 5.8 percentage points to 51.6 percent. The rate is still falling. As of the first quarter of 2011, only 50.3 percent owned a home. Even if they want to buy, bigger down payment requirements and student loans (37 percent of householders under age 35 have student loans) will prevent many from getting a mortgage.

Generation X: Underwater. No one has been hurt more by the housing crisis than Gen Xers. They were most likely to buy homes when prices were peaking, and they are most likely to be underwater today. According to a Pew survey, 21 percent of homeowners with a mortgage were underwater in 2010. The percentage was 25 percent among 30-to-49-year-olds. With housing prices continuing to decline, the number who are underwater is growing. Trapped in their expensive homes, the mortgage interest payments of householders aged 35 to 44 are an astounding 66 percent above average, according to the Consumer Expenditure Survey. This generation will not be moving up, another lethal crack in the structure of today's housing market. 

Boomers: Downsizing. Each year 2 million homeowners aged 45 to 64 move, joining the growing ranks of Americans who are losing money on their biggest investment. According to Zillow, 37 percent of homes sold in April 2011 went for less than their purchase price, not to mention the target price boomers had in mind when they planned their empty-nest and retirement years. Those movers may be the lucky ones, able to unload their white elephants ahead of the crowd as their peers create an increasingly top heavy and unstable housing market. According to the 2010 Del Web Baby Boomer Survey, 42 percent of 50-year-olds and 32 percent of 64-year-olds plan to move when they retire. Many will have to change their plans.  

Older Americans: Indebted. Once upon a time, it was the norm for older Americans to be debt free. Today, millions of householders aged 65 or older are in debt. Twenty-seven percent of homeowners aged 65 or older had a mortgage in 2009, according to the American Housing Survey, up from 18 percent ten years earlier. The Survey of Consumer Finances finds fully 62 percent of householders aged 65 to 74 having debt (including mortgage and other types of debt), owing a median of $48,100. The debtors probably planned at one time to sell their house and pay off their obligations. Oops! Now their wealth is frozen, creating financial hardship and threatening the inheritance of the next generation--another crack in the structure of the housing market.  

Like I said, there is no good news for housing in the demographic trends. 

For much more about homeowners, renters, and the housing market, see the all new 3rd edition of Americans and Their Homes

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