What's Ahead in Residential Finance and Housing Markets? Looking beyond Foreclosures
Immergluck, Dan, Partners in Community and Economic Development
Following a period of steady increase from the mid-1990s through the early 2000s, the homeowner-ship rate in the U.S. began dropping during 2005, driven by surging foreclosures. By early 2009, homeownership was down to 67.3 percent, roughly equivalent to the rate in early 2000. This represents a dip of 2.8 percent. (1)
This contraction is significant, but the changes in national homeownership figures mask even larger fluctuations at the metropolitan level. Figure 1 shows changes in metropolitan homeownership rates for a number of cities, including some that saw relatively large declines. While the 2008 third quarter average rate of homeownership for the U.S. as a whole fell by 1.7 percent since third quarter 2005 (from 68.8 to 67.6 percent), the drop in some metro areas was much steeper. For example, in Toledo, the corresponding change was 9.6 percent, and in Riverside, California, it was 8.1 percent. Such disparate changes in homeownership mean that each market will need to develop customized responses through strategies focused not only on rental housing, but also on encouraging new and returning homeownership.
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Prospects for Rental Housing Markets
As foreclosures continued and fewer households qualified for a mortgage, the demand for rental housing increased somewhat. If the foreclosure and mortgage crisis had occurred in the absence of the deep economic crisis that followed in its wake, the demand for rental housing would have risen more substantially. However, demand has been dampened as higher unemployment and some slowing in immigration rates have led to fewer young people forming their own households and to other households merging to share household expenses. (2)
Although the demand for rental housing has climbed, the overall demand for apartments in multifamily complexes has generally not. This is because two sources of competitive supply have increased. (3) First, some foreclosed single-family homes are being converted to rental housing. Also, a portion of excess condominium stock is also being converted to rental, creating what some are calling a "shadow" market of multifamily units. (4) As of early 2009, total U.S. demand for multifamily apartments had not kept pace with the total demand for rental housing.
It is important to recognize that although these are highly aggregated and near-term patterns, current problems in multifamily housing finance (discussed below) suggest that the supply of affordable rental units may be constrained over the longer term. Rental markets are also being affected by high levels of affordability mismatch: few units exist at rents that are reasonably affordable to lower-income households. Rising unemployment is likely to lead to the paradox of higher overall vacancy rates in rental housing, as more people, especially younger singles, will find roommates or live with relatives. Many families will see their incomes drop faster than declines in rents. The rent burden on these families will be driven up substantially, forcing them to live in overcrowded or substandard accommodations or face significant periods of homelessness.
Geographic mismatches further complicate supply and demand for rental housing. The foreclosure crisis has led to substantial concentrations of vacant homes in neighborhoods that have been hit hard by both the foreclosure crisis and the broader recession. (5) Some of these homes are becoming available for rent, but this new supply of rental units may not be located in places best suited to renters' needs with regard to job locations, schooling, and child care issues. Meanwhile, in some communities offering superior access to jobs and good schools, conversion of owner-occupied units to rental housing may occur slowly, especially if condominium or homeownership associations resist, such changes.
Another problem is that many very low-income households rely on federal housing choice vouchers (formerly, "Section 8" vouchers), which many landlords do not accept. …