New Housing Headwind Looms as Fewer Renters Can Afford to Own

The following article by Nick Timiraos in the June 7th edition of the WSJ predicts that renters will be a growing portion of the total new home market. 

Coach Note: If modular construction isn't the first choice when it comes to putting up large townhouse and apartment projects, then the factory's sales staff needs to be trained in how to approach builders and developers, give them the facts and benefits and then hand them off to a factory team that specializes in these projects.

New Housing Headwind Looms as Fewer Renters Can Afford to Own

Last decade’s housing crisis could give way to a new one in which many families lack the incomes or savings needed to buy homes, creating a surge of renters and a shortage of affordable housing.

The latest problem looks very different from the subprime mania of the early 2000s, but it shares one trait: Policy makers in Washington appear either unaware or unwilling to do much about it.

The U.S. homeownership rate is below where it stood 20 years ago when President Bill Clinton launched a national campaign to encourage Americans to buy homes.

Conventional wisdom says the rate, at 63.7%, is leveling off to where it was for decades before the housing-market peak.

But this is probably wrong, according to research from the Urban Institute, which predicts homeownership will continue to slip for at least 15 years.

Demographics tell the story.

Urban Institute researchers predict that more than 3 in 4 new households this decade, and 7 of 8 in the next, will be formed by minorities. These new households—nearly half of which will be Hispanic—have lower incomes, less wealth and lower homeownership rates than the U.S. average.

The upshot is that fewer than half of new households formed this decade and the next will own homes. By contrast, almost three-quarters of new households in the 1990s became homeowners.

The downtrend would push homeownership below 62% in 2020, and it would hold the rate near 61% in 2030, below the lowest level since records began in 1965.

The declines reflect a surge of new renter households, which is boosting rents. Together with tougher mortgage-qualification rules, this will leave households stuck between homes they can’t qualify to purchase and rentals they can’t afford, says Ron Terwilliger,who spent two decades running Trammell Crow Residential, one of the nation’s largest apartment developers.

As rent takes a larger share of income, families could face greater challenges in saving for a down payment. This could restrain a housing market that has failed to provide any real lift to the economy in the current expansion.

Not everyone, however, shares such a pessimistic view.

The decline in homeownership during the past year reflects a surge in new households, a positive development for the economy. For now, these people are renting, but some economists say rising rents will make homeownership look attractive.

Economists at Goldman Sachs say demographics ultimately could be a tailwind. They noted in an April report that even though Hispanics, for example, have lower homeownership rates than non-Hispanic whites, those rates have been rising for the past four decades. They see the homeownership rate stabilizing next year after it falls to 63.5%.

Housing construction is sure to rise as the millennial generation, about 75 million Americans born between 1981 and 1997,comes of age and leaves the nest. But Laurie Goodman, one of the Urban Institute researchers, says these households have less wealth than previous generations.

While the U.S. is on course to add almost 400,000 apartments this year, the vast majority of these are luxury rentals for young, urban professionals, says Mr. Terwilliger. This leaves a shortage of more-affordable supply.

One concern, he says, is that ownership simply will climb out of reach for some because of cost, particularly as interest rates rise.

A related concern is that qualified households will be unable to move from renting to owning as housing-cost burdens, slow wage growth and student debt make it more difficult to cobble together even a modest down payment.

“America is blissfully unaware of this,” says Lewis Ranieri, the financier who co-invented the mortgage-backed security, which allowed large numbers of baby boomers to become homeowners beginning in the 1980s. “We’re rapidly running to a crisis in less than 10 years.”

By contrast, Social Security receives far more attention from politicians even though it isn’t projected to run out of cash until the early 2030s.

Some fear that, as in the early 2000s, Washington will address a housing-cost crisis by pushing some households to buy homes before they are financially ready. That is less likely today because lenders are being far more careful about qualifying borrowers for a mortgage.

What’s to be done?

Given budget pressures, it may not be realistic to expect the government to spend more money on housing than it already does. Thus, the focus now should be on reallocating what already is committed, says Mr. Terwilliger, a Republican who this month formally will launch a foundation designed to start these conversations.

His goal is legislation after the 2016 election that would realign housing policy with the shifting dynamics.

The U.S. commits about $200 billion annually to housing, largely through tax breaks. Nearly three-quarters of that goes toward homeownership, and the biggest piece—almost $100 billion annually—is the mortgage-interest deduction.

According to the Congressional Budget Office, the wealthiest 20% of households, those earning more than $160,000 annually, receive 75% of the total tax benefit. Many homeowners don’t directly benefit from the deduction because they don’t itemize their tax deductions.

Given the failures of housing policy during the past two decades, Mr. Terwilliger says the U.S. must rethink providing the most generous federal housing assistance to the well-housed and the well-to-do. Instead, the government should refocus the existing subsidies on helping young families save to purchase a home, he says.

Curbing the interest deduction also could free up funds for the rental side, where the government could boost the use of low-income housing tax credits that entice developers to build or renovate more affordable housing units.

Politically, none of this will be easy. Some will say it is a zero-sum game—helping renters at the expense of owners.

Not so, says Mr. Terwilliger. If renters can’t ever become homeowners, who will buy those homes when today’s homeowners need to sell?