By Lily Leung
Baby boomers looking to downsize and young adults who can afford to finally move out will be key drivers of the residential recovery, says Harvard University‘s state of the nation’s housing report, released Monday.The U.S. home recovery, expected by many industry leaders to come around slowly, in the meantime has been hampered by declining prices, high rates of foreclosure in states such as California and people faced with negative equity.”The state of the nation’s housing is sobering,” said Eric S. Belsky, the managing director of the Joint Center for Housing Studies, which wrote the report.
“Total housing construction over the previous decade now barely exceeds the lowest level of any ten-year period in records dating back to 1974.”Hopes of a housing turn-around depend largely on two groups: boomers and those in their 20s.Authors of the housing paper say the majority of boomers, born from 1946 to 1965, will likely stay in their current homes and “age in place.” However, an estimated 3.8 million people in this age range are expected to move to smaller units and gravitate toward “preferred retirement destinations,” including areas in the South and West, the report says.Meanwhile, more “echo-boomers” – those born after 1986 – are expected to move out of Mom and Dad‘s place and into starter apartments, although that impact hinges mainly on job creation.
Home prices have dropped drastically during the last three years throughout the U.S., causing real home equity to fall from $14.9 trillion at its peak in early 2006 to $6.3 trillion at the end of 2010. Despite new levels of affordability and the continued aspiration to own, many potential homebuyers can’t afford the higher down payments, income requirements and credit score minimums. Those factors have kept many from entering the starter-home market, especially minorities, whose average incomes are on average lower than whites, the report says.As the owner-occupied market suffered, the rental market picked up: vacancy rates fell and rents rose, a scenario that has played out in San Diego County.
“If employment growth, especially among young adults, continues to pick up and homeownership rates continue to slide,” the report says. “renter household growth should remain strong.” That in turn will result in higher demand in rental housing, perhaps prompting more multi-family construction, authors say.Gary Painter, director of research at University of Southern California’s Lusk Center for Real Estate, told the Union-Tribune last week it will take two years before people buy again. Meanwhile, the rental market will be the first to pick up. Recovery-wise, California is among five states that have “the farthest to go.” What’s critical to a recovery, Harvard experts say, is an increase in the creation of households, which will help the rental market. Also a factor is consumers’ perception that prices have hit bottom. Once that happens, buyers on the fence will return to the market and “quickly burn through the lean inventory” and “slim down the excess supply,” the report says.