Although falling home prices have improved homebuyer affordability in many metros, many homeowners have been left holding inflated levels of debt. While real homeowner equity dropped $2.5 trillion in 2007, mortgage debt levels actually rose by $400 billion. By the end of 2008, mortgage debt surpassed home equity, and debt now exceeds equity by $2.6 trillion. Falling home values have left millions of homeowners underwater — homes worth less than the outstanding balances on their mortgages. Moody’s Economy.com estimated that in March 2009, there were 14 million such households — and other estimates place this number much higher. Not only have these homeowners lost all of the equity that they may have built up in their homes, but they are also unable to sell or refinance if their mortgage payments become unaffordable. Rising unemployment and millions of job losses from the current recession means more homeowners simply cannot make their mortgage payments. Many are forced to sell or walk away from their homes. According to Zillow.com, by the end of 2008 over 40 percent of all home sales were homes sold for a loss, many of which were as a result of a foreclosure. Indeed, the National Association of Realtors reported that in the fourth quarter of 2008, 30 percent of all home sales were foreclosures and an additional 15 percent were distressed short sales. Entering 2009, rising delinquencies and record foreclosures continued to weigh heavily on the markets. By the first quarter of 2009, nearly one in eight mortgaged homeowners was delinquent or in foreclosure. While this includes a dramatic 37 percent of all subprime loans, it also includes fully eight percent of all supposedly less risky prime conforming loans, and prime foreclosures are accelerating. Foreclosures have been especially prevalent in areas that had recently been the hottest housing markets. California, Arizona, Nevada, and Florida alone accounted for nearly half of all homes in foreclosure by the first quarter of 2009. And while nationwide the number of homes in foreclosure entering 2009 was over three times what it was entering 2007, the jump in these four states was nearly ten-fold.
No Picnic for Renters Either
While the decline in home values and housing wealth has been a major issue for low-income and minority homeowners, renters have not escaped harm either. For years, renters have suffered higher rates of severe housing cost burdens than homeowners, and according to the US Census Bureau’s 2007 American Community Survey, at last count nearly a quarter of all renters paid more than half of their pre-tax incomes on rent. Because renters are generally younger, they have lower incomes than homeowners and are also more likely to be in entry-level jobs and therefore more susceptible to job loss in economic declines. Particularly harmed by the downturn have been those renters unknowingly living and paying rent in properties that have been foreclosed upon because of the delinquencies of their landlords. Reports from the Furman Center for Real Estate at New York Univerisity and the National Low Income Housing Coalition have shown rental properties to be a significant share of foreclosures in the cities studied. Small multifamily rental properties have been especially at risk of foreclosure since many were financed using the same risky lending products and practices that contributed to the record foreclosure levels for homeowners. These small multifamily properties typically charge lower rents than larger properties and are more likely to be occupied by low-income households.
Small multifamily rentals are not the only properties being impacted by the downturn. Delinquency rates of multifamily mortgage-backed securities were increasing rapidly as of the first quarter of 2009, demonstrating that larger multifamily properties are also being pressured. In total, after rising significantly for several years, real rent growth was flat but trending downward in 2008, while property values declined as buyers demanded a higher risk premium for their investments (Figure 4). With declining rents and property values and increasing delinquencies, access to credit for multifamily properties has been severely constricted. Reduced access to funds may have a negative impact on the quality of rentals as it will be more difficult for cash-strapped property owners to find a buyer or to borrow against their properties to make necessary improvements or repairs.
Looking to the Future
The problems facing minorities may have a lasting impact on housing markets given their expected increase in influence in the next 20 years and beyond. Even assuming that the current downturn will cut immigration to half of recent census projections, minorities will account for 73 percent of all household growth from 2010-2020 which will increase the minority share of the population from 29 percent in 2005 to 35 percent in 2020. These demographic shifts will be associated with distinctly different changes in household types among whites, blacks, and Hispanics. For example, while the number of white married couples with children is actually expected to decline sharply — by nearly a million from 2010-20 — minority married couples with children will grow by well over a million. Therefore, many large suburban homes of today’s baby boomers will be suited from a design perspective to the growing number of minority families. But even though the downturn has increased the affordability of many of these homes, even larger price declines may be necessary if minority families with children become the main source of demand for these homes because they have much lower average incomes and wealth. Making matters worse, incomes of younger householders are not keeping up with those of their predecessors. For the first time in generations, householders in each 10-year age group under the age of 55 will likely end the decade with lower real incomes than their peers at comparable ages when the decade began. In sum, the current downturn has brought dramatic house price declines, huge losses of wealth for homeowners, record foreclosures, no meaningful relief in cost burdens for renters, and a severe economic recession with millions of job losses. Though bad as things have been for most, low-income and minority households have been hit the hardest on many counts. With their influence expected to grow, overcoming the housing problems of an increasingly younger, larger, and more diverse population will be crucial to securing the future of the nation’s housing markets and a lasting economic recovery.
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