by guest contributor, Peter Fugiel, Ph.D.

The U.S. Owner-Occupancy Rate is a Stubborn Fact of Life, Changing Slowly over Time

The 1950’s suburbia craze of building mostly detached units was the one real exception in the housing sector. Homeownership rates in the U.S. soared from 50% to 60% percent during that decade. But it then took another 50 years – half a century! – for the national homeownership rate to climb just another five percentage points, up to 65%.

Then, unexpectedly, the capital market “credit bubble” formed between 2002 and 2006. The bubble added five million owner units, and the ownership rate went to an impressive 69%. Home sales rose to seven million units a year in 2006 – up from five million a couple of years earlier – and prices in many markets were rising 10% a year.

What to do we do with six million owner units hard-to-price/hard-to-manage/and tough-to-’de-convert’ to rentals?

What got pushed up too fast had to come pushing back down. Easy capital from national banks and federal agencies is no substitute for commonly accepted lending rules enforced by the state governments. By 2013, the national homeownership rate was back down to 65%. By the time it is all over, and prices return to their 2002-04 levels, it is estimated that 10 million households and an estimated 20 million Americans will have lost their homes due to this highly innovative, but largely unregulated banking invention called loan securitization.

The Good News and the Bad News about the Housing Recovery to Date

Several leading resources monitor the “post-bubble” housing sector. As of mid-year 2013:

  • Realty Trac is showing the huge foreclosure rate difference that has emerged between the two kinds of state late loan disposition procedures. While foreclosure rates among non-judicial states have been declining for nearly two years, foreclosures are rapidly increasing in the largest judicial states. By now the very late loan pipelines in Illinois, New York/New Jersey, and Florida are each above 6%. The Illinois foreclosure rate is among the highest in the country, for the fifth year in a row. In contrast, among the non-court states, some of which have been foreclosure hot spots, areas like Phoenix and San Bernardino, now have rates below 2%.
  • Core Logic continues to monitor the staggering size of the “shadow inventory.” The total number of loans that comprise the shadow inventory has declined 20% in the last two years, down to 2.6 million loans. It should be noted however, that many loans in the shadow inventory are not listed for sale, and many loans that start out in the foreclosure process, are ending end up as empty units. Lender reluctance to list foreclosed loans is a disturbing new part of the shadow inventory. Timely disposition of lender late loans cannot be assumed. Even as the big national banks reduce their anticipated loan losses provisions for the shadow inventory, their late loans are not necessarily secured by appreciating properties in the minority of strong local markets.
  • Calculated Risk has been tracking the all-important Mortgage Bankers’ Association loan delinquency stats. Between 2005 and 2010, the combined delinquency rate in the U.S. nearly tripled, to 15%. Here was sure evidence that the securitization industry had pushed the owner occupancy button too hard, for too long. By the beginning of 2013, combined delinquency numbers are back down, closer to 10%. As the nation’s loan disposition systems try to dispose of six million late loans over the next five years, the real challenge in the sector now will begin to emerge. What to do we do with six million owner units hard-to-price/hard-to-manage/and tough-to-’de-convert’ to rentals?
  • Zillow InfoGraphics is monitoring the percentage of local home loans that are ’under water’ and in delinquency for every county in the US. Disposition trends among the states have already made it difficult to generalize about the distressed home sector. The drill down into some of these bellwether metro counties reveals astonishing divergences. Popular western cities like Austin and Denver show delinquency rates below 5% with virtually no underwater loans. The same is true in several very expensive markets like Seattle and Portland- which are reporting low delinquencies and only moderate negative equity problems. The local differences abound everywhere. In wealthy suburban Westchester County (NY,) delinquencies are extremely high, at 12%. In Miami-Dade, the delinquency rate stands at 30%. And delinquencies throughout Florida are very high as investor speculation and aging in place disrupt local supply and demand equations.
  • The National Association of Realtors (NAR) and Standard & Poor’s (S&P) follow home price trends for nearly three hundred local U.S. markets. Most of the capital market talk about home prices in the past decade has centered on the reputable S&P home price indices. Even though the two measures have brought some much-needed comparability and long price time lines to the sector, there are a couple of other things to consider about local market trends. The cities in the S&P 20-market index are mostly booming western, high price coastal, and speculative markets. There are only a handful of truly affordable markets, and some struggling Midwest markets, in the twenty market index. When you consider that two-thirds of the National Realtor survey cities have home market prices under the current median price of less than $160,000, the huge difference among expensive and ’heartland’ prices in the U.S. is seen to be problematic from a national policy perspective.

Housing Trends over the Next Five Years

Five to ten million home units are currently mispriced, many of which are not well suited to long-term rental status. The value of these units can be easily lost to the local tax rolls, especially when mispriced units are concentrated. A 10% tax base loss in most slow growth areas is not unrealistic.

State foreclosure rules that cause a unit to become empty too soon are encouraging vandalism and local abandonment trends to set in, and such rules are distorting local tax levels.

Localities that are losing population will be the most at risk of seeing their over-priced housing bubble units go empty. The cities whose nose counts went negative the past decade are numerous and far flung, including Memphis, Pittsburgh, Rochester (New York), Baltimore, Sarasota, Mobile, Ft. Lauderdale, Marietta, and Chicago. When Chicago reported 50,000 foreclosures during the past decade, it was hard to accept that that the foreclosures meant 200,000 people gone as well.

Two-thirds of all U.S. markets have home values below the current U.S. median of approximately $160,000. It is very easy to over-price distressed home units in most U.S. markets. In many of the hardest hit urban markets, there is no “ask and bid” system in operation. It is a negotiated price at best.

The future ’home demand pecking order’ among communities will be based off of the top 20% of U.S. households with high credit scores, and who use the federal income tax mortgage deduction. These households are concentrated in fewer than fifty home markets on both coasts, and increasingly, in the west, where interstate migration has been the strongest.

Only housing market ’newbies’ think that renting out detached home units makes economic sense for longer than five years. Adverse occupancy selection easily takes over, especially in declining towns and communities. Of course many attached rental units are maintained and community assets. It is just that they will tend to lose their tax value in most communities, until market comparables are found that justify keeping condo conversion prices as the basis for ongoing value.

Strategic Thinking for Investors, the States and Communities

  • Saving at-risk home units for temporary rental purposes at least, and for ownership long term, has to be the most important economic development goal for middle class communities in virtually every state in the coming decade.
  • In most circumstances, ownership preserves unit tax value better than does renting. Renting-to-own is vastly more promising than just living in a unit. But renting out a unit is preferable to seeing it go empty and deteriorate. And for sure having a unit go bad is nothing compared to having a pattern of vacancy set in in an area, at which point all unit values plummet.
  • Many housing bust units are simply waiting for the home credit markets to loosen. Has easier credit in exchange for community preservation been recognized yet?
  • State foreclosure rules that cause a unit to become empty too soon are encouraging vandalism and local abandonment trends to set in, and such rules are distorting local tax levels. State policy is needed in this area to prevent needless value losses.
  • Likewise, state policy is needed to prevent needless losses to a community caused by state foreclosure rules that allow a possibly disinterested household several years to stay in their unit. When a lender fails to complete a foreclosure, and lets the unit become a ’zombie’ foreclosure, the community pays the full and long-term cost. State policy should encourage well-managed rent-to-own and strategically important rental programs to protect the value of the unit for the community.

About the Author

Peter Fugiel, Ph.D., a housing and public finance consultant in Chicago, is a frequent contributor to His firm, PMN Community Services, provides research services to Chicago-area communities based on platform that combines real estate market analysis with municipal bond research.

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