Urban Land Institute study: The age of suburbanization is over

Housing in America: The Next Decade, a major report by John McIlwain of the Urban Land Institute, has much to say about the current state of affairs, problems with mortgage finance and long-term trends associated with U.S. housing markets. Published in March 2010, the report is well worth reading for anyone with an interest in housing markets, home ownership or the future of this industry.

The current assessment is that markets are beginning to stabilize, at least with respect to prices.  The author is well aware of the destruction of values throughout the country and even endorses the idea of further price declines through 2010; this is consistent with many other economists. McIlwain’s prediction for stable prices for 2011 is predicated on declining unemployment rates during 2010, something which seems a bit more uncertain these days. Additional employment is expected to prop up housing demand; a “jobless recovery” may not do the trick.

By the end of 2010, the report predicts as many as 40 percent of all households with mortgages will have negative amortization (a.k.a. being “underwater”). It is well known that the absence of equity for homeowners is a serious problem and not only because of the reduction in the homeowner’s wealth. More importantly, such a situation changes the homeowner’s attitude towards the asset as well as his obligation to continue to service the debt. Previous estimates of underwater households were 25 to 30 percent. At 40 percent, the magnitude of the problem cannot be over-emphasized.

The report emphasizes the need for financial reform but not the financial reform talked about in the latest 2000+ page tome coming out of Washington. There is a need to reform or replace Fannie Mae and Freddie Mac, the now government-dominated agencies crucial to the American housing finance system. (For political reasons, reforming these agencies has been completely avoided by Washington politicians to date.)  In addition, the Federal Housing Administration (FHA) is backing 90 percent of the mortgages made today, where historically they were involved with only up to 30 percent of all mortgages.  The report also calls for new rules and regulations for mortgage securitization. Clearly, we need a new system of securitized instruments for the future.  Just read The Big Short by Michael Lewis (2010) or other recent books if you need convincing.

The long-run predictions are also interesting.  In addition to identifying various demographic classes for future housing demand, the report envisions a future for housing different than the past: 

• Demographics will favor housing demand but at lower home ownership rates than at the peak or even currently. Rental markets will rejuvenate.
• Families with moderate or limited income will struggle as increases in household income will be “constrained” and house prices, despite their recent declines, will continue to be too expensive for many potential buyers. Such buyers will consider moving to distant suburbs but be faced with significantly higher commuting costs. 
• New homes will reflect sustainable development objectives and over time, will become very energy efficient.

Consider this set of conclusions and visions for the future:

The age of suburbanization and growing homeownership is over.  The demographics of the next decade indicate that the market for urban living will continue to grow. There will be regional winners and losers as markets recover, and the strongest markets will be found in places that provide a vibrant 24/7 lifestyle. Many central cities will experience strong demand for housing. People who want an urban lifestyle but either do not want to live in a “big city” or cannot afford to will look to live in the many suburban town centers that have been emerging in metropolitan regions across the country.  

Herein is the optimism: the changes which have been foisted upon households, financial institutions and the real estate industry since 2006 will result in new opportunities in the markets of the future.  Metropolitan areas throughout the land will be altered by these changes in many fundamental ways.

There is much more to the ULI study and it is definitely worth a look. Housing markets and the housing industry are undergoing dramatic changes. The winners and losers have yet to be drawn. Will you be prepared for the road ahead?

No related posts.

 Print This Article

Tags: Fannie Mae, financial reform, homeownership, Urban Land Institute

This entry was posted on Friday, July 9th, 2010 at 6:00 am and is filed under Economics, Industry News. You can follow any responses to this entry through the RSS 2.0 feed.