Wednesday, December 19, 2012

Sizing Housing’s Role in the Economy Before and After Recessions

by Dan McCue
Research Manager
The most direct measure of housing’s impact on the economy is Residential Fixed Investment (RFI). RFI includes spending on construction of new housing units and manufactured homes, as well as improvements spending, brokers’ commissions on the sale of residential property, spending on some types of built-in equipment (such as heating and air conditioning equipment), and also net purchases of residential units from the government.

In any single period of time, RFI is a modest part of the total output of the US economy as measured by gross domestic product (GDP). According to the US Bureau of Economic Analysis’s National Income and Product Account (NIPA) tables, which provide quarterly GDP data for most series dating back to 1947, RFI has on average represented just 4.2% of the economy. In terms of economic growth, however, growth in RFI can have influence that far exceeds its share of the economy (Figure 1). This is particularly the case in the time periods around recessions, when decline or growth in RFI can account for 15 or even 20 percent of overall decline or growth in GDP – enough to push the economy into or out of a recession (see Leamer (2007) “Housing IS the Business Cycle“). Prior to the Great Recession of 2007-9, for example, the preceding downturn in RFI alone shaved fully 1 percentage point off of GDP.

Note: Shaded areas are recessions.
Source: JCHS tabulations of BEA and NBER Business Cycle data.

In the five recessions that occurred prior to the Great Recession between 1970 and 2001, housing construction was both a drag on the economy leading into the recessions and a buoy immediately afterwards (Figure 2). In the four quarters leading into each of these recessions, RFI’s contribution to GDP growth was normally negative, ranging from a mild -0.1 percentage point prior to the 2001 recession up to a half a percentage point drag on GDP prior to the 1980 double-dip recession. Following these recessions, RFI’s influence not only returned positive, but its positive contribution to GDP growth generally skyrocketed to several multiples above normal. The average percentage point contribution of RFI to GDP growth ranged from 0.3 to 1.1 percentage points in the first year after each of the past five recessions. Such growth in RFI during those periods equated to about one-fifth of all GDP growth at the time - a nice boost to the economy.

RFI’s positive contribution to GDP following the Great Recession has been nowhere near those seen after past recessions. As shown in figure 2, while RFI’s drag on GDP heading into the Great Recession exceeded that heading into any recession since 1970, RFI provided just 0.1 of a percentage point to GDP in the first four quarters after the recession, and was still providing negligible impact fully nine quarters after the recession officially ended. However, the third quarter of 2012 marks 13 quarters after the Great Recession, and RFI’s impact to GDP over the past year has been consistently positive on the order of 0.3 percentage points, or about 12 percent of current GDP growth. With housing construction starts rising, the positive economic contributions of RFI will follow.

Thursday, December 13, 2012

More Working Americans Struggling to Afford Housing

by Eric Belsky
Managing Director
With growth in incomes lagging growth in housing and utility costs, the share of Americans spending large sums of their income on housing has climbed nearly uninterrupted for decades.  But the Great Recession has taken an especially heavy toll, as millions of families have slipped down the income scale due to job loss or curtailment of hours. Indeed, while households with incomes under $15,000 made up only 12 percent of all households in 2001, they made up 40 percent of the net growth in the number of households over the past ten years. Faced with reduced incomes, some of these households have moved so that they can save on housing costs but many others are instead stretching to make their rent or mortgage payments.

As shown in Figure 1, even households with incomes above $15,000 (slightly above the equivalent of full-time work at minimum wage) are finding it harder to keep up with housing costs.  Fully 64 percent of all households with incomes in the $15,000-$30,000 range are housing cost burdened, spending 30 percent of their income on housing and utilities. Among those with incomes of $30,000-45,000, a smaller but still substantial 42 percent are cost burdened, while more than a quarter of those with incomes in the $45,000-$60,000 range are cost burdened. These shares are each up over seven percentage points across all three of these income bands in just the past ten years.

Notes: Income groups are defined using inflation-adjusted 2011 dollars.  Cost-burdened households spend more than 30% of pre-tax household income on housing costs. 
Source: JCHS tabulations of US Census Bureau, American Community Surveys.

Renters and owners are both experiencing rising housing cost burdens. On the rental side, the share of renters with cost burdens has doubled, from a quarter in 1960 to a half in 2011, while the share with severe cost burdens (spending more than half their income on housing and utilities) shot up from 11 percent to 28 percent over that period, spiking in the last decade. Renters with incomes of $15,000-$30,000 who have severe cost burdens climbed from 2.0 million in 2001 to 3.2 million in 2011, and those with incomes of $30,000-$45,000 doubled from 300,000 to 600,000.

Cost burdens have also reached record highs for homeowners. Among homeowners under age 65, 39 percent of those earning one to two times the minimum wage and 18 percent of those earning two to three times the minimum wage are now severely housing cost burdened.

Notes: Income groups are defined using inflation-adjusted 2011 dollars.  Severe housing cost burdens are households who spend more than 50% of pre-tax household income on housing costs. 
Source: JCHS tabulations of US Census Bureau, American Community Surveys.

There is an irony to the situation of homeowners: millions of them can’t take advantage of today’s low rates to lower their housing costs because their homes are worth less than they owe on their mortgages. Despite many federal efforts to ease the path to refinancing for such owners, it remains blocked for large shares of them.  Those who have loans not endorsed by FHA, Fannie Mae, or Freddie Mac are out of luck.  And for those with loans endorsed by these agencies, they may still not meet credit score, debt-to-income ratio, and documentation requirements for refinancing.  Even if existing owners can refinance, loss of an earner or curtailment in hours may result in payments that still stretch them thin.

These affordability problems are not likely to abate any time soon.  Rents are back on the rise, and in many areas sharply. Incomes remain under pressure from high unemployment rates and an ongoing shift in the composition of jobs to lower paying work, where entry-level workers in many key occupations are priced out of affordably covering their housing costs. For example, two-thirds of households that include a retail worker in the lowest wage quartile for that occupation are severely cost burdened, along with seven in ten of those including a childcare worker in the lowest wage quartile for that occupation.

Meanwhile a golden moment is being missed to place people into homeownership at record low interest rates.  Additionally, home prices have fallen by about a third nationally, and by much more in many places. As a result, relative to renting, the cost of owning a home for first-time buyers has not been as favorable for at least 40 years, on average, nationally. But lenders are reluctant to lend, fearful of the impact of new regulations and that they will have to buy back poorly performing loans. As a result, many would-be homebuyers are missing a chance to lower their payments relative to today’s rents and also to lock in their mortgage costs with extraordinarily low fixed-rate loans.

Having so many Americans spend so much on housing is a concern not just for those affected. Housing cost burdens affect the national economy, leaving less to spend on other items and making it harder for Americans to save for the future.  As an example, families with children in the bottom quarter of spenders with housing and utility payments of more than half of total outlays spent a third as much on healthcare, half as much on clothes, and two thirds as much on both food and pension and insurance as those with housing outlays of less than 30 percent. In retirement, more will be entitled to programs like Medicaid, placing strains on social service systems.

Note: Low-Income families with children are those in the bottom expenditure quartile. Severely cost burdened households spend over half of all expenditures on housing; unburdened households spend less than 30 percent.   
Source: JCHS tabulations of the Bureau of Labor Statistics, Consumer Expenditure Survey.

Hemmed in by budget pressures and the enormity of the problem, our political leaders have done little to forestall or address growing housing affordability problems. Federal programs are costly and also have limited reach. Indeed, only about a quarter of all renters eligible for housing assistance (those earning half or less local area median incomes) receive it and there is essentially no comparable program to help struggling homeowners apart from a very small, temporary, emergency program put in place in 2010.

Still, some places at least, have found ways to reduce housing costs in their areas through regulations and land use policies that do not involve taxpayer subsidies or tax incentives.  These include some cities that are relaxing minimum unit-size requirements to encourage production of small micro-units of only a few hundred square feet.  Others with markets strong enough have been offering density bonuses to encourage set-asides of affordable housing units in new construction projects.  Yet most local governments continue to restrict residential densities.  Lenders, meanwhile, are so cautious after having so badly missed the mark with their lending standards that many who could lock in today’s low home prices and record low rates are unable to do so.

Americans will face daunting housing cost burdens that thwart savings and sap spending on non-housing items until: 1) lenders ease standards back to reasonable levels, 2) homebuilders are freed of barriers preventing them from building at greater densities, and 3) governments provide greater tax incentives or subsidies to close the gap for more low and moderate-income households between what they can afford and the costs of market-rate housing.

Wednesday, December 5, 2012

When it Comes to Home Remodeling, Younger Generations Aren’t Doing it Themselves

by Kermit Baker
Director, Remodeling
Futures Program
In the world of home improvement activity, do-it-yourselfers (DIY) have become a very important market segment. Younger homeowners, with more energy to undertake these projects and generally fewer resources to hire a professional remodeler, generally have been active participants. In 2011, while DIY spending accounted for almost 18% of overall home improvement spending, owners under age 35 devoted 29% of their spending to DIY projects. For 35 to 44 year olds the share was 22%. In recent years, however, these younger owners have become less active in this realm.

Before the housing bust, about a quarter of all home improvement spending by homeowners typically was on projects installed on a DIY basis. And even this statistic is an underestimate, because as reported in the American Housing Survey (AHS), a DIY project includes only the cost of the products installed, while a professionally installed project also includes labor and contractor overhead and profit. As such, the Joint Center estimates that on a project basis typically about 40% of all home improvement activities are primarily DIY projects. Home Depot, Lowe’s, and countless numbers of local hardware stores and home centers owe their success to their DIY customer base.

However, recent data from HUD’s AHS indicates that the DIY share of the home improvement spending has been steadily declining. As of 2011, it was eight percentage points below its level in 2003 when it reached its most recent high, and six percentage points below the 1995 level, which was a fairly typical year for home improvement spending. This trend is particularly perplexing since the DIY share is thought to be countercyclical. Households are more likely to do an improvement project themselves to save money when economic times are uncertain, according to industry logic. 

Source: JCHS tabulations of the 1995-2011 American Housing Surveys

There are, however, other factors that influence the likelihood of undertaking a DIY home improvement. One is the mix of projects undertaken. Households seem quite comfortable undertaking minor kitchen and bath projects and other interior projects like flooring and paneling. They are less inclined to replace their roofing or siding or upgrade major electrical, plumbing, or HVAC systems. So if the mix of projects were to change during an economic cycle, that might well influence the DIY share.

Indeed, the mix of home improvement projects has changed in recent years in favor of exterior replacements and systems as more discretionary projects have been deferred. However, the DIY share of spending within all major home improvement categories has been declining. In 1995, 30% of spending for kitchen projects was done by DIYers; by 2011 that share had dropped to 22%. Ditto for bath projects (30% to 26%); exterior replacements (17% to 12%); systems and equipment upgrades (16% to 15%). With the DIY share declining for all major categories, the mix of projects is much less important in explaining the decline in the overall share.

A more likely explanation is that traditionally active younger owners are less engaged in these activities. Younger owners seem to have less inclination or ability to undertake these projects, at least in part because they have been hardest hit by the housing downturn. Fewer of them have been buying homes, and the ones that did were more likely to have purchased nearer the peak of the market. As house prices fell, many lost their homes to foreclosure or short sales. Of those that have remained homeowners, most have lost a significant share of the equity in their home, with many currently underwater with their mortgage.

All of this has discouraged young owners from undertaking all kinds of home improvement projects, including the DIY variety. Between 1995 and 2011, the DIY share for owners under age 35 fell twice as much as for the overall population. Indeed, in 1995 owners under age 35 accounted for 22% of all DIY spending. By 2011, this share declined to 16%. Older owners have continued to undertake some DIY projects, but not enough to offset the decline of younger owners. With younger owners doing fewer projects, it’s likely to take a broader recovery in the housing market to get these younger owners back to improving their homes, and to get DIY activity back near its historical levels.