The long-awaited housing recovery finally may have arrived last year, but homeownership continued to decline, despite record-low interest rates and escalating home values. And while new-home construction is bouncing back, the question remains whether builders are building to a market that is more imagined than real in its growth potential.

Those are some conclusions Builder drew from the Harvard University Joint Center for Housing Studies’ “State of the Nation’s Housing 2013” report, its annual review of housing and ownership released Wednesday.

The Joint Center reports historically have offered a positive spin on housing’s future, and the 2013 edition is no different. Its touch points include steady growth in home sales and prices, low inventories of new homes, and a sharp rise in household formation to 980,000, all of which helped housing contribute to increases in residential fixed investment and the country’s economic expansion for the first time in five years.

“The housing sector has plenty of room to improve on last year’s contribution to economic growth,” which represented 0.3 percentage points of the GDP’s increase, the Joint Center wrote.

However, the center warned it could take “several years” for the housing sector to return to normal. (Coincidentally, Trulia’s chief economist Jed Kolko released on Wednesday his monthly Housing Barometer for May, which estimates that the housing recovery was at 61% of pre-boom “normal” levels, based on starts, existing home sales, foreclosures, and delinquencies.)

Minority Households Expand

Even during the housing recession, the Joint Center pointed optimistically to demographic trends that justify starting at least 1.2 million homes annually. For example, the Joint Center notes that between 2013 and 2023, households led by owners age 65 or older are expected to increase by nearly 10 million, and that the number of “mover” households age 65 or more will increase to 1.6 million per year, from an average of 1.2 million in previous decades. (One intriguing factoid: from 1989 to 2010 the share of owners aged 60 to 69 with mortgage debt rose from 32% to 60%, while the median loan-to-value ratio among owners 50 to 59 years old rose from 10% to 38%.)

The Joint Center also expects minority households to expand by nearly 9 million over the next decade, accounting for seven out of 10 net new households and an even larger share of first-time buyer activity.

Last year, builders started 535,300 single-family homes, half of the annual averages in the 1980s and 1990s. Prognosticators are encouraged that single- and multifamily starts are in track to exceed 1 million units in 2013, and should keep on growing. But the Joint Center notes that household formations still have not kept pace with population growth.

Homeownership fell by 0.7 percentage points, to 65.4% last year, and fell again, to 65%, in the first quarter of 2013. Ownership among African Americans, at 43.9% in 2012, was the lowest it’s been since 1995, and Hispanic and Caucasian ownership rates were at their lowest levels in a decade. Even ownership among married couples with children fell by 7% since 2005 to 72.6% last year.

Low Mortgage Rates
These declines occurred even as owning a house has rarely been more affordable, with mortgage interest rates at 40-year lows last year. And even as prices for new and existing homes are gaining (builders report price appreciation for the first time in years), prices are still at or below pre-boom levels in many markets.

The Joint Center blames “tight credit” as a mitigating factor that’s preventing more people from becoming buyers. That credit situation hasn’t been helped, either, by the federal government seemingly endless fiddling with the language that will define what constitutes Qualified Mortgages and Qualified Residential Mortgages.

Ownership declines also occurred despite improvements in home values, as unsold inventory created by the foreclosure crisis has abated. While 10 million households were still underwater (and two-fifths of owners with negative equity had mortgages that are more than 25% higher than their houses are worth), the annual rate for foreclosures in 2012—1.49 million—was the lowest since 2007. Plus, the number of homes in some stage of pre-foreclosure delinquency fell by 7.3% in the first quarter of 2013.

Consequently, the number of existing homes on the market as 2013 began stood at 1.8 million units, the lowest level since 2001. The inventory of new homes, at 150,000, also was a historical low. And the number of new homes completed but not sold, at 43,000, was down by 27%.

Rental Time
One unanswered question, when it comes to home values and inventory, is how many REO properties held by banks will ultimately come back onto the market. This “shadow inventory,” which last year hit a record 7.4 million units, was the equivalent of 5.6% of the country’s total housing stock.

However, industry watchers contend that a sizable portion of this shadow inventory is in no physical condition for resale. Meanwhile, a lot of REO inventory has been scooped up by investors and converted into rental.
There were 1.1 million renter households added last year. As of early 2013, renters accounted for 35% of the nation’s total households, the Joint Center estimated. Ninety percent of the 245,300 multifamily housing units started last year were targeted for rental. And several forecasters, including NAHB, project a significant leap in multifamily starts in 2013.

The Joint Center concedes that homeownership has lost some luster and attractiveness among various buyer groups, especially younger, presumably more mobile Americans. However, it also points out that the rental option is becoming a more expensive proposition. The 186,000 new multifamily units added last year were significantly below historical annual averages. (The Federal Housing Finance Agency also is reducing its lending for multifamily by 10% this year.) And because supply still is lagging demand, rents in a growing number of markets are rising to the point where owning becomes a far more financially viable alternative.

Lack of Affordable Housing
However, the Joint Center’s report laments the general lack of affordable housing; nationwide 42.3 million households (37% of the total) paid more than 30% of their pretax income for housing in 2011 (the latest year estimates were available). Nearly 21 million households paid more than half of their incomes for housing.

Indeed, the paradox of the housing sector’s recovery, cautioned the Joint Center, is that if, as expected, demand overwhelms supply, the affordability gap will inevitably widen.

John Caulfield is senior editor for BUILDER.