HARVARD UNIVERSITY'S JOINT CENTER FOR Housing Studies set its annual report, “The State of the Nation's Housing 2005,” against the now-familiar backdrop of another record-shattering year for the housing industry. The authors, however, laced the study with concern about home prices that are increasingly out of reach for buyers.
The main takeaway for the housing industry: The great ride of the last 13 years isn't likely to come to a halt any time soon. Thanks to a growing economy, job gains, and continued low interest rates, “the homeownership boom has some life left,” the study's authors declare, and the report projects that new-home demand is on track to total as many as 20 million units during the next decade.
Immigration trends, the report indicates, contribute to the strength of today's housing market and the household formations that will drive demand through 2015. Between 1991 and 2003, the minority share of all new-home buyers grew from 13 percent to 24 percent; their share among first-time home buyers is even more impressive, jumping from 22 percent to 35 percent during the same period.
That trend is likely to continue. The children of immigrants who arrived in the United States during the last 20 years are on the verge of entering the housing market; this group of Americans accounts for 15 percent of those aged 11 to 20. “Members of this generation are likely to out-earn their parents and thus become an even greater source of housing demand in the next two decades,” the study says.
What's more, the Joint Center expects future immigration to outpace Census Bureau estimates of about 13.3 million between 2005 and 2015; the report pegs the more likely figure at 14 million or more. “If anything, that's even a little conservative,” says Nicolas Retsinas, director of the Joint Center. “It doesn't appear to be slowing in any way.”
Neither do new-home sales, which hit another record in 2004 with more than 1.2 million sales; they're on pace for 1.3 million this year. Even a dip in sales wouldn't hurt the market, the report asserts: “New-home sales would have to retreat by more than a third—and stay there a year or more—to create anywhere near a buyer's market.”
Many markets are well beyond the reach of most buyers, but the report's authors aren't optimistic about that dynamic shifting. The Joint Center has found 33 metro areas where the median house price is more than four times the median household income. And though Retsinas expresses skepticism that double-digit price appreciation can continue, he says natural and regulatory constraints, in some markets—particularly on the coasts—will continue to shore up high home prices. “In some places a new floor has been set,” he says.
As certain as the projections seem, Retsinas sees a few signs of the industry's vulnerability. Among them: buyers' increased tolerance for longer commutes, as a trade-off for more-affordable housing. In 1970, half of all households lived more than 10 miles from the central business district in just 13 metro areas nationwide; by 2000, that figure had spiked to 46 metro areas.
Creative financing—including the use of such mortgage products as adjustable-rate and interest-only loans—is also adding to risk, the report cautions. “These products add a whole new element of risk that is, on one hand, reflective of the desperation of people to buy a home and, on the other hand, of their tremendous optimism that home prices are going to keep rising and that they will get raises,” Retsinas says.