Reasons for Shift in Housing Occupancy (A)

Part
01
of three
Part
01

Reasons for Shift in Housing Occupancy - 1980s

There are several key factors that influenced the shift in property occupancy in the 1980s. The so-called "1980's Property Boom" can be attributed to the influence of technical change. However, the huge increase in mortgage rates priced most Americans out of the real estate market, decreasing occupancy rates.


The Influence of Information Technology

  • Technical change provided great influence on the shift of property occupancy in the 1980s.
  • The most relevant ways in which technical change influenced this housing shift is seen in the effect of information technology on products and services, a rise of income amongst the U.S. population, and the effect of service industry growth.
  • Technical change during the 1980s directly affected the housing market. Buildings (whether commercial or otherwise) are where much of economic change takes place. Altering those economic characteristics ultimately influenced the demand for property.
  • Property builders had previously faced unknown variables in the housing market. Considerations (such as drawing up plans, approval of such plans, and any incurred project cancellation costs) were made more transparent through the use of new technologies.
  • Consequently, long-term shifts with construction input had an effect supply and demand in the 1980s. The number of housing units available in the United States grew from 68.7 million in 1970 to 88.4 million in 1980.
  • The problem in property occupancy became apparent when it was clear that there was a supposed lack of demand for all the supply in the housing market industry. Especially commercially, this boom created 10-20% more space than was needed, resulting in a decrease of occupancy and a huge drop in the real estate market.

Mortgage Rates

  • The apparent lack of demand in the U.S. housing industry was not actually a lack of interested buyers, but rather being driven by the insane increase of mortgage interest rates in the 1980s. This led to a drop in home ownership.
  • Although the average cost to buy a home in 1981 was $82,500, the average mortgage rate was about 18.5%.
  • Taking inflation into consideration, the average cost to buy a home in 1980 was equivalent to a $3,986 monthly mortgage payment today. Today, most interest rates on homes in the U.S. are somewhere between 4 and 5%.
  • The increase of mortgage rates for Americans was so dramatic that home sales decreased by 50% between 1978 and 1982. In fact, this had such a profound effect on the housing market and occupancy rates, that it wasn't until 1996 that home sales once again increased past the 4 million unit level of sales seen in 1978.


Research Strategy

To provide applicable insights surrounding the 1980 shift in occupancy, we consulted a research journal that discussed several plausible explanations for this shift. This journal examines global factors, and considers financial and service sector influences in the U.S. After finding relevant information about the 1980s boom, we then consulted several sources on the U.S. housing market and census in order to ascertain what the relationship was between supply and demand during this time. During this search, we found that there was a large boom in the building industry, but a decrease in occupancy.

In order to gain a clear perspective on what factors contributed to this seemingly low need for demand, we looked for resources from real estate industry experts. We found conclusive evidence that the shift during the 1980s was a direct result of high mortgage interest rates, which most families could not afford. We included applicable data to show how the market would look today with comparable rates.


Part
02
of three
Part
02

Reasons for Shift in Housing Occupancy - 1990s

The statistical analysis provided by James L. Freund, the author of The Causes of Increase in Homeownership in the 1990s, shows that homeownership rose by about 3-1/2% in the 1990s. The rise was due to the economic boom in this decade, the increase in innovation in mortgage finance, and shifts in demographic attributes.

Innovation in Mortgage Finance

  • According to the report on "Homeownership in the 1980s and 1990s: Aggregate Trends and Racial Gaps" by Stuart. A. Gabriel and Stuart S. Rosenthal from the Department of Economics, Center for Policy Research, the 1990s period witnessed considerable innovation in mortgage finance, which led to an increase in homeownership. "This was prompted by prominent media accounts in the 1980s and a related report by the Federal Reserve Bank of Boston that heightened concerns regarding unfair denial of mortgage credit to minorities."
  • These concerns led the government to have a stricter oversight of the mortgage industry and on new mortgage products, which relaxed the load underwriting standards. This was for the low-income and minority families that did not have enough downpayment.

Changes in Financial and Demographic Attributes

  • According to the United States Census Bureau, homeownership among individuals who were 65 years and above increased by 75% in 1990, while those who were 35 years and below had consistent ownership due to a rise in economic and employment opportunities during this decade.
  • In 1995, home buying rate rose to 65.4% among individuals with a high school diploma, 67.5% among those with post-secondary education rose, and 71.8% among those with a college degree or higher. During this era, education provided wider income opportunities.
  • In 1995, the rate of home buying also rose to 53.2% among Asians, 43.6% among Blacks, 41.8% among Hispanics, and 71.4% among Whites.
  • The James L. Freund analysis also shows that the saving culture of minority renters changed significantly, and as such, the percentage of minority renters equaled that of white renters.

Economic Growth and Decline in Mortgage Interest Rate


Part
03
of three
Part
03

Reasons for Shift in Housing Occupancy - 2000s

The factors that affected housing occupancy/vacancy in the US during the 2000s are as follows:
1. The homeowner housing occupancy was affected by the overbuilding in cities and the subsequent foreclosures that were caused by the housing boom.
2. Recession and variations in housing rent, which affected the rental housing occupancy, were also a result of overbuilding and the low-income housing tax credit provided by the US government.

In 2009, Nicolas P. Retsinas, Director Emeritus of the Joint Center for Housing Studies at Harvard University, said in an interview that the housing occupancy/vacancy rates were affected primarily by two factors, demand and supply.

Overbuilding and Foreclosures caused by the Housing Boom:

  • Overbuilding of houses during the housing boom was a supply-related problem (i.e., there were too many houses compared to the number of people that could afford the purchase/rent of those houses).
  • As the prices of houses rose higher in the early 2000s, consumers took heavy loans assuming that these prices would continue rising further. Instead, they fell drastically, and consumers were left with lower-priced houses and heavier loans than what they began with.
  • Moreover, in cases where consumers were unable to pay their debts, the houses underwent foreclosures. Consequently, the owners had to vacate their homes, which resulted in the homeowner housing vacancies in the 2006-2012 period.
Some examples of increasing yearly homeowner housing vacancy rates are:

Varying prices of homes and Tax Credits provided by the US Government:

  • The rising prices of housing units in the early 2000s also resulted in an increased cost of rental housing. However, the fall of actual prices of homes, which began in 2006, did not immediately result in decreased rents.
  • From 2001 to 2007, the affordable rental housing inventory, which is considered to be below 60% of the local area median income (AMI), decreased by 6.3%. This translated into a loss of 1.2 million unassisted affordable rental units from 2001 to 2007. On the other hand, in the same period, the high-rent housing stock increased by 94.3%.
  • During 2003-2008, for assisted affordable rental units, in case of the project-based section 8 developments, the vacancy rates remained lower than 5%. Moreover, in the case of public rental housing stock, the vacancy rates had fallen from 12.2% in 2003 to 9.5% in 2008.
  • Additionally, the properties that received the Low Income Housing Tax Credit (LIHTC) saw much lower vacancy rates compared to the overall rental market from 2005 to 2009.
In terms of a rise in the percentage of homes that were available to the median households, the price variations observed in different cities are as follows:
  • Las Vegas: Available homes for median households increased from 19% in 2007 to 56% in 2008. The housing prices by 20.2% in this period.
  • Sacramento, California: Available homes for median households increased from 13% in 2007 to 50% in 2008. The housing prices had fallen by 29.2% in this period.
  • Phoenix, Arizona: Available homes increased from 30% in 2007 to 60% in 2008. The prices dropped by 15.4% in this period.
  • Washington, D.C.: Available homes increased from 37.7% in 2007 to 57% in 2008. The housing prices decreased by 13.1% in this period.
  • Tampa, Florida: Available homes increased from 14.4% in 2007 to 60% in 2008. The housing rent was slashed by 9.1% in this period.
  • According to Ken Shuman, a Bay Area-based spokesman for real estate data provider Trulia.com, workers wouldn't mind how high the rent was as long as their wages were decent enough. However, due to the recession, in the Bay Area, unemployment had increased from 4.6% in 2007 to 9.4% in 2008, and in most cases, the wages were either frozen or reduced. Due to this, the vacancies in rental housing units continued to rise until the market had recovered.

Research Strategy

For this research, we browsed through census data provided by the US government, news magazines, and preexisting research reports. During our search, we came across some magazine articles that discussed this topic in detail and used interviews with industry experts. Hence, we used three historical articles from Forbes Magazine to completely answer this request. While these articles are outdated according to Wonder standards (published 2008-2010), this request asks for historical information, and therefore, the data remains relevant.

The Forbes website does not allow direct links to old sources. Therefore, only their titles and quotes could be provided as sources. However, these articles can be easily found using the search bar provided on the official Forbes website. Additionally, to support these articles, links to the government housing census datasheets, on which the aforementioned articles are based, are provided in the sources. Moreover, some detailed research reports that covered different sections of the request were also added to provide supporting numerical data.
Sources
Sources

From Part 03
Quotes
  • "In Kansas City, rental vacancy rates rose from 11.9% to 15% over the past year; homeowner vacancy rates nearly doubled, up from 2.1% to 3.8%. Comparatively, the average homeowner vacancy rate in the country's 75 largest metro areas improved slightly from 3% to 2.7%, while the rental vacancy rate edged up to 10.2% from 10% a year ago."
  • " Miami, which ranks No. 8, owns a whopping 12.7% rental vacancy rate, up from 11.4% a year ago; residential towers built in the final stages of the boom now stand as empty monuments to an over-hyped market downtown. Homeowner vacancy stands at 5.6%, up from 3.8% last year, thanks mostly to a spate of foreclosures. According to Trulia.com, 40% of the homes available in Miami's city limits are foreclosures."
  • "But despite the perks, the Bay Area is losing people at an even greater clip than Miami--and ranks second on our list. Rental vacancy rates swelled from 4.7% to 7.1%; homeowner vacancies more than tripled from 1.1% to 3.4%. "
  • "According to the Bureau of Labor Statistics' latest reports, Bay Area unemployment has more than doubled since last year, up from 4.6% to 9.4% as of April. Many laid-off workers aren't sticking around."
  • "There really are two reasons why you'd have vacancies: supply-related and demand-related," says Nicolas P. Retsinas, director of the Joint Center for Housing Studies of Harvard University. "A number of these places have experienced substantial overbuilding, which would lead you to have supply issues. Others, with troubled local economies, are more demand-related."
Quotes
  • "Las Vegas edged Detroit for the title of America's most abandoned city. Atlanta came in third, followed by Greensboro, N.C., and Dayton, Ohio. "
  • "Cities like Detroit and Dayton are casualties of America's lengthy industrial decline. Others, like Las Vegas and Orlando, are mostly victims of the recent housing bust. Boston and New York are among the lone bright spots, while Honolulu is the nation's best with a vacancy rate of 5.8% for homes and a scant 0.5% for rentals."
  • "The national rental vacancy rate now stands at 10.1%, up from 9.6% a year ago; homeowner vacancy has edged up from 2.8% to 2.9%. Richmond, Va.'s rental vacancy rate of 23.7% is the worst in America, while Orlando's 7.4% rate is lousiest on the homeowner side. Detroit and Las Vegas are among the worst offenders by both measures--the Motor City sports vacancy rates of 19.9% for rentals and 4% for homes; Sin City has rates of 16% and 4.7%, respectively."
Quotes
  • "The good news is that Las Vegas sellers are slashing prices to make deals happen. Housing became almost impossible to afford in the Las Vegas metro area as every new development priced itself like it was going to attract high- rolling out-of-towners. While affordability has come faster than anywhere in the country, it's not a good time to bet that Vegas is near bottom."
  • "Part of the reason that Sacramento ranks so highly in this measure is that the sales index compiled by First American Real Estate Solutions, a Santa Ana, Calif., marketing company, includes foreclosure sales, which currently represent a significant chunk of the Sacramento market. While that's not going to turn around prices anytime soon, the return of the median buyer to the marketplace and the increase in affordability can only be read as good things."
  • "During the housing boom, it made sense that properties in areas like Paradise Valley and Scottsdale were going for record rates, but when homes all the way out in Maricopa County were being flipped for big profits, there was clearly something wrong. In the continuing correction, housing affordability has started to return to the area, though as job growth flattens out due to the slowdown in construction, it remains to be seen how significant the influx of new buyers will be."
  • "Housing overbuilding, especially in the exurbs of Maryland and Virginia, inundated the D.C. metro housing stock with more properties than there were buyers, and the quick pace of appreciation was attractive to speculators. As that market has corrected, sellers are unloading exurb properties for reduced prices to buyers who couldn't afford the area just a few years ago."
  • "During the housing boom, Tampa was overrun with speculative investors, who, according to Moody's Economy.com, represented 25% of area property owners in 2005. Subsequent price declines have made Tampa more affordable to large parts of the population that had been priced out."
Quotes
  • "U.S. foreclosure filings spiked by more than 81% in 2008, a record, according to a report released Thursday, and they're up 225% compared with 2006."
  • "Declining prices put many homeowners "underwater" on their mortgages, owing more than their homes are worth, which makes them more likely to default. And adding a flood of bank-owned homes to already slow markets further outstrips demand and dampens prices, creating a spiral of lower prices and higher foreclosures. As a result, more homeowners who fall behind on their mortgage payments end up losing their homes, according to Jay Brinkman, the chief economist for the Mortgage Bankers Association."
  • "The three states hit hardest by foreclosure in 2008 were Nevada, Florida and Arizona. In Nevada, 7% of homes received a foreclosure filing - such as a notice of default, auction sale notice or foreclosure sale - during the year, up 126% from 2007. Florida filings soared 133%, hitting more than 4.5% of all households, while Arizona filings jumped 203%, also to about 4.5%."
  • "California had the highest total number of filings for any state, 523,624, more than double 2007 levels. Stockton, Calif. had the highest rate of foreclosures of any metropolitan area, at 9.5%. Las Vegas was second with 8.9% and Riverside/San Bernardino Calif. was third with 8%."
Quotes
  • "Since 2000, LIHTC properties have comprised about 50 percent of all newly constructed multifamily rental units. From 1995-2005, two rental units were permanently removed from supply for every three produced. Over this same time period, the nation permanently lost 1.5 million low-cost rental units."
  • "As Figure 3 shows, from 2001 to 2007 the nation’s affordable rental housing stock (below 60% AMI) decreased by 6.3%, while the high-rent rental housing stock increased 94.3%. This translates into a loss of more than 1.2 million unassisted affordable rental units from 2001 to 2007."
  • "Figure 7 shows that vacancy rates for the nation’s assisted housing units are considerably tighter than the overall rental market in recent years. The available data indicates that vacancy rates remain quite low (5 percent or below) in project-based section 8 developments. Vacancy rates in the public housing stock have fallen from 11.5 percent in 2006 to 9.5 percent in 2008."
  • "Proprietary data from the portfolios of six private and two nonprofit investors indicate that properties receiving the Low Income Housing Tax Credit (LIHTC) have considerably lower vacancy rates than the nation’s overall rental market from 2005 to 2009 (See Appendix 5)."
Quotes
  • "In an interview in Forbes, Nicolas P. Retsinas, former Federal Housing Commissioner and Director Emeritus of Harvard University’s Joint Center for Housing Studies, says the housing recovery is being spurred by new household formation, which in turn has been sparked by the improving job market, and abnormally low interest rates."
  • "He says while the administration is trying to accelerate the housing recovery, the government-sponsored enterprises (Fannie Mae and Freddie Mac) which insure, securitize, and guarantee 95 percent of all mortgage loans, are narrowing the credit tunnel because they do not want to lose money and be on the front page asking for a bail-out."
  • "Noting we over-encouraged homeownership, which in part led to the housing downturn, he says the mortgage interest deduction (MID) has become a sacred cow, but perhaps it is time to allow first-time homebuyers and those below a certain income only to use it, as it deprives the government of $100 billion annually."
Quotes
  • " One of the many lessons of the recent crisis is that renting isn’t always bad and it has a place. I don’t know that I would extrapolate from that that owning is now bad. I think the issue is balance. "
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