Sweet Orange

Downs [of the Brookings Institute] expects big changes because of the recession, such as homes being built smaller and being less affordable. He also expects a switch from the more conservative spending and fewer government restrictions of the Reagan and Bush eras to the more liberal government spending and tighter government regulations that the Obama administration has already started to enforce.–”Brookings fellow: Recession is not over yet,” Jacksonville Business Journal

We are about to have new legislation that is aimed at preventing the housing and financial market crashes that we recently experienced from occurring again. Opinions differ on where or not this new legislation adequately addresses these problems while at the same time not unnecessarily stifling financial institutions ability to lend.

Back in February at an Urban Land Institute event, Anthony Downs of the Brookings Institute identified the following as issues that the new financial legislation should address but probably would not due to “political backlash.” When reviewing this new legislation, keeping this points in mind can help you decide how successful lawmakers were in their attempt at reform.

Here are the points that Downs thought were necessary for successful reform of the financial institutions:

• Break up the largest U.S. banks that control much of the nation’s money
• Require that financial institutions have adequate reserves
• Reorganizing securities
• Require that mortgage bankers conform to stricter rules
• Ensure international cooperation on financial regulations

What do you think? Does the new legislation go too far or not far enough in addressing the problems that lead to our current financial difficulties?

Note: For one analysis with some pros and cons, see “The Dodd-Frank Financial Reform Bill is a Valuable Step Forward” Douglas J. Elliott, Brookings Institute.

Photo Courtesy Brookings Institute

“The rate [of home ownership] only began to climb above 64 percent in the 1990s and the first decade of the current century when Administrations of both parties adopted national policies designed to encourage home ownership; the result was to drive both home prices and the home ownership rates to unsustainable levels”.–”Housing in America: The Next Decade,” Urban Land Institute

The percentage of those in the U.S. that are homeowners has fluctuated throughout U.S. history. As mentioned in the quote, the home ownership rate peaked in 2004 at 69%.

Here is the U.S. homeownership breakdown as provided by the Urban Land Institute (ULI):

• 1900-1930: 45% to 48%
• 1940: 43% (The reduced amount was due to the Depression and World War II.)
• 1945-1960: 62% (This was the period of “the great suburbanization of the U.S.” The factors leading to this suburbanization was “a booming economy, rising real incomes, favorable tax laws, a rejuvenated home building industry, and easier financing.“)
• 1960-1990: 62% to 64%
• 2004: 69%
• First quarter 2009: 67.2%
• Likely near-term stabilization rate: 62% to 64%

ULI provides the following analysis on the effects that a change in the number of homeowners will have in the U.S.:

“Government policies are in the process of being rebalanced today. A homeownership rate of 62 to 64 percent will have only a modest impact on local communities….

There have been many studies which extol the virtues of homeownership for community stability and educational and health benefits for children. These are being questioned by new studies, however, and new evidence suggests that housing stability is more important than whether a home is owned or rented in producing positive outcomes.

If, on the other hand, a confluence of circumstances conspires to produce a rate in the 50s, this will be a “game changer.” The most likely cause for such a low homeownership rate would be a prolonged or double dip recession, with a slow recovery”.–Urban Land Institute

To see a ULI video presentation of the report, click here. To read the ULI report, click here. To read a related report from ULI, see “2010 Emerging Trends in Real Estate“

Cash-in-hand converts to house-in-hand in current market

MDA DataQuick had the following to report on the number of Southern California homes that are bought but do not end up being occupied by the owner:

Absentee buyers - mostly investors and some second-home purchasers - bought 18.9 percent of the homes sold in February. Buyers who appeared to have paid all cash - meaning there was no indication that a corresponding purchase loan was recorded - accounted for 29.3 percent of February sales. In January it was a revised 29.7 percent - an all-time high. The 22-year monthly average for Southland homes purchased with cash is 13.8 percent.

As would be expected, some of these absentee buyers are flippers. According to DataQuick’s DQNews, 3.4% of Southern California homes were flipped* last month (February 2010). This is up 1.6% from February 2009.

This brings up the question: What is the optimum percentage of homes that should be owner-occupied versus rentals? Urban Land Institute (ULI) predicts that homeownership levels in the U.S. will stabilize at 62% to 64%.** Whether or not that is the optimum level is a discussion that I’ll leave for another time.

*Flipped is defined as bought and sold within a three-week to six-month period.

**The U.S. homeownership rate is currently approximately 67% and was approximately 45% between 1900 and 1945. I’ll have more on this in an upcoming post. You can also read more about this in the ULI report “Housing in America: The Next Decade,”

According to a report from the Urban Land Institute (ULI), when the economy picks up, the demand for housing will increase, However, this does not mean that ULI sees a return to “normal” for the U.S. housing market in the coming decade:

Workforce housing will remain a challenge. The age of suburbanization and growing homeownership is over. The outer suburbs will have the least expensive housing but the cost in time and money of long commutes will eliminate any savings. Many who live there will do so not by choice but by necessity.

An article in Time magazine gives another twist on what the new normal for housing will be:

“The housing that has been built doesn’t fit the market any longer,” says Berkus [Barry Berkus, president of B3 Architects]. Which is part of the reason that, even with so many existing homes sitting unsold, we keep building.–”Downsizing: Today’s Home Buyers Are Thinking Small,” Barbara Kiviat, Time

The ULI report goes on to say that four groups will have the most influence on the housing market in the coming decade. And the report states that the circumstances that these four groups will encounter will affect their buying power.

These four groups are as follows:

• Older Baby Boomers who will become seniors in unprecedented numbers
• Younger Baby Boomers many of whom will be unable to sell their current suburban homes to move to new jobs
• Generation Y who will be renting far longer than past generations
• Immigrants and their children who will want to move to the suburbs but may find them too expensive even after current drop in housing prices.

What do you think? Are we just in a down phase of a cyclical housing market? If so, when the upswing occurs, will it look like the traditional housing market of the last fifty years? And if not, what will the new normal be for the U.S. housing market? The ULI report and Time magazine article provide some thoughts on this.