As the housing market continues to mend, bringing hope to many formerly underwater homeowners or others who simply hoped for a good return on their investments, at least one group of young Americans has seen no relief in the improving market. HUD released a report this week chronicling the challenges young adults aging out of foster care face in finding safe, affordable housing.
Youth are no longer eligible for foster care when they reach either age 18 or 21, depending on their location. When they age out of the program, many lack the resources necessary to find and obtain safe, stable housing, according to HUD.
In 2010, close to 28,000 youth aged out of foster care and had to find housing “with little or no support from either their family or the state,” according to HUD. Regional studies estimate between 11 and 37 percent of these youth end up homeless at some point.
“Studies estimate that 25 to 50 percent of young adults exiting care couch surf, double up, move frequently within a short period of time, have trouble paying rent, and face eviction,” HUD stated.
With little or no credit history and no rental history, landlords may be reluctant to rent to these youth, according to HUD. Even more of a hindrance, “Those who exit foster care before age 18 cannot legally sign a lease,” HUD reported.
Furthermore, affordability is a common issue for these youth who are finding themselves on their own for the first time, perhaps now more than ever. HUD Secretary Shaun Donovan recently said, “This is the worst rental affordability crisis this country has ever known.”
While a smattering of programs exist that can help former foster children obtain housing, the HUD report revealed these youth sometimes get overlooked even in these programs.
The Family Unification Program subsidizes housing for families and youth. However, the program appears to focus more on families with children than young adults in need of housing. In fact, young adults accounted for just 14 percent of those helped through the Family Unification Program last year.
“Current research on the outcomes of youth aging out of foster care points to a real need for policy and programs to assist them in maintaining housing and preparing for self-sufficiency,” HUD stated in its report.
HUD recommends “rigorous evaluations” of current programs in order to determine what types of programs best meet these youths’ needs.
Despite disappointing home sales in the first quarter of the year as winter storms took their toll, home prices increased 1.3 percent over the first three months of the year on a seasonally-adjusted basis for the purchase-only market, according to the Federal Housing Finance Agency (FHFA).
“Although the first quarter saw relatively weak real estate transaction activity—in part due to seasonal factors—home prices continued to push higher in the first quarter,” said Andrew Leventis, principal economist for FHFA, with the release of the agency’s House Price Index.
Leventis cites the “modest inventories of homes available for sale” as a major factor in the first-quarter increase.
While the rose 1.3 percent over the quarter, first-quarter prices were 6.6 percent higher than prices recorded in the first quarter of last year, according to FHFA. This compares to just 0.8 percent growth in the price of other goods and services.
When adjusted for inflation, first-quarter home prices are 5.7 percent higher than they were one year ago.
Home prices rose in 42 states and the District of Columbia over the first quarter of the year.
On an annual basis, only one state posted a price decline over the year in March—Vermont, with a 1.24 percent decline.
Nevada ranked highest for annual price appreciation in March, with a 20.96 percent rise. The District of Columbia (19.78 percent) ranked second, followed by California (15.78 percent), Arizona (14.72 percent), and Florida (10.65 percent).
Among the nine Census divisions, FHFA noted “substantive decelerations” in prices over the past year in the two divisions that posted the greatest price gains over the previous year.
In the Pacific division, prices increased 12.4 percent over the year in March after posting a 15.8 percent gain over the year in March 2013.
In the Mountain division, prices increased 9.8 percent over the year in March, down from a 14 percent gain a year earlier.
The smallest price gain was recorded in the Middle Atlantic division, where prices rose 2 percent. This price gain matches that of a year ago. No division posted a decline in prices over the year in March.
Of the 100 largest metropolitan areas, the Charleston metro posted the greatest price gain compared to last year’s first quarter: 10.7 percent.
The lowest price increase took place in the New Orleans metro area, where prices declined 2.6 percent over the year.
FHFA also tracks “distress-free” home prices in 12 large metros, which excludes sales of bank-owned properties and short sales. In nine of the 12, the distress-free index reported lower price appreciation than the traditional purchase-only indexes.
The agency’s index came out the same day as the Case-Shiller Home Price Indices, which showed prices up 12.4 percent in 20 of the nation’s biggest markets—a slight cut from a 12.9 percent increase recorded in February.
Speaking before an audience at the Boulder Summer Conference on Consumer Financial Decision Making,Consumer Financial Protection Bureau (CFPB) director Richard Cordray spoke on the effects of student loan debt on the future of the housing market. The oft-criticized director commented on the growing $1.2 trillion of student loan debt, and how student debt will have negative ramifications on the housing market in the future.
“It is not an overstatement to say that we are now standing at a precipice when it comes to the magnitude and consequences of our student loan debt in this country. We have reached $1.2 trillion of student loan debt, second only to mortgage debt as a category of consumer finance. This fast-growing burden is a pressing problem and a matter of grave importance to public policy in America,” Cordray began.
He cited his experience at the CFPB listening to consumers, whose complaints range from their student loan debt burden as preventing them from buying a home, opening a small business, or starting a family. The obligation to pay back student loans has a ripple effect across the entire economy.
Cordray continued, citing a Pew study that found 40 percent of younger households, classified as homes headed by someone under the age of 40, as having student loan debt.
“Tuition costs have risen rapidly. Debt has risen even faster than tuition and default rates have increased. Graduates are earning less because of the recession. It has become increasingly clear that a weak labor market and rising student debt are putting the squeeze on young people,” Cordray said, noting the more than 7 million Americans in default on student loans.
He continued, “Notably, it appears that young people are not forming new households at the same rate they did in the past. Many are living with parents or sharing space with their peers. In fact, according to a recent Pew survey, more than one-third of young people aged 18 to 31 are living with their parents—a jump of nearly 18 percent since the start of the recession.”
A recent National Association of Realtors study found that 49 percent of Americans cited student loan debt as a “huge obstacle” to homeownership. Typically, higher education yields higher incomes, but post-recession this trend seems to be dwindling, if not petering out altogether. Cordray noted a Federal Reserve Bank analysis that said for the first time in at least a decade households with student loan debt are less likely to have a mortgage than those without student loan debt.
Furthermore, student loans can have a crippling long term effect on the economy, with younger borrowers unable to invest in small businesses or save adequately for retirement. The CFPB director called the current state a “vicious cycle.”
Cordray encouraged servicers to play by the rules and treat borrowers fairly in order to help mitigate some of the financial problems created by burdensome student loans. “Together with greater outreach to encourage more borrowers to utilize affordable repayment options on federal student loans, these efforts will help promote more latitude for those laboring under significant levels of student loan debt to find ways to better manage these obligations,” Cordray said.
He concluded that the current system is problematic, and that public policy decisions currently being made regarding higher education are “embarrassing.”
“In the end, we need to recognize as a nation that we cannot afford to put higher education on an unsustainable basis for people whose ambitions and abilities should mark them out as our future leaders. It is also profoundly discordant with basic notions of equal opportunity if young people with merit, and who lack only the means, are unable to advance or end up crushed under student loan debt for much of their lives,” he concluded.
The number of underwater borrowers continues to fall, but that was about the only good news Zillow had to report in its latest look at negative equity.
The company released Tuesday its Negative Equity Report for the first quarter, revealing an estimated 9.7 million homeowners continue to owe more on their mortgage than their home is worth. That number, down from about 9.8 million in Q4 2013, represents about 18.8 percent of mortgage-paying Americans, according to Zillow.
Conservative estimates from the company call for a negative equity rate of 17 percent by this time next year as home value growth moderates.
While the continuing downward trend in underwater rates is a welcome sign of improvement in the housing sector, the company notes that the “effective” negative equity rate, which includes homeowners with 20 percent or less equity in their homes, remains elevated at more than one in three.
“The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come,” said Zillow’s chief economist, Dr. Stan Humphries.
With so many borrowers lacking enough equity to comfortably sell their homes and afford a down payment on a new one, Humphries expects inventory to remain choked, driving home values higher and making affordability a greater concern.
What’s more, Zillow found that homes priced in the bottom third of home values nationwide have a greater negative equity rate, with 30.2 percent of that population currently underwater compared to 18.1 percent of those in the middle tier and just 10.7 percent in the top tier.
For those underwater borrowers who happen to be in the lower tier of home values, listing their home will remain difficult without engaging in a short sale or bringing cash to the closing table—another contributor to the supply shortage and a major obstacle for buyers in search of starter homes.
“It’s hard to overstate just how much of a drag on the housing market negative equity really is, especially at the lower end of the market, which represents those homes typically most affordable for first-time buyers,” Humphries said.
Data through April 2014 showed a decline in the national default rate from March, according to S&P Dow Jones Indices and Experian for the S&P/Experian Consumer Credit Default Indices. The indices are a comprehensive measure of changes in consumer credit defaults, released monthly.
The national composite default rate recorded its lowest post-recession figure of 1.11 percent in April. The month’s number was the lowest default rate since June 2006. Default rates for first mortgages continued their downward slide, settling at 1.01 percent in April.
The first mortgage default rate in April was the seventh consecutive month of decline, and was the lowest level seen since July 2006. However, the second mortgage default rate saw an increase, which posted at 0.63 percent for April 2014.
“The prospect for further gains in economic activity and consumer confidence is good as shown by the continuing decline in consumer credit default rates,” says David M. Blitzer, Managing Director and Chairman of the Index Committee for S&P Dow Jones Indices. “Consumer default rates have stabilized at levels similar to those seen before the financial crisis.”
Blitzer continued, “The national composite is nearing a historic low while the auto loan reached a historic low in April. Neither the one-month uptick in consumer price inflation nor the Federal Reserve’s winding down of its bond buying threaten either consumer default rates or overall economic activity.”
All five cities (New York, Chicago, Dallas, Los Angeles, Miami) measured by the S&P/Experian saw default rate decreases for the second consecutive month. New York experienced the largest month-over-month downturn, dropping 18 basis points below March’s default rate.
All five cities posted default rates below the previous year’s rate.
The good thing about economic recovery, even when it’s not living up to expectations, is that forecasters always remain optimistic for tomorrow.
Despite many beginning-of-the-year predictions about spring growth in the housing market falling flat, and despite a still chugging economy that changes its mind quarter-to-quarter, economists at the National Association of Realtors and other industry groups expect an uptick in the economy and housing market through next year.
The key to the NAR’s optimism, as expressed by the organization’s chief economist, Lawrence Yun, earlier this week, is a hefty pent-up demand for houses coupled with expectations of job growth—which itself has been more feeble than anticipated. “When you look at the jobs-to-population ratio, the current period is weaker than it was from the late 1990s through 2007,” Yun said. “This explains why Main Street America does not fully feel the recovery.”
Yun’s comments echo those in a report released Thursday by Fitch Ratings and Oxford Analytica that looks at the unusual pattern of recovery the U.S. is facing in the wake of its latest major recession. However, although the U.S. GDP and overall economy have occasionally fluctuated quarter-to-quarter these past few years, Yun said that there are no fresh signs of recession for Q2, which could grow about 3 percent.
A major key to housing growth, of course, is job growth. The U.S. overall has recovered nearly all of the eight million jobs lost to the Great Recession and, according to Yun, employment is expected to grow 1.6 percent this year and 1.9 percent next. Similarly, the GDP is on course to grow 2.2 percent this year and about 2.9 percent in 2015.
Eric Belsky, managing director of the JointCenter for Housing Studies at Harvard University, said that growth in the stock market and the recovery in housing, along with pent-up demand, are major factors driving the economy right now, leading economists like Yun and Belsky to suggest that housing will improve, just not on the schedule many other economists had expected.
One thing to keep in mind is that 2014’s spring housing sales figures are being compared to those from 2013, which saw impressive gains‒‒existing-home sales rose more than 9 percent to nearly 5.1 million last year‒‒after four years of sagging sales. Because of tight inventories and rising sales last year, the median existing-home price rose 11.5 percent to just over $197,000. Still, according to NAR, sales figures will likely decline about 3 percent over the rest of this year to just over 4.9 million, then trend up to more than 5.2 million in 2015.
According to Yun, home price growth is likely to moderate from more new home construction. “Based on our forecast for this year, the median home equity gain over three years is expected to be $40,000,” he said. “A gap between new and existing-home prices from rising construction costs shows that prices are well supported by fundamentals in most of the country.”
Housing starts have stayed below 1 million a year for the past six years, but need to reach the long-term average of 1.5 million to balance the market. “Because of the prolonged slowdown in construction, we now need 1.7 million housing starts per year to catch up,” Yun said.
The sluggish recovery in housing starts is greatly affected by the fact that construction costs are rising faster than inflation. Add to that labor shortages in the building trades, and the onerous financial regulations preventing small banks from giving construction loans to small local builders, and it’s no wonder why construction starts are behind schedule, Yun said.
Dennis McGill, director of research for Zelman & Associates in New York, offered some hope. McGill said that his firm’s most recent analysis of Census Data shows an average of only 720,000 housing starts annually from 2010 through 2013. “But our projections over the next five years exceed an average of 1.9 million,” he said. “We won’t ramp up to that level right away, but if you average housing starts for the entire period from 2010 to 2019, it would be about 1.44 million.”
McGill added that there is “a strong tailwind” to housing starts. “We’re starting to see capital come back to single family construction, which is very favorable,” he said.