Unclear Demographic Shifts Create Uncertainty In U.S. Affordable Housing

A recovering economy and housing industry are affecting the environment for affordable housing financing, but not in a clear and consistent manner. Multifamily housing has improved much more than single-family housing, in general, and particularly in the affordable housing arena, said a number of credit analysts and industry experts at Standard & Poor’s Ratings Services’ Affordable Housing Hot Topics forum held on June 10, 2014 in New York City.

The housing choices that younger adults make will have a profound effect on the type and profitability of affordable housing developments. In addition, potential changes to the structure of government-sponsored entities (GSEs) Fannie Mae and Freddie Mac could force affordable housing providers to, once again, change their strategies.

Housing Is Boosting The Economic Outlook

The housing market continued its climb from a historic drop, but there was no indication of an impending bubble, noted Standard & Poor’s U.S. Chief Economist, Beth Ann Bovino. Prices are near the historic average of 260% of average household income, but this is much lower than in 2006 when prices were 400% of average household income. Bovino said that the probability of another U.S. recession in the next 12 months is between 10% and 15%, a significant reduction from a 25% probability in 2012. Housing is one of the factors behind the improved economic outlook. In 2012, the housing market contributed to economic growth in the U.S. for the first time since 2005. Other causes of economic optimism include what appears to be a stronger desire by legislators to compromise at the federal level regarding the budget, spending, and the debt ceiling; robust private sector demand and hiring; improved consumer sentiment and spending; and a manufacturing boom spurred by cheap natural gas.

The economy and consumer sentiment, combined, are important to potential first-time home buyers. “Consumer sentiment is 75 according to the University of Michigan Survey [a monthly consumer sentiment index], up from below 60 in 2009,” continued Ms. Bovino. “Lower unemployment improves consumer sentiment, so if unemployment falls below 6%, consumer sentiment could surpass 90.” Stronger consumer sentiment may bring out more first-time homebuyers, thus boosting the economy more. But that also depends on wage stability and other obligations, such as student loans, that young buyers may have. In addition, the labor force participation rate for recent college graduates is at a four-decade low, which further contributes to student debt burdens.

John Burns, CEO of John Burns Real Estate Consulting, cited challenges for first-time homebuyers. “They need confidence that they’re not going to lose their jobs. I don’t know how we overcome that except with time and more economic growth. They also have debt. The entry-level buyer is really struggling with a lot of things.”

Burns mentioned that a large number of potential buyers exists. “The number of people aged 20 to 24 is huge. . . So there is a lot of pent-up demand for household formation, and it’s going to unleash here sometime, it’s just predicting when.” In addition, 1.2 million more 25 to 34 year olds live with a parent, so the housing decisions that younger people tend to make affect the housing industry and, thus, the economy as a whole.

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