Harvard University Predicts Soft Landing for Housing Market

As long as jobs continue to be created and builders curb production, sharp drops in residential real-estate prices are unlikely, the Joint Center for Housing Studies says. Foreign born and minority homeowners will help lift property investments to new highs in the next decade, the study says.
By: Amy Hoak: The Wall Street Journal Online
Climbing interest rates and cooling speculative demand is putting pressure on the housing boom, but as long as jobs continue to be created and builders curb production, the sector will experience a soft landing, according to Harvard's Joint Center for Housing Studies.

The center's "State of the Nation's Housing" report, released on Tuesday, predicted that even though home-price growth will fall to more moderate levels in many areas, sharp drops in prices are unlikely. The absence of severe overbuilding or big job losses in major metropolitan areas is an important factor in the stability, the report said.

About 1 million people became homeowners last year, and mortgages including low-down payment, hybrid-adjustable and interest-only loans helped them make the purchases amid higher home prices and interest rates, the report said. Most owners with adjustable loans have an initial fixed-rate period of three or more years, and most interest-only loans extend for at least five years.

"While homeowners with annually adjusting mortgage rates are facing interest increases this year, including those with expiring teaser discounts, only about one in 10 homeowners face higher mortgage payments this year" Nicolas P. Retsinas, director of Harvard's Joint Center for Housing Studies, said in a news release.

Years of high appreciation rates, however, are feeding housing affordability problems, the report found. Between 2001 and 2004, the number of households spending more than half their incomes on housing increased by 14% to 15.8 million. In addition, the bottom three-quarters of the income distribution is seeing slow wage growth that isn't keeping pace with rising housing costs. The supply of rentals affordable on a $16,000 annual income fell by 1.2 million between 1993 and 2003.

"Slow growth in domestic discretionary spending at the federal level and the reluctance of state and local governments to relieve intense barriers to the production of more affordable housing make the road ahead difficult," Retsinas said. "Unless governments step up to these challenges, spending on housing will increasingly crowd out spending on pensions and savings among those with low and moderate incomes."

The report also looks at the contribution foreign-born and minority owners will make to overall household growth. The center projects net immigration will run at 1.2 million annually, which will help drive household formation to 14.6 million over the next ten years.

"Strong household growth, combined with record incomes and wealth, will lift housing investments to new highs next decade," Eric Belsky, executive director of center, said in the news release. "Each generation is achieving higher homeownership rates, incomes, and wealth than the one ahead of it, with the leading edge of the echo baby boom now in their 20s and the baby bust now in their 30s starting off on especially high paths. This is despite the fact that each younger generation has successively higher shares of foreign-born and minority household heads with lower average incomes than same-age native-born whites."

Other findings:

    • A renewal of rental demand was seen in all four regions of the country last
      year. Rental vacancy rates fell from 10.2% to 9.9% in 2005.

    • Adjustable rate mortgages shares fell from 35% in 2004 to 31% in 2005.
      Interest-only loans rose to 20% of loan originations in 2005. Subprime
      originations increased in real terms to $625 billion in 2005 from $210 billion
      in 2001; more than one in 10 mortgage holders is a subprime borrower.

    • House prices increased 9.4% in 2005, after adjusting for inflation. Of the 149
      largest metropolitan areas in the country, the number in which median house
      prices are at least four times the median household incomes increased from 13
      in 2001 to 49 in 2005.

    • Minorities accounted for 63% of household growth from 1995 to 2005. They are
      projected to account for 71% of household growth from 2005 to 2015, which
      would put the minority share of all households from 28% today to 33% in
      2015.