The Ground Floor

Suburban Housing Market Declines a Result of Demographics Shift

This post was written for The Ground Floor by Lori Hatcher, senior vice president of membership and marketing at the Urban Land Institute.

The current decline in demand for suburban “trade up” housing is more than just an economic correction; it is the result of a seismic shift in demographics and consumer behavior according to James Chung, president of Reach Advisors, speaking at the ULI Real Estate Summit at the Spring Council Forum in Boston last week.

According to Chung, the wave of the Baby Boom population passed the mid-forties—the age that buyers typically move up, and will be 30 percent of the 65-plus age group by the end of the decade. Coming along behind them is Generation X, a smaller cohort that is unwilling to pay for premium housing features and prestigious, exclusive communities, instead choosing attractive community characteristics.

The bulging Generation Y will reshape consumer markets, just as the Baby Boom did, but it will be a slow build, not a tsunami. Chung cited new gender gap statistics—1.5 times more women than men are completing college degrees, and women in their 20s in cities with a knowledge driven employment base now earn 100–120 percent of the salary of their male counterparts. The implications for homeownership and housing needs include delayed marriage and children, increased savings, and a fiscal conservatism that makes them less willing to spend for the flashy housing features that have attracted men as a signal of affluence.

Another factor is that inventory of Baby Boom “trade up” housing outstrips the size and income level of the next generation. While early Baby Boomers were able to reap income growth, everyone else has faced reduced, inflation adjusted income. Although the population is expected to grow by 17 percent—a major factor in producing robust housing markets in the past—almost all of the expected growth will be among groups with historically lower rates of homeownership: Hispanics, Asians, and mixed-race individuals.

Where are the opportunities in housing development? Chung provided this advice: Plan for development where the population is growing and tune in to the community features attractive to minorities or ethnic groups that are getting college educations.

Look for areas with job growth, identifying the companies and the employment profile of those that work there. Develop product clearly targeted at this market.

If planning to trade up product in a master-planned community, ensure the area has very limited supply or the product is superior and can command a higher share of a smaller market.

Consumer willingness to pay for green features is slim, mainly limited to those with both high educational attainment and high income. However, there are wider opportunities to use green features as selling points, such as communities with access to open space, or features that produce demonstrated savings in energy costs.

In Years to Come New Real Estate Development Patterns will Evolve

This post was written for The Ground Floor by Trisha Riggs, vice president of communications at the Urban Land Institute.

In: Inner-ring suburbs. Out: Exurbs. In the years ahead, changes in demographics and consumer behavior will drive new real estate development patterns that reflect a trend toward more urban suburbs, according to industry experts at ULI’s Real Estate Summit at the Spring Council Forum in Boston.

Well-known analysts Joel Kotkin, Robert Lang, Richard Florida, and Christopher Leinberger offered different views on what’s ahead, but they all agreed that most of the growth in U.S. urban regions (more than 100 million will be added to the population by 2050) will occur not in downtown cores, but in the suburbs.

The catch: The suburbs will grow differently than they have in the past, reflecting a trend toward denser development and smaller homes on smaller lots, and less dependence on cars. The winners: close-in suburbs with an urban feel, featuring town centers as a focal point, with ample recreational, shopping and entertainment opportunities, and which are near employment centers. The losers: big houses on big lots in isolated suburbs on the edge. The reason: three major demographic groups, all of whom place high value on time and convenience, none of whom want long commutes or long errands, and at least some of whom have soured on homeownership.

The groups:
• Aging baby boomers (55 to 64 years old): Although they are nearing retirement age, many will keep working out of necessity or by choice. Some will be forced to stay in their suburban homes until values recover. Those who are able to move will not choose traditional retirement locations or senior housing, opting instead for more mixed-age living environments that cater to their active lifestyles. Suburban town centers with a walkable urban "feel" will appeal to this group.  
• Younger baby boomers (46 to 54 years old), now in or entering their prime earning years: This group will also face a tough time selling suburban homes, hampering the ability of these boomers to move. Because the recession has left many younger boomers with flat incomes and less home equity, their ability to purchase second homes will be greatly diminished, curbing prospects in general for the second home market. However, like their older counterparts, they will be drawn to more connected, compactly designed communities when they are able to switch houses. 
• Generation Y: This tech-savvy generation has a population of about 86 million, more than the baby boomers. Gen Yers place high value on community; on diversity; on places (either virtual or actual) to gather; and share information, ideas and opinions. As they enter the housing market, they will be far less interested in homeownership than their parents were when they were young adults. Gen Y will gravitate toward walkable, close-in communities, choosing housing on outer edges only as a last resort because it is the most affordable.

One point repeated in several presentations: The housing collapse is a major factor behind some of the change in attitudes about where and how to live. Despite the recovery that is occurring in some housing markets, the number of foreclosures and "underwater" mortgages (loan amounts that are higher than the current value of the homes) continues to rise. The growing number of consumers who are choosing to walk away from those mortgages suggests a fundamental change from the long-held notion of homeownership as the ultimate "American Dream." This disillusionment over homeownership as a way to build wealth could persist for decades to come, as those entering the housing market will be more apt to rent longer, and to place more emphasis on buying for shelter rather than investment purposes.

Describing the new suburban development pattern as "smart sprawl," author and a fellow at Chapman University Kotkin said, "We can solve the problem of sprawl within sprawl itself." Mid-size cities, he said, will prove attractive to Gen Y, not only because they are affordable, but because many have transformed themselves into recreational and/or entertainment hubs, providing an urban lifestyle that is within their means.

According to Florida, author of The Rise of the Creative Class and other books on social trends, the "engine" that powers the next economic boom will be human creativity, and the places that meet the needs of the most talented and innovative workers from all types of employment sectors will be the most successful. "Place will be the organizing economic and social unit," he said.

The different lifestyles of both baby boomers and echo boomers will require the development community to provide products that are flexible in use, and that reflect the high mobility tendencies of the younger generation. "We are at a break with the past," he said, noting that society has entered an era in which time matters most of all. "We must respond by creating efficiencies in housing and transportation."

Second Home Buyers Still Looking

This post was written by Trisha Riggs, vice president of communications for ULI.

Despite the recession, high-end second-home buyers are still in the market, willing to purchase homes that meet their needs and desires but do not display conspicuous consumption, according to resort specialists speaking at ULI’s 2009 Fall Meeting in San Francisco.

According to a recent survey of second-home purchasers conducted by American Lives, the affluent are increasingly drawn to smaller units--provided they have the same amenities as larger, luxurious homes--because the downsizing is perceived to be more “politically correct” in the current economic environment of layoffs and budget cuts. 

American Lives President Brook Warrick said second-home buyers are still viewing the purchase as a personal reward, but that many of today’s buyers are purchasing the homes not as places to escape, but as gathering places to reconnect and re-establish bonds with family members and friends.

Life stages, said Warrick, are the best predictors of when purchasers will enter this niche market: 1)immediately upon retirement; 2) just prior to retirement; and 3) empty nesters still working, but who have different housing needs. What they aren’t compromising: any feature related to health and wellness--the one area that has not experienced any decline in consumer demand. These active, upper-income baby boomers are determined to stay fit and healthy, and are not content to age in just one place, but in several places, any of which could serve as a primary residence.

Also appealing: places that include educational components, and those that offer opportunities for altruism. "Being part of the greater community is very important to these buyers," said Toni Alexander, president and creative director of InterCommunications. Rather than presuming to know what the market wants based on pre-recession activity, it’s critical to examine how those buying preferences have changed, she said. "The world has changed, and once we understand that, we can do great things in design (of second-home and resort communities)."

Demographics of the Next Decade Will Transform New Housing and Retail

This post was written for The Ground Floor by Robert Krueger, communications associate with the Urban Land Institute.

SAN FRANCISCO -- There is no doubt that the big question at this year’s ULI Fall Meeting is what the U.S. and international markets will look like once the recession is over. For those in the industry, they realize that this economic downturn is uncharted territory and uncertainty for the future leads to many unanswered questions. A session panel focused specifically on the next decade and the implications that changing demographics will have on commercial real estate and land use patterns. Specifically, the panel answered the question of how people of the next decade will live, play, and shop.

The panel discussed two main demographic groups that will drive the next decade’s housing market: Generation Y and their parents (the aging baby boomers). As one panelist, Deborah L. Brett, president of Deborah L. Brett & Associates, stated that the demand from these two generations will determine the location of housing and heavily influence the success of retail and office space. 

James H. Johnson, director of the Urban Investment Strategies Center at the University of North Carolina, got more specific by addressing what he called 'disruptive demographics."”  With this, Johnson referred to changing demographics that are seriously altering real estate development and needs that have been in place for over a generation.

"The browning and graying America will transform all of our political and economic institutions, but especially real estate," said Johnson. "Increased minorities, immigrants, and seniors make up this package."

Brett pointed to the implications of these two generations as well as other statistics that are changing the market.  These include:

• Little or no growth in purchasing power due to the expectation of continued stagnation of household income over the next decade.

• Changes in the work place, such as delayed retirement, working from home, and computer based virtual meetings instead in-person less business travel.

• Greater diversity in housing since there are more single households, nontraditional households comprised of multiple roommates, and more minority and immigrant groups.

Will commercial real estate be in a position to handle these changes? In a publication released at the Fall Meeting, Five ULI Fellows Present Ideas for the Next Years, ULI senior resident fellow John McIlwain, said that these two groups and other changing demographics "will bring long-term growth to cities and help redevelop town centers. The bad news is that it is unlikely that enough new housing can be built in urban areas to meet this growing demand.  The result is likely to be rising urban housing costs--good for developers and owners and bad for homebuyers and renters with limited funds."

Five Experts Join the National Advisory Board of ULI Terwilliger Center for Workforce Housing

Five widely renowned housing and real estate finance experts have joined the National Advisory Board of the Urban Land Institute (ULI) Terwilliger Center for Workforce Housing, the Center announced today.

The ULI Terwilliger Center, established in 2007 by former ULI Chairman J. Ronald Terwilliger, supports the development of housing affordable to moderate-income workers, including teachers, nurses, firefighters, government workers, and police officers. Terwilliger, chairman of Atlanta-based Trammell Crow Residential, committed $5 million to the creation of the Center.

The National Advisory Board guides the Center’s program of work, which is to identify barriers to workforce housing production and eliminate those barriers by raising awareness of the affordability gap and by advocating changes in public policy. The Board, chaired by Mr. Terwilliger, has 14 members, including the five new Board members: Carin Barth, president of LB Capital, Inc., a private equity investment firm in Houston; Tom Bozzuto, CEO of The Bozzuto Group, a private real estate services organization; Steve Preston, former Secretary of the U.S. Department of Housing and Urban Development (HUD); Jonathan Reckford, CEO of Habitat for Humanity International; and Ronald A. Rosenfeld, former Chairman of the Federal Housing Finance Board.

Other members of the ULI Terwilliger Center’s National Advisory Board include:  former HUD Secretary Henry Cisneros, currently Chairman of City View in Los Angeles;  Bart Harvey, former Chairman of Enterprise Community Partners and the 2008 laureate of the ULI J.C. Nichols Prize for Visionaries in Urban Development; Bruce Katz, Vice President, Brookings Institution; Robert Larson, Chairman, Lazard Real Estate Partners, LLC; former Congressman Rick Lazio, Managing Director, Global Real Estate and Infrastructure, J.P. Morgan Asset Management; Nicolas Retsinas, Director, Joint Center for Housing Studies, Harvard University; Alan Wiener, Managing Director, Wachovia Securities; and Richard Rosan, Chief Executive Officer, ULI Worldwide.  

Audio: Housing Market Still Feeling Effects

Hear ULI's Senior Resident Fellow of ULI/J. Ronald Terwilliger Chair for Housing John McIlwain speak to Minnesota Public Radio yesterday on the real estate bubble and how the housing market is still feeling the effects. 

“Choice Neighborhoods” Program Announced by HUD Secretary

Public announcement by HUD Secretary Shaun Donovan and former HUD Secretary Henry Cisneros on July 14, 2009 at the National Press Club in Washington, D.C.

HUD Secretary Shaun Donovan and Henry Cisneros held a joint address at the National Press Club in order to announce the availability of $113 million in funding for HUD’s new competitive grant program called “Choice Neighborhoods”, which is intended as a replacement for HUD’s HOPE VI program. 

The event also marked the release of Mr. Cisneros’ new book “From Despair to Hope” which chronicles the history of the HOPE VI program and seeks to evaluate its overall success.  Over the course of its existence from 1992 to 2008, HOPE VI invested $6 billion in 240 public housing projects across the country, directly leveraging $11 billion of additional public and private urban investment totaling $17 billion.  The book includes essays from ULI Nichols Prize Winners Peter Calthorpe and Richard D. Baron, whose work has repeatedly been acknowledged as being instrumental to the creation and development of the HOPE VI program.

Sec. Donovan started his address relaying that President Obama has ordered a full review and assessment of all federal programs across all federal agencies with respect to their impact on urban and metropolitan areas.  No small undertaking!  This review is to be conducted by the Office of Management and Budget (OMB), the Domestic Policy Council, the National Economic Council, and the White House Office of Urban Affairs, and is expected to lay the groundwork for revamped urban policy agenda. 

Sec. Donovan went on to frame the backdrop of social and environmental justice issues related to U.S. housing policies, referring to an uneven “geography of opportunity” in U.S. cities.  He stated, “we must not penalize low-income families for the housing markets they live in” referring to the diverse housing markets in cities across the country.

“Choice Neighborhoods” is intended to extend the public-private development frameworks fostered by the Hope VI program beyond the sole objective of transforming public housing, thereby broadening its impact and extending its reach to catalyze community and neighborhood revitalization.  “Reinvesting in public housing, which is surrounded by deteriorated private properties, has little opportunity to succeed,” he said. 

Transforming public housing will remain a central objective of the program, but at $113 million in its first year, it does not measure up to the levels of HOPE VI funding in the late 1990s, which approached $700 million a year or the equivalent of about 15-20 annual project grants of around $35 million each.  The U.S. Department of Education has recently announced a companion grant program called “Promise Neighborhoods”, which is modeled on the Harlem Children’s Zone, which seeks to coordinate a broad range of social and educational activities all within one individual neighborhood.

Donovan echoed Obama’s recent directive to have HUD, US-DOT, EPA and US-DOE work in a more collaborative manner around the six “livability principles” laid out by agency directors at the beginning of June in testimony before the Senate Banking, Housing, and Urban Affairs Committee.  Donovan concluded by stating his belief that housing in the United States remains the “essential source of stability” for all citizens and that “the hopes and dreams of all Americans should not be limited by where one lives.”

HUD’s “Choice Neighborhoods” press release:
http://www.hud.gov/news/release.cfm?content=pr09-119.cfm&CFID=15174762&CFTOKEN=47616137

Sec. Donovan’s “Choice Neighborhoods” remarks:
http://www.hud.gov/news/speeches/2009-07-14.cfm

President Obama’s announcement of the federal policy review: http://www.whitehouse.gov/blog/A-New-Vision-for-Urban-and-Metropolitan-Policy/

HUD’s “Livability Principles” press release: http://www.hud.gov/news/release.cfm?content=pr2009-06-16.cfm

Housing: The Road Ahead

Attendees at ULI’s Spring Council Forum received an update on various efforts by the federal government to aid the housing recovery, including funding in the recently enacted economic stimulus package to support the weatherization of affordable housing, aid communities in neighborhood stabilization through the acquisition of foreclosed housing, and reignite use of the low income housing tax credit (LIHTC) program.

The billions allocated by American Recovery and Reinvestment Act--including more than $6 billion for energy efficiency conservation grants, $5 billion in weatherization assistance, $6 billion for foreclosure acquisition, and more than $2 billion in funding for the LIHTC program--represent opportunities not just for job creation, but to help lay the groundwork for a strategy for communities to grow out of the recession, panelists said. The key: the money must be used efficiently, effectively and in a timely manner to prove it was funding well spent.

An overview of the Washington, D.C.-based National Community Neighborhood Stabilization Trust was provided by trust president Craig Nickerson, who explained that the organization was created to facilitate the transfer of foreclosed and abandoned homes from financial institutions to localities to promote stability and stem neighborhood decline. The trust, based in Washington, D.C., is sponsored by Enterprise Community Partners, Inc.; the Housing Partnership Network; Local Initiatives Support Corporation; NeighborWorks America and the National Urban League.

According to Nickerson, the primary purpose of the organization is to "build a bridge" between lenders and state and local agencies, helping the government organizations learn how to best leverage the federal funding for acquisitions. With 90,000–plus foreclosed homes being added to the nationwide inventory each month, there is an urgent need to act quickly to stem further neighborhood decline, he noted. A focal point of its work: The "First Look" program, which allows localities quick access to foreclosed properties and an opportunity to acquire them before they are placed on the market. By purchasing the most distressed properties, the localities can catalyze turnaround activity by sparking private purchases of foreclosures, thus stretching the impact of the federal assistance, Nickerson explained.

A program for weatherizing and greening subsidized multifamily housing was discussed by Michael Bodaken, president of the National Housing Trust in Washington. "Preserving affordable housing is inherently energy- and resource-efficient," he said. The federal focus on this as part of a larger focus on green retrofitting funding has led to efforts to make more cost effective for multifamily owners to retrofit units and retain their affordability, he said. Bodaker pointed to Galen Terrace in Washington, D.C., as a successful example of greening an affordable housing development. The retrofitting, which has resulted in significant energy and water savings, "changed the nature of how the property looks…the tenants love it," he said. Prospects are promising for more of this activity, given the funding offered through the stimulus package.

Increased federal support for the LIHTC was reviewed by Shekar Narasimhan, managing partner of Beekman Advisors, Inc. in McLean, Va.The tax credit provides funding for the development costs of low-income rental housing by allowing an investor to take a federal tax credit equal to a percentage of the cost incurred for development of the low-income units in a rental housing project. Development capital is raised by syndicating the credit to an investor or, more commonly, a group of investors. The program is administered at the state level with each state getting a fixed allocation of credits based on its population.

The current economic downturn has greatly diminished demand for the credits, as investors such as financial institutions have incurred losses and have less income to shelter. At the core of the federal effort to spur more use of the program is an initiative making it easier for state housing agencies to either exchange existing credits for cash or to redistribute the credits. As yet, as many as eight states have promulgated rules for using the federal funds to ramp up use of the tax credits, Narasimhan said, speculating that the rest of the states "are likely waiting to see what happens" as a result of actions by those few. What is clear, he said, is that "we need proof that this effort is working…If we can’t prove that it works, we won’t get any more funding." 

A Closer Look at the Homeowner Affordability and Stability Plan

This post was submitted by ULI Senior Resident Fellow for Housing John McIlwain, who analyzed guidelines issued by the Obama Administration regarding its plan to mitigate home foreclosures nationwide.

Yesterday, the Treasury Department announced it was publishing the guidelines for the Administration’s "Making Home Affordable" program. This is the second half of the "Homeowner Affordability and Stability Plan" announced several weeks ago. The first part is the program requiring Fannie Mae and Freddie Mac to refinance mortgages they hold or have guaranteed even if the principal amount of the loan is more than 80 percent of the value of the home (but not more than 105 percent). This program is also underway now.

The Making Home Affordable program is far more complex than simply asking Fannie and Freddie to refinance a high loan-to-value mortgages. In this part of the plan, lenders have to voluntarily agree to modify a loan. The first step is for the lender to bring the amount of the borrowers’ monthly payments (including principal, interest, insurance and taxes) down to 38 percent of their income by reducing the interest rate (but not below 2 percent). Then the monthly payments are to be reduced further, down to 31 percent of income, and the government will share the cost of this further reduction including, if need be, a reduction of principal.

Because the program is voluntary, there are incentive payments for lenders, servicers, and borrowers. There is also what are called "Home Price Decline Reserve Payments," which will cover part of the decline in the value of a home if a modified loan has to be foreclosed later on. These are designed to encourage lenders to modify loans even if they fear that home values are declining and so it is better to foreclose now than later.

At this point the program gets quite complex. In fact, these complexities are both necessary, given the wide variety of circumstances borrowers may be in, and may be the downfall of the program. Sevicers of single family mortgages work on very thin margins and are already overwhelmed by the volume of defaults, requests for modifications, and foreclosures. They have little capacity to work through all the various provisions included in the guidelines.

Furthermore, there are a number of business and legal reasons why it is far easier for a servicer to opt to foreclose on a loan than attempt to modify it. The history of loan modifications over the past year also has been mixed to say the least; over half of them by some reports are already back in default (though this is most likely due to the fact that only those modifications done by the FDIC in fact reduce the monthly payments to 31 percent of income--the rest have been short term deferrals of part or all of the amounts due but unpaid due to the default). So one question is whether the incentives for the servicers and lenders will be sufficient to encourage modifications in large numbers.

This is by far the most ambitious plan to stem the increasing flood of foreclosures. Nevertheless, it has its limits. An increasing number of the defaults and foreclosures each month are due to borrowers losing their jobs in the declining economy.  To put it bluntly, it is hard to calculate 31 percent of no income, and so this plan is unlikely to help the unemployed.

Furthermore, there are some 13 million homes "underwater," with loans worth more than the value of the homes. As home values continue to fall, this number is rising. It is all too possible that these borrowers will at some point chose not to opt for a loan modification but simply send in the keys (called "jingle mail" in the business) and walk away from homes in which they have no equity.

So the Administration get an A for effort and thoughtfulness. There may in fact be no better plan possible short of a moratorium on all foreclosures. Many borrowers will likely get modifications they would otherwise not get, which is all to the good. But this plan is unlikely to end the growing number of foreclosures, only slow it somewhat.

• Modification Program Guidelines
• Summary of Guidelines
• Fact Sheet

Rental Housing Preservation Initiative

As two million rental unit have been demolished over the last 10 years. In an effort to help 12 states preserve more than 70,000 affordable rental homes, the Macarthur Foundation's $32.5 million investment--$9.5 million in grants and an additional $23 million in low-interest loans--will leverage more than $147 million in other funding.

The new projects will assist military families in Maryland, seniors in rural Iowa and Vermont, low-wage workers in Florida and Oregon, and people who have been homeless in Los Angeles. They will promote energy efficiency in Pennsylvania, save distressed buildings in Minnesota, improve management of rental housing in Washington State, and ensure that rental homes are available in gentrifying areas near public transit in Denver.

“These grants have spurred state and local innovation and leadership in the preservation of affordable housing,” said U.S. Department of Housing and Urban Development Secretary, Shaun L. Donovan. “At each grantee site, a representative of HUD has participated in developing the strategies and aligning efforts. It is my goal to make HUD a strong partner at the state and local level. The MacArthur Foundation should be commended for supporting partnerships across the government, private and nonprofit sectors.”

State and local governments in 40 states competed for MacArthur’s support, indicating broad, national interest in preserving affordable rental housing. The Foundation’s funding for these 12 projects is a part of MacArthur’s Window of Opportunity initiative, a $150 million, ten-year effort to preserve affordable rental homes across the nation. By investing in public sector initiatives such as these, the Foundation hopes to help create a wave of policy reform in cities and states that will make it possible to preserve one million homes this decade.

“For many years, the goal of home ownership has been emphasized in the U.S. and as a country we lost sight of the value of rental housing in a balanced national housing policy,” said MacArthur President Jonathan Fanton. “The end of the housing bubble and a wave of foreclosures have underscored the importance of affordable rental housing. We now have an opportunity to reset the policy agenda, restore rental housing to its proper place, and reshape the policy environment so that it both encourages rental housing preservation and makes it easier to do. State and local governments are at the forefront of this effort, showcasing innovation and trying fresh approaches.”

Read more about The Preservation Compact, a rental housing strategy for Cook County, guided by ULI Chicago with support from The MacArthur Foundation.