The housing industry plays a critical role in the U.S. economy by contributing 15%-18% to GDP every year, and homeownership accounts for a quarter of American household net worth. So when analysts and experts start hinting at a “housing crisis,” it can spark concern, confusion, and a flurry of panic.
John Dunham, a finance expert who served as the senior economist for the New York City Mayor’s Office and the New York City Comptroller’s Office before starting his own firm, says that a housing crisis is in the eye of the beholder.
He cites one example of the housing crisis for renters in San Francisco, driven by the out-of-control cost of rent with the median asking rent for a one-bedroom apartment running at $3,500 per month. In the wake of the pandemic and resulting urban exodus, San Francisco rents plummeted 31%. Another kind of crisis — this time for landlords.
“There is no single economic definition of a housing crisis,” says Dunham. “Depending on who you are speaking with, it could be a bubble in prices, a lack of supply, a surge in demand, or basically anything that puts the housing market out of equilibrium.”
In this guide, we break down some of the main categories of housing crises, including:
- Subprime mortgage crisis
- Homelessness crisis
- Natural disaster housing crisis
- Pandemic rental crisis
- Chronic housing affordability crisis
Subprime mortgage crisis
Utter the words “subprime mortgage crisis” or “2008 housing market crash” to any real estate agent, homeowner, or economist who lived and worked through that challenging time, and you’re likely to receive a shudder in response — and perhaps a harrowing tale of their own firsthand experience.
The trouble began when banks started relaxing their lending criteria and handing out subprime loans to borrowers who wouldn’t have qualified under ordinary circumstances. No down payment? No problem — many lenders required little to no upfront cash to finance a home. Sub-par credit? No worries — banks across the country eased their credit requirements to make it possible for more people to secure loans.
Buoyed by the sudden ease of loan approvals, buyers flooded the market. Amid the growing demand, house prices continued their steady climb. Borrowers took on high-risk loans, counting on being able to refinance later. But when house prices declined more than 18% in the fall of 2008 and interest rates started to tick up, many homeowners found themselves stuck in unsustainable mortgages, sometimes owing more than the value of their homes.
“When demand crashed due to people’s inability to meet their mortgage obligations, the pendulum swung the other way, and there was too much supply chasing too little demand,” explains Dunham.
During 2008, 3.1 million foreclosures were filed, the equivalent of one out of every 54 homes, and homeowners lost $3.3 trillion in home equity.
In Sept. 2020, The New York Times published the heartbreaking story of 55-year-old Miles Oliver, a military veteran in Phoenix, Arizona. When COVID-19 brought his pizza delivery shifts to a standstill, he could no longer pay his rent and was locked out of his apartment, forcing him to live in his Ford Fusion.
When his car broke down a few months later, Oliver wound up at a homeless shelter along with hundreds of other aging adults. He was ultimately lucky enough to get an apartment through a veterans’ assistance program, but countless other older and elderly adults remained stuck in shelters or living in their cars, unable to afford housing.
Oliver’s situation has become all too common among aging adults. According to a study published in 2019 that looked at the population of homeless shelters in Boston, New York City, and Los Angeles County, the number of elderly people forced out of their homes is expected to increase by more than three times over the next decade — a situation that has only become more dire due to the pandemic.
John A. Kilpatrick, Ph.D. has more than 30 years of experience in the real estate appraisal industry and is a certified appraiser in all 50 states. Although Kilpatrick’s appraisal business is national, he lives primarily in Seattle and Key West. Over the years, he’s taken part in a number of homelessness initiatives, such as Habitat for Humanity and low-income housing programs. “There is no ‘one-size-fits-all’ solution to homelessness,” he says. “It’s a very granular problem.”
As Kilpatrick points out, every instance of homelessness has its own unique backstory. For example, there might be an intact, nuclear family who ends up homeless and needs assistance with finding a rental and other critical support. Then there might be single parents who have both child care challenges and significant, immediate housing needs. Yet another example are the homeless encampments seen under bridges in Seattle, which are often populated by homeless people with serious substance abuse problems.
“Unfortunately, our cities are all too often set up to deal with this as if it’s a criminal problem (which it is), but not set up to deal with the root-cause social work issue that gives rise to homelessness,” says Kilpatrick.
According to a report from the White House, on any given night, 0.2% of the American population are homeless — or 17 out of every 10,000 people. As of Jan. 2018, 552,830 people were counted as homeless, 65% of whom were unsheltered.
Natural disaster housing crisis
Whether it’s a hurricane, wildfire, flood, or earthquake, unwelcome “acts of God” wreak instant havoc on people’s homes, communities, and livelihoods. That makes natural disasters a housing crisis of their own. However, while a natural disaster usually hurts real estate transaction volume in the short term, property values often hold or even rise due to a resulting housing shortage.
Take Hurricane Katrina, which damaged 1 million homes and displaced over 1 million people. After the storm hit on Aug. 23, 2005, HomeLight transaction data shows that locally, only one home was sold each week from Sept. 5- Oct. 5. Essentially home sales came to a halt. But by the week of Oct. 17, transaction volume started to pick up again as the city started to regain some strength and normalcy. Meanwhile, the reduction in New Orleans housing supply actually caused home prices to spike 17% between Nov. 2005 and Nov. 2006.
Another effect of natural disasters on housing is an uptick in housing demand and home values in cities surrounding the affected town. After displaced residents receive their insurance money and are ready to find a new, permanent place to live, most of them will look to re-settle in the same general area, often in a neighboring town.
This outcome was seen after a 2018 fire in Paradise, California, which displaced thousands of families from their homes. Due to a severe housing shortage, 1,000 of those families were still looking for places to live six months after the fire. As a result, home sales in Paradise plummeted 40%-50% compared to the prior year, CoreLogic noted — but in neighboring cities that were not impacted by the fire, home sales spiked.
Lynn Peters, a top real estate agent in Pensacola, Florida, knows firsthand how a natural disaster can send a housing market into a tailspin. After experiencing the wrath of Hurricane Ivan in 2004, her town was hit with Hurricane Sally in September of 2020, which dumped 25 inches of rain and caused storm surge flooding of five and a half feet. The disruption slowed the housing market to a crawl.
“If a home was already listed prior to a disaster, the whole selling process slows down,” Peters says. “If inspections and appraisals were already done, they have to be done all over again. If there is damage to the property, the seller has to file an insurance claim and wait for repairs to be made.”
And finding experts to complete repairs was expensive, slow, or virtually impossible. Contractors were slammed with jobs and struggled to keep up. At the same time, building materials were in high demand, sending construction costs soaring.
“Before the storm, if someone needed to replace a roof, it would have cost around $10,000-$15,000,” notes Peters. “Now, that same roof would cost $18,000-$25,000 to replace. Repairs are also taking up to three times as long to complete.”
Closing delays long after the event
Another impact of the storm has been a delay in closings. Before Sally, Peters says homes typically closed in 30 days or less. These days, it takes at least 45-60 days due to appraisers, inspectors, and other professionals facing a backlog of orders.
In addition to forcing residents out of their homes, natural disasters also lead to higher delinquency rates. As many people’s sources of income dry up after a catastrophic event, they are unable to cover their mortgage payments, leading to a spike in delinquency rates even for properties that weren’t damaged.
Event impact on housing varies
Our research shows that a city prone to natural disasters can take steps to mitigate the impact of the event on housing. For example, the housing market Houston bounced back faster after Harvey — compared to NOLA after Katrina — due to factors like a faster FEMA response and hurricane preparedness.
Pandemic rental housing crisis
With the onset of the COVID-19 pandemic, 20.5 million people suddenly lost their jobs and unemployment skyrocketed 3.5% in Feb. 2020 to 14.7% in April 2020 — a greater increase than the 8.8 million jobs lost in the aftermath of the Great Recession. The abrupt and severe recession prompted speculation that there could be another housing crash similar to 2008 underway.
Housing market holds strong post-pandemic
A 2008-esque crash has yet to materialize in 2020 for a few reasons. Through the CARES Act, the government issued forbearance plans allowing mortgage holders to pause or reduce mortgage payments for a limited period of time. So far, this has prevented a glut of mortgage defaults and foreclosures. In addition, improvements in the jobs market since April (unemployment sits at 6.9% as of Oct. 2020) will help homeowners get back on track with their mortgage independently.
Meanwhile, a lack of new construction, low mortgage interest rates, and a surge of pandemic home purchases has kept supply at record lows. As a result, the median sale price of existing homes skyrocketed over 15% in Oct. 2020, according to the National Association of Realtors.
It’s yet to be seen how long the state of the current market will hold. In Peters’ Pensacola market, she predicts that they’ll see an increase in distressed sales in 2021, largely driven by mortgage forbearances running out and payments coming due around March, even as many people are still out of work.
Uneven demand from cities to suburbs, condos to homes
“Governments have shut down major cities, making them difficult to live and work in,” notes Dunham. “This has sent middle-class and wealthy individuals to more suburban and coastal areas. Supply is reacting to demand, which means there is a construction boom in these markets and prices are rising.”
But that doesn’t mean the urban housing markets are on the decline. The pandemic has, however, translated into strengthened demand for single-family housing across the board. For example, homebuyers continue to flood the Minneapolis market in search of roomy detached homes, especially those over 2,000 square feet, according to the Star Tribune.
Rental market sees harsher impact
The rental market hasn’t fared as well as owned housing post-pandemic, and that’s especially true for cities with economies centered on oil and energy and major metro areas with a heavy concentration of professional and technical workers. According to an analysis from AdvisorSmith, cities where the cost of rent has fallen the most dramatically as of Q3 2020 include:
- Odessa, TX (-34.7%)
- Midland, TX (-30.9%)
- Williston, ND (-24.1%)
- San Francisco, CA (-19.1%)
- New York, NY (-10.9%)
However, cities that hug the outskirts of larger metros and have absorbed urban sprawl have actually seen the cost of rent increase, including:
- Stockbridge, GA (+12.5%)
- Avondale, AZ (+11.6%)
- Spokane Valley, WA (+11.3%)
- Chino, CA (+10.8%)
- East Point, GA (+10.7%)
Where the asking price for rent is declining sharply, landlords are struggling to cover their mortgage, and where the cost of rent is increasing, unemployed renters are finding it hard to make ends meet. Experts have estimated that over the next several months, 30-40 million Americans could be at risk of eviction.
“The pandemic is causing great concern, particularly in the apartment market, as apartment dwellers are disproportionately hit with job loss and rent payment woes,” says Kilpatrick. “This ricochets throughout the apartment market. Many apartments are now owned by big REITs and conglomerates and this will inevitably result in availability — and thus affordability — issues down the road.”
Chronic affordability crisis
Perhaps the most basic form of a housing crisis boils down to people not being able to afford the available homes and apartments, a situation that Kilpatrick says has plagued the country for many years.
In 1970, he notes that the average household income in the U.S. was $8,730 and the average home price was $17,000. To qualify for this loan, a buyer would need a down payment of about $5,238, or about 60% of their annual gross income.
Today, the average U.S. household income is $68,400 per year, or about $5,700 per month. However, the average home price in the U.S. is $387,000 as of the third quarter of 2020. In this scenario, a 20% down payment would exceed the entire annual household income. “This situation is even worse among first-time buyers, and builders report record low numbers of first-time buyers in the pipeline,” Kilpatrick points out.
Identifying and rebounding from a housing crisis
While every housing crisis has its own unique causes and consequences, there are some common red flags and resolutions that tend to emerge.
In her 16 years as a Florida real estate agent, Peters has seen the market go through plenty of highs and lows. She names these core elements that distinguish a housing crisis from an ordinary lull:
- Lack of buyers
- Decline in home prices
- Rising interest rates
Fortunately, what goes down eventually comes back up. According to Peters, the most important elements of a housing market recovery include:
- Availability of affordable mortgages with low interest rates
- Tight housing inventory
- Simultaneous increase in home sales and home prices
Heading into 2021, Peters is cautiously optimistic about the future of the housing market and the economy as a whole. “If interest rates stay low, the economy stays healthy, and we see more businesses open up, I think we will start to see recovery for the overall market,” she says.
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