De­layed main­te­nance on ag­ing homes adds to in­ven­tory con­cerns

As homes con­tinue to age, re­pair needs be­come greater and the gap between ren­o­va­tion costs and ex­pected in­crease in home value widens.

National Mortgage News - - Contents - By Paul Cen­topani

Main­te­nance and ren­o­va­tions aren’t keep­ing up with the na­tion’s ag­ing hous­ing stock, cre­at­ing an in­flux of ob­so­lete prop­er­ties that’s adding fur­ther strain to an al­ready tight in­ven­tory of homes for sale.

The houses them­selves aren’t ag­ing quicker per se, but as the over­all hous­ing stock gets older, a larger num­ber of homes are fall­ing into disrepair to the point where they’re un­liv­able. What’s more, the fre­quen­cies of up­keep and ren­o­va­tions have plum­meted.

Now, fewer ma­tur­ing homes get the care they need to re­main in us­able con­di­tion and get­ting cy­cled out of the hous­ing stock sooner than in the past.

As homes con­tinue to age, their re­pair needs be­come greater and the gap between ren­o­va­tion costs and ex­pected in­crease in home value widens. Hous­ing ex­perts are con­cerned the home eq­uity lost dur­ing the Great Re­ces­sion made home­own­ers re­luc­tant to take on ren­o­va­tions if re­pair projects cost more than the ex­pected gain in home value. Ba­si­cally, the juice wasn’t worth the squeeze.

As a re­sult, prop­er­ties are be­ing doomed to a vi­cious cy­cle of de­cay, ex­plained David Dworkin, a for­mer Trea­sury De­part­ment hous­ing pol­icy ad­vi­sor who’s now the pres­i­dent and CEO of the Na­tional Hous­ing Con­fer­ence, an as­so­ci­a­tion of mort­gage lenders, home­builders, af­ford­able hous­ing ad­vo­cates and other in­dus­try stake­hold­ers.

“That’s the ironic un­der­side of the hous­ing af­ford­abil­ity cri­sis — the top’s not af­ford­able and the bot­tom’s not re­stor­able,” he said.

Data about the scope of res­i­den­tial hous­ing ob­so­les­cence is lim­ited and im­pre­cise. In­dus­try an­a­lysts and aca­demics rely on changes to over­all in­ven­tory lev­els and the age dis­tri­bu­tion across the hous­ing stock to iden­tify trends.

The me­dian age of owner-oc­cu­pied homes was 37 years in 2015, up from 31 years in 2005, ac­cord­ing to a Na­tional As­so­ci­a­tion of Home Builders anal­y­sis of Cen­sus Bureau data.

But that’s largely due to the pre­cip­i­tous drop in new home con­struc­tion dur­ing and af­ter the Great Re­ces­sion.

Home­builders con­structed a scant 6.1 mil­lion sin­gle-fam­ily units over the 10-year stretch from 2008 to 2017, only slightly more than the 6.04 mil­lion houses built from 2004 to 2007, ac­cord­ing to the Cen­sus Bureau.

On av­er­age, more than 1 mil­lion hous­ing units fall out of the over­all in­ven­tory ev­ery year for a va­ri­ety of rea­sons, in­clud­ing mul­tiu­nit prop­er­ties that are con­sol­i­dated or struc­tures that are con­verted to non­res­i­den­tial uses.

The De­part­ment of Hous­ing and Ur­ban De­vel­op­ment es­ti­mates 43% of all prop­er­ties that fell out of the hous­ing stock between 2011 and 2013 were lost due to de­mo­li­tion, dis­as­ter, dam­age or con­dem­na­tion. That’s up from 30% of units lost for those rea­sons between 1997 and 1999.

To be sure, this trend can be in­con­sis­tent. For ex­am­ple, the data shows sharp in­creases fol­low­ing Hur­ri­canes Ka­t­rina and Sandy when hun­dreds of thou­sands of hous­ing units were de­stroyed or lost.

But new con­struc­tion is only part of the on­go­ing hous­ing in­ven­tory squeeze that’s sent home prices soar­ing and put

a damper on mort­gage vol­ume. Ex­ist­ing homes ac­count for about 90% of the roughly 6 mil­lion home sales that hap­pen each year, ac­cord­ing to data com­piled by the Na­tional As­so­ci­a­tion of Home Builders.

It’s in­evitable for the na­tion’s hous­ing stock to con­tinue to age be­cause new con­struc­tion will never pro­duce enough units to main­tain a con­stant av­er­age age of homes, said Lau­rie Good­man, vice pres­i­dent of hous­ing fi­nance pol­icy at the Ur­ban In­sti­tute.

And even if the rate of ob­so­les­cence re­mains con­stant, as the hous­ing stock grows, the num­ber of ac­tual homes that fall out of us­abil­ity keeps go­ing up.

“If the av­er­age unit is 37 years old, next year it will be 38 years old. How­ever, about 0.75% of the na­tion’s 135 mil­lion hous­ing units will have ex­ited the hous­ing stock,” Good­man es­ti­mates. “To keep the hous­ing stock at 37 years old, you need to add 3.6 mil­lion units.”

The prob­lem is builders aren’t cre­at­ing enough homes to keep up with the pace of new house­hold for­ma­tion, let alone the grow­ing re­place­ment rate.

While there were 1.4 mil­lion new house­holds in 2017, builders com­pleted only 1.15 mil­lion sin­gle-fam­ily and mul­ti­fam­ily units and man­u­fac­tured hous­ing ship­ments to­taled 93,000, ac­cord­ing to the Cen­sus Bureau.

Among its many ca­su­al­ties, the Great Re­ces­sion swal­lowed up home­builders and the la­bor around it. The acute short­age of work­ers, com­bined with in­creased land and lum­ber costs con­trib­uted to the un­der­pro­duc­tion of homes, said Sam Khater, chief econ­o­mist at Fred­die Mac. It’s go­ing to take a sig­nif­i­cant in­crease in home­build­ing to re­verse this mul­ti­year trend. De­mand for buy­ing has picked up in re­cent years, but sup­ply hasn’t kept pace.

“It’s led to con­tin­ued price growth and lim­ited in­ven­tory. Home sales have legs to grow this year as long as in­ven­tory con­di­tions im­prove enough to meet de­mand,” he said.

Mort­gage lenders can feed this grow­ing de­mand by ex­pand­ing fi­nanc­ing op­tions to builders, as well as ex­ist­ing and prospec­tive home­buy­ers.

Al­ready, lenders and the gov­ern­mentspon­sored en­ter­prises have added new low down pay­ment op­tions and taken other steps to im­prove ac­cess to credit. But there’s more room for lenders to grow with­out tak­ing ex­ces­sive risk, Dworkin said.

“The lenders can seek the ex­tra vol­ume re­spon­si­bly, learn from the cri­sis, and be ap­pro­pri­ately cau­tious in stretch­ing the credit en­ve­lope,” Dworkin said.

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