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Urban Headwinds, Suburban Tailwinds

Although home prices are rising faster in urban neighborhoods, population is growing faster in suburban neighborhoods. Consumer preferences and the aging of the population are tailwinds for suburban growth; so are falling oil prices if they stay low long-term.

Jed Kolko, Chief Economist
January 22, 2015

How fast have cities and suburbs grown recently? During last decade’s housing bubble, suburbs and rural areas grew much faster than cities. But briefly, early in the housing recovery, it looked like the long suburbanization of America might go into reverse. For a moment in 2011, urban counties grew faster than suburban and rural counties. Since then, old patterns have returned. Suburbs are now gaining population faster than urban neighborhoods, even though home prices are rising faster in cities than in suburbs. And the trend seems likely to continue. Trulia’s latest consumer survey and projected demographic shifts point to future headwinds for urban growth.

To compare cities and suburbs, we classify individual neighborhoods as urban or suburban based on whether or not most households live in detached single-family homes (see note on methods and data sources). This definition better reflects how residents describe their neighborhoods than do official city boundaries. That’s because many neighborhoods within big-city limits consist overwhelmingly of single-family homes and feel more suburban than urban.

Prices Rising Faster in Cities, but Population Growing Faster in Suburbs

In the recovery, the home-price rebound has been stronger in urban neighborhoods. Most of the overbuilding during last decade’s bubble involved single-family suburban homes, and the single-family vacancy rate remains elevated. Comparing urban and suburban neighborhoods in the 100 largest metros over the past four years, urban home prices have consistently risen faster, or fallen less, than prices in suburbs. And, for the year 2014, the urban median asking price per square foot rose 8.1% versus a 5.7% gain in suburban neighborhoods.

HomePriceGrowth

However, during most of this period, suburban population growth has been faster than urban growth. In 2014, suburbs grew 0.96% and cities 0.85%, according to Postal Service data on occupied homes receiving mail. That’s not a huge difference, but it continues the trend of suburbs outpacing urban areas.

PopulationGrowth

How can prices rise faster in urban neighborhoods even as suburbs lead in population growth? One reason is that most new construction takes place outside urban neighborhoods. Cities have less open land, and often more onerous regulations limiting new construction. It’s true that in 2014 multiunit buildings—typically located in urban neighborhoods—accounted for the highest share of overall construction since 1973. Still, in urban neighborhoods, fewer new units are built relative to the size of the housing stock. Limited construction holds back urban population growth and worsens urban affordability, even when—as rising prices show—housing demand in cities is strong. But what does the future hold?

Dreaming of the Suburbs and Beyond

In November, Trulia asked more than 2,000 American adults whether they lived in an urban, suburban, or rural area, and where they wanted to live in five years. We didn’t define urban, suburban, and rural, but instead left them open to interpretation. (See note.) Rural areas were the winner. Just 21% of respondents said they were rural residents, but 28% said they would like to be living in a rural area in five years.

LiveWantSurvey

Urban residents feel the tug of the suburbs. For every 10 suburbanites who said they wanted to live in an urban area in five years, 16 urban dwellers said they wished to live in the suburbs. Even among young adults aged 18-34— who are more likely to live in urban areas than older adults are—more wanted to move from city to suburbs than the other way around, though the sample size was small.

To put it another way: Urban residents were the least likely to want to live in a similar area in five years. Two-thirds (67%) of urbanites wanted to live in an urban area in five years, compared with 80% of suburbanites and 83% of rural residents who wanted to live in areas like where they were.

Urban living generally declines with age, which partly explains why people are less likely to want to live in cities in five years. But will the large millennial generation give urban areas a sustained boost? In other words, will the U.S. population’s changing age profile be a tailwind or headwind for cities?

The Demographic Urban Headwind

Today, urban neighborhoods are getting a demographic jolt. The largest segment of the big millennial group—folks in their early 20s—are entering the peak age for urban living. Some 26% of 22-24 year-olds live in urban neighborhoods, rising to 27% for 25-29 year-olds. Older people are far less likely to live in urban neighborhoods. Just 17% of the largest segment of baby boomers—those in their early 50s—live in such neighborhoods, a third lower than the share of early twentysomethings.

Comparing the 2009-2013 period with 2000, city living held up for people aged 25-44. Meanwhile, the share of adults 18-24 living in urban neighborhoods declined because they became more likely to live with their parents. But the most dramatic change in urban demographics concerned older adults. People age 45 and older were less likely to live in urban neighborhoods in 2009-2013 than in 2000. And the share of seniors in their 70s and early 80s living in urban neighborhoods fell more than 10 percent. In fact, for decades, seniors have become more likely to live in single-family homes. Increasingly, cities may be for the young. But that’s because oldsters are getting less urban, not because youngsters are getting more so.

AgeUrbanComparison

What then will happen as the two largest groups age—those in their early 20s and those in their early 50s? As millennials get older, many will follow a familiar path: They’ll partner up, have kids, and move to the suburbs. Urban living starts to decline after ages 25-29 and drops to its lowest level at ages 65-69. On the other hand, the baby boomer leading edge is nudging 70, when urban living starts to rise again. The return of older boomers to cities will offset some of the millennial suburban migration.

Nevertheless, the aging population is overall a slight headwind for cities. Suppose the propensity of each age group for urban living remains at 2009-2013 levels. In that case, over the next few decades, the changing age distribution projected by the Census Bureau would lead to a slow, but steady decline in the share of adults living in urban neighborhoods. To be sure, the decline will probably be small—around a tenth of a percentage point per decade. Still, it suggests that aging boomers returning to cities might not fill all the homes suburbanizing millennials leave behind.

What could boost urban growth? For starters, more construction in city neighborhoods. That would allow higher urban population growth, while slowing price increases. Also, higher energy prices would encourage people to live closer to work and in smaller homes. By the same token, the recent drop in oil prices, if sustained, would have the opposite effect, becoming yet another tailwind for suburbs and headwind for cities. Finally, cultural attitudes could shift in favor of renting and urban living. But is that likely? Today, the vast majority of young renters aspire to own. Homeownership remains core to the American Dream. The future of the suburbs looks bright.

Notes:

To compare “city” versus “suburb,” we classify neighborhoods as urban or suburban based on how dense or spread out the housing is, as we have done in previous Trulia Trends posts. Using Census data, we define urban neighborhoods as ZIP codes (technically, ZCTAs — ZIP Code Tabulation Areas) where a majority of the housing is apartments, attached townhouses, or other multi-unit buildings; suburban neighborhoods are those where a majority of the housing is single-family detached houses. We used this methodology rather than simply identifying the biggest city in a metro as “urban” and treating the rest of the metro as the “suburbs,” as other reports on cities-versus-suburbs often do. The problem with using city boundaries is that many neighborhoods outside of the biggest city are actually much more urban than some neighborhoods within a city’s boundary. For instance, our definition classifies Hoboken, NJ, Central Square in Cambridge, MA, and Santa Monica – which are all very dense – as urban neighborhoods, even though they’re outside the city boundaries of New York, Boston, and Los Angeles, respectively.

The urban vs. suburban comparisons of prices and population growth cover the 100 largest metros, with individual ZIP codes classified as urban or suburban. Price changes are year-end year-over-year changes in median asking price per square foot of homes listed on Trulia. Population changes are the year-end year-over-year change in the U.S. Postal Service’s count of addresses receiving mail, reported monthly by ZIP code.

The consumer data is based on a survey of 2,008 American adults conducted for Trulia on November 6-10, 2014, by Harris Interactive. Respondents were asked whether they lived in an urban, suburban, or rural area, without being provided a definition. Self-reported urban locations aligned better with our housing-stock-based definition of urban versus suburban than with official city boundaries, though race, for instance, had a statistically significant relationship with self-reported neighborhood urban classification, even after accounting for the housing stock, household density, and city population.

Data on urban residence by age group is based on the ZCTA population as reported in the 2000 decennial Census and the 2013 five-year American Community Survey, covering the years 2009–2013. Population projections by single year of age from 2014 to 2060 are also from the Census Bureau.

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Housing in 2015: Consumers Upbeat, but Recovery Faces a Tricky Handoff

Consumers think 2015 will be a better year than 2014, especially for selling a home. But the recovery will slow as the rebound effect fades before fundamentals become strong. Key markets to watch are in the Northeast, South, and West.

Jed Kolko, Chief Economist
December 3, 2014

What does 2015 have in store for the housing market? Nine years after the housing bubble peaked and three years after home prices bottomed, the boom and bust still cast a long shadow. None of the five measures we track in our Housing Barometer is back to normal yet, though three are getting close. The rebound effect drove the recovery after the bust, but is now fading. Prices are no longer significantly undervalued and investor demand is falling. Ideally, strong economic and demographic fundamentals like job growth and household formation would take up the slack. But the virtuous cycle of gains in jobs and housing is relatively weak, and that will slow the recovery in 2015. All the same, consumers are optimistic, according to our survey of 2,008 American adults conducted November 6-10, 2014.

Consumers Expect 2015 To Be Better, Especially for Selling a Home

Consumers are as optimistic about the housing market as at any point since the recovery started. Nearly three-quarters — 74% — of respondents agreed that home ownership was part of achieving their personal American Dream – the same level as in our 2013 Q4 survey and slightly above the levels of the three previous years. For young adults, the dream has revived: 78% of 18-34 year-olds answered yes to our American Dream question, up from 73% in 2013 Q4 and a low of 65% in 2011 Q3.

AmericanDream

Furthermore, 93% of young renters plan to buy a home someday. That’s unchanged from 2012 Q4 despite rising home prices and worsening affordability.

Which real estate activities do consumers think will improve in 2015? All of them – but especially selling. Fully 36% said 2015 will be much or a little better than 2014 for selling a home. Just 16% said 2015 will be much or a little worse, a difference of 20 percentage points. The rest of the respondents said 2015 would be neither better nor worse, or weren’t sure. More consumers said 2015 will be better than 2014 for buying too. But the margin over those who said 2015 will be worse was not as wide.

BetterorWorse

Despite this optimism, barriers remain to homeownership. Saving for a down payment is still the highest hurdle, as it was last year, followed by poor credit and qualifying for a mortgage. Not having a stable job has become considerably less of an obstacle, dropping to 24% this year compared with 36% last year thanks to the recovering job market. But affordability has become a bigger obstacle. Some 32% of respondents cited rising home prices, compared with 22% last year.

BiggestObstacle

Housing Recovery in 2015: Rebound Effect to Fade Before Fundamentals Can Take Over

Different engines power each stage of the housing recovery. During the early years – roughly 2012 to 2014 – the rebound effect drove the recovery. Investors and other buyers scooped up undervalued homes and took advantage of foreclosures and short sales, boosting overall sales volumes. Local markets hit hardest in the housing bust posted the largest price rebounds. Now, though, the rebound effect is fading. Price levels and price changes are both approaching normal, foreclosure inventories are dwindling, and investors are pulling back. This is inevitable as the market improves and therefore shifts to slower, more sustainable price increases and a healthier mix of home sales.

So what replaces the rebound effect in the next stage of the housing recovery? The market increasingly depends on fundamentals such as job growth, rising incomes, and more household formation. But here’s the hitch: These fundamental drivers of supply and demand haven’t returned to full strength. They aren’t able to fully take the reins from the rebound effect. Importantly, the share of young adults with jobs is still less than halfway back to normal, many young adults are still living with their parents, and income growth is sluggish. This points to a tricky handoff, and means housing activity in 2015 might disappoint by some measures, though the rental market will remain vigorous.

Here’s what we expect:

  • Price gains slow, but affordability worsens. Price gains slowed in 2014 and we’ll see more of the same in 2015. In October 2014, prices increased4% year-over-year, down from 10.6% in October 2013. The slowdown has been especially sharp in metros that had a severe housing bust followed by a big rebound. Now, prices nationwide are just 3% undervalued relative to fundamentals. That leaves fewer bargains and scant room for prices to rise without becoming overvalued. What’s more, with consumers expecting 2015 to be a better year to sell than 2014, more homes should come onto the market, cooling prices further. Nevertheless, despite slowing price gains, home-buying affordability will worsen in 2015 for two reasons. First, even these smaller price increases will almost surely outpace income growth. In 2013, incomes rose just 1.8% year-over-year in nominal terms, and a negligible 0.3% after adjusting for inflation. Second, the strengthening economy and the Fed’s response should push up mortgage rates.
  • The rental market will keep burning bright. Next year will see strong rental demand and lots of new supply. The demand will come from young people leaving homes belonging to parents or roommates and renting their own places. Until now, they’ve been slow to leave the nest. But the 2014 job gains for 25-34 year-olds should lead to the rise in household formation we’ve been waiting years for. At the same time, the 2014 apartment construction boom will mean more supply in 2015 since multi-unit buildings take about a year to build. Will rent gains slow? Probably – provided that this new supply keeps up with formation of renter households. This surge of renters will probably cause the homeownership rate to fall. To be sure, the ranks of homeowners will probably rise. But an even larger number of young adults will enter the housing market as renters.
  • Single-family starts and new home sales could disappoint. While apartment construction is breaking records, single-family housing starts and new home sales are still not much better than half of normal levels. They’ll improve in 2015, but not as much as we’d like. Our consumer survey suggests more people will try to sell existing homes. That would add to the supply on the market and possibly reduce demand for new homes. Also, the strongest source of housing demand will be young people getting jobs and forming households. But they’ll be moving into rentals and saving for a down payment rather than buying homes right away. Finally, the vacancy rate for single-family homes is still near its recession high, which discourages new construction. The apartment construction boom shows that where there’s demand, builders will build. But buyer demand for single-family homes simply hasn’t recovered enough to support near-normal levels of single-family starts or new home sales.

If these predictions for 2015 sound similar to our predictions for 2014, you’re right. As the rebound effect fades and fundamentals take over, the recovery gets slower and the market starts to look more similar from one year to the next. But there’s good news here. Even though the recovery remains unfinished, the housing market is becoming more stable and more certain for buyers, sellers, and renters.

Markets to Watch in 2015

As the rebound effect fades, our 10 markets to watch have strong fundamentals for housing activity. These include solid job growth, which fuels housing demand, and a low vacancy rate, which spurs construction. We gave a few extra points to markets with a higher share of millennials. These young adults are getting back to work and that will drive household formation and rental demand. We didn’t include markets where prices looked at least 5% overvalued in our latest Bubble Watch report. Here are our markets to watch, in alphabetical order:

  1. Boston, MA
  2. Dallas, TX
  3. Fresno, CA
  4. Middlesex County, MA
  5. Nashville, TN
  6. New York, NY-NJ
  7. Raleigh, NC
  8. Salt Lake City, UT
  9. San Diego, CA
  10. Seattle, WA

 

MarketstoWatch

These markets are spread across the country: Boston, Middlesex County (just west of Boston), and New York in the Northeast; Dallas, Nashville, and Raleigh in the South (the Census considers Texas part of the South); and Fresno, Salt Lake City, San Diego, and Seattle in the West. No Midwestern metros make the list because they generally have slower job growth and higher vacancy rates than other markets, even though many are quite affordable and prices are rebounding.

In 2015, more markets will settle back into their long-term housing patterns. Fast-growing markets that boomed last decade, collapsed in the bust, and then rebounded are now leveling off. Even the markets that have been slowest to recover and have struggled longest are seeing foreclosure inventories decline and the sales mix moving back toward normal.

At the same time, first-time homeownership, single-family starts, and new home sales won’t come close to fully recovering in 2015. But if 2015 brings strong job growth, big income gains, and the long-awaited jump in household formation, then 2016 could be the year when we see a major turnaround in homeownership and single-family construction.

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Cutting Housing Costs When Financial Hardship Strikes

If forced to spend less on housing, people would rather change where they live than whom they live with. Downsizing is the #1 way people would reduce their housing costs. Furthermore, renters are significantly more willing to move or get a roommate than homeowners are.

In good economic times as well as in bad, financial hardship can always strike. And when it does, people might have to cut back on housing, which is typically the largest household expense. However, cutting housing costs involves hard tradeoffs: moving can be expensive and a hassle, and living with family, friends, or strangers can be a challenge. To understand how people might make these tradeoffs, we asked 2,048 Americans in late March and early April 2014 the following question:

“If you experienced a major financial hardship (e.g., lost your job, unexpected medical bills), and you needed to cut back significantly on your housing costs, which of the following would you most likely do? Please select all that apply.”

Here’s what they told us.

Everyone’s Top Cost-Cutting Strategy: Downsizing
Facing financial hardship that required cutting back on housing, nearly 2 in 5 people (38%) would move to a smaller home — more than any other option by a wide margin. In fact, twice as many people would prefer downsizing than the next most popular actions of (1) renting out part of their home to a roommate or housemate or (2) moving to a more affordable neighborhood. Far fewer people would take the more radical actions of living in their car or not paying the rent or mortgage.

How Would You Cut Your Housing Costs If Hit With A Major Financial Hardship? Share
Move to a smaller home/apartment 38%
Rent out part of my home to a roommate/housemate 19%
Move to a more affordable neighborhood in the same city, metro area, or region 19%
Move to a more affordable city, metro area, or region 16%
Move into my parents’ home 14%
Move into my children’s (or other relative’s) home 8%
Rent out part of my home to vacationers/visitors 6%
Live in my car, office, or another place that’s not intended as housing 5%
Move into a non-relative’s home 4%
I would stay in my current home but stop paying the rent or mortgage 4%

… continue reading

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To Buy a New or an Existing Home? Why, How Much, and Where

41% of Americans say they would prefer to buy a newly built home over a previously-lived-in home; modern features and the ability to customize the home are the top reasons. However, just 46% of the people who strongly prefer a new home are willing to pay the 20% premium that new homes typically cost.

Should you buy a newly built home or one that’s been previously lived in? Both have their advantages and both have people who love them. Trulia surveyed 2,048 Americans in late March and early April 2014 about their preferences for new versus existing homes, and also analyzed recent home-purchase and building-permit data from the Census. Here’s what we found.

Twice as Many People Prefer New Homes Over Existing Homes
For the same price, 2 in 5 of Americans (41%) strongly or somewhat prefer to buy a newly built home over an existing home. Just 21% strongly or somewhat prefer an existing home. The remaining 38% have no preference. (The survey question explained that “new” means newly built, while “existing” means someone else has lived in it.)

Trulia_NewVsExisting_PieChart_5.55.14_v2

… continue reading

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Trulia’s Housing Predictions: How 2014 Will be Different

Next year looks to be the year of the repeat home buyer, as worsening affordability discourages first timers and investors; also, the buying process will be less frenzied. Hot markets to watch are primarily in the South, Plains, and Mountain states. Rental activity will swing back toward urban apartments, away from single-family homes.

Jed Kolko, Chief Economist
December 11, 2013

The housing market continued its uneven recovery in 2013 and will enter 2014 closer to normal than it was a year earlier. Consumer optimism is climbing back: in Trulia’s latest survey, 74% of Americans said that homeownership was part of achieving their personal American Dream – the highest level since January 2010. Even among young adults (18-34 year olds), many of whom struggled through the recession and are still living with their parents, 73% said homeownership was part of achieving their personal American Dream, up from 65% in August 2011. Rising prices over the past two years have been great news for homeowners, especially for those who had been underwater, and the real estate industry has benefited from both higher prices and more sales volume.

At the same time, the effects of the recession and housing bust still sting: the barriers to homeownership remain high, and a few markets – mostly in Florida – still have a foreclosure overhang. Plus, the housing recovery itself brings its own challenges, including declining affordability and localized bubble worries, especially in southern California.

Barring any economic crises, the housing market should continue to normalize. Here are 5 ways that the 2014 housing market will be different from 2013:

  1. Housing Affordability Worsens. Buying a home will be more expensive in 2014 than in 2013. Although home-price increases should slow from this year’s unsustainably fast pace (see #4, below), prices will still rise faster than both incomes and rents. Also, mortgage rates will be higher in 2014 than in 2013, thanks both to the strengthening economy (rates tend to rise in recoveries) and to Fed tapering, whenever it comes. The rising cost of homeownership will add insult to injury in America’s least affordable markets: in October 2013, for instance, 25% or less of the homes listed for sale in San Francisco, Orange County, Los Angeles, and New York were affordable to middle class households. Nonetheless, buying will remain cheaper than renting. As of September 2013, buying was 35% cheaper than renting nationally, and buying beat renting in all of the 100 largest metros. However, prices and mortgage rates might rise enough to tip the math in favor of renting in a couple of housing markets – starting with San Jose.
  2. The Home-Buying Process Gets Less Frenzied. Home buyers in 2014 might kick themselves for not buying in 2013 or 2012, when mortgage rates and prices were lower, but they’ll take some comfort in the fact that the process won’t be as frenzied. There will be more inventory on the market next year, partly due to new construction, but primarily because higher prices will encourage more homeowners to sell – including those who are no longer underwater.  Also, buyers looking for a home for themselves will face less competition from investors who are scaling back their home purchases (see #3, below). Finally, mortgages should be easier to get because higher rates have slashed refinancing activity and pushed some banks to ramp up their purchase lending. Moreover, the new mortgage rules coming into effect in 2014 will give banks better clarity about the legal and financial risks they face with different types of mortgages, hopefully making them more willing to lend. All in all, more inventory, less competition from investors, and more mortgage credit should all make the buying process less frenzied than in 2013 – for those who can afford to buy. … continue reading
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