Gearing Up for the 2020 Census: Lack of Funding and Leadership Vacancies Imperil Crucial Update

It’s hard to over-state the importance of the decennial census, which has been undertaken every decade since 1790.

Indeed, this key accounting of the American population was deemed important enough to be listed in Article 1 of the U.S. Constitution.

Today, however, with the departure of the Census Bureau’s director in June and a refusal by Congress to adequately fund important tests of the first Internet-based count in advance of 2020, alarm bells are going off at The Census Project, which counts among its 200 members the NAHB, the NAR and the U.S. Chamber of Commerce.

They certainly have reason to be worried. Several months before the departure of former director John Thompson, the Government Accountability Office had added the Census Bureau to its ‘high-risk list’ of imperiled agencies and programs.  If there is any economic sector which would be negatively impacted by the Bureau being under-funded and rudderless, it would be the building industry.

That’s because, besides the decennial census, the Bureau also collects monthly data critical for homebuilders such as building permits, starts, completions and new single-family home sales at various geographical levels.

Each quarter, the Bureau releases data on homeownership and residential vacancy rates by state and many MSAs.  The Bureau’s data can even move the stock market in either direction because it’s regularly tracking the health of retail stores, wholesale trade, manufacturing, domestic and international trade and even construction spending by sector.

Because a country as large and vibrant as the U.S. can change a lot between decades, the Bureau also conducts the American Community Survey (ACS), which provides annual information to better determine how over $400 billion in federal and state funds are spent based on local jobs, education levels and homeownership levels.

For demographers and market researchers looking at development opportunities, the Bureau’s data allows them to cobble together datasets to compare the risk profile of one city or town versus another.  If a small city is seeing a boom in new jobs that isn’t being met with new population or housing growth, that’s an opportunity the Bureau can help unearth. The Census Bureau may be one of the most important federal government agencies we have.

Although various state agencies also gather their own data on population, employment and housing trends – and have served as official State Census Data Centers since 1978 – they still must ‘benchmark’ their estimates against the latest decennial census data when it is released.  Sometimes this process can unveil a large discrepancy, which can deprive a large state of its share of numerous federal programs and even cost it a Congressional seat.  In some cases, the loss of a seat could potentially swing an election.

The private sector is also impacted, because when you order a demographic report from a company such as ESRI or Claritas, their analysts are basing their current-year estimates and projections on the most recent decennial census.  Consequently, if the 2020 update is under-funded, that could lead to another decade of bad guesses based on incomplete data.  Given the impact that under-building housing is having on home prices in many areas of the country, ensuring an accurate update in 2020 should be a rallying cry for our industry.

There are two reasons for this Census Bureau under-funding: (1) Because the budget is set at the same level as the 2010 Census, it is not accounting for either a decades’ worth of inflation or another estimated 25 million people to count by 2020; and (2) Because the Bureau is attempting to harness the Internet and new technology for the first time to reduce the need for door-to-door counting, it needs additional funds for tests originally scheduled to start in 2018.

According to The Census Project, the Bureau needs an additional $300 million in 2018 to extensively test this new technology for an accurate count, but the White House and Congress have approved just over 10 percent of that amount.  This puts the 2020 Census in danger of a botched count, which could lead to undercounts of rural and minority populations while over-counting whites, especially those with multiple homes.

There are fears that the 2020 Census could be the victim of politics, and be used as a means to shift federal spending from blue to red states – or vice versa if such a myopic precedent is set.  At a time when just agreeing on facts is a challenge, there’s a reason the Founding Fathers inscribed the decennial census into the Constitution.

Let’s at least honor their wishes by fully funding it.

State of the Rental Market: Growth is Moderating but Long-Term Prospects Very Favorable

While it’s certainly no secret that the multi-family sector has been on a roll over the past few years, there have been some recent signs that its growth trajectory will continue to moderate this year. 

Nonetheless, with an economic expansion in its seventh year and an average of one million new renter households being formed over the past five years, these economic tailwinds should continue to support this sector over the near term. The long-term prognosis is even better, with a recent study concluding a need for 4.6 million new apartments between now and 2030.

For now, overall tenant demand remains strong, especially as more millennials continue to form new households after being delayed due to the Great Recession and paying off student loan debt. Nationally, the homeownership rate fell to a 51-year low of 63 percent last year, and is expected to remain around this level for at least the rest of the year.

Construction of new apartments is also expected to peak this year, especially as over-supply in some high-growth markets is beginning to impact both vacancy rates and rent growth. Mindful of this trend, construction lenders are also being more discreet, critically assessing the experience of developers, double-checking projected returns while acknowledging lower growth in operating income.

In addition, if government proposals for increased infrastructure spending see the light of day, this could mean increased competition for both the materials and labor required for more multi-family supply.

According to recent figures from brokerage Marcus & Millichap, most of the softening is beginning to occur for Class A buildings, both due to an increase in new product as well as historically weak absorption during the fourth quarter of 2016 being pushed into 2017. Nationally, this meant a large bump in Class A vacancy rates to over 6.5 percent. Yet instead of lowering asking rents to fill vacant units, many owners are betting that the strong spring and summer leasing season will mop up the excess supply.

For Class B properties, a slight rise in vacancies was often due to renters opting to make the leap to higher-quality apartments, especially in regions such as the South where the price difference between the two classes is the smallest.  Not surprisingly, the vacancy rate for Class C properties remains the lowest due to the strong demand for affordable housing.

Both Axiometrics and Yardi Matrix -- which regularly survey apartment communities across the country each month – have shown a similar softening in both rent growth and occupancy rates.  According to Axiometrics, although its surveyed properties had rebounded to the benchmark occupancy rate of 95 percent by May 2017, annual effective rent growth has stayed within a fairly narrow band of 2.0 to 2.2 percent over the past six months.

Yardi Matrix, however, showed an annual overall rental rate increase of 1.5 percent for the 12-month period ending in May 2017, down sharply from the 5.3 percent noted a year ago even though it reported an overall occupancy rate of 94.8 percent for April.

As Marcus & Millichap similarly found, this is largely due to a temporary over-supply in Yardi’s “Lifestyle” class, which caters to households who prefer to rent versus owning, and has resulted in flat growth. Meanwhile, low supply and strong demand for “Renter by Necessity” units helped propel their average rents by 2.6 percent over the same time period.

Due to this softening, as well as higher borrowing costs and proposed changes to fiscal policy and the tax code – including a possible end to the popular 1031 tax exchange program – investors have recently pulled back. Preliminary estimates for first quarter 2017 sales suggest a decline of 15 to 20 percent from the same period of 2016, although greater clarity on these policy changes would certainly lead to a rebound in investor interest.

In the longer term, a combination of delayed marriages, an aging population and continued legal immigration will continue to put increasing pressure on new apartment supply, but it’s not just the millennials filling these units. It’s also Baby Boomers and other empty-nesters over 45 who accounted for over half of new renter households over the last decade in search of the flexibility and convenience of apartment living.

With an annual projected demand of 325,000 new units per year through 2030 and an aging housing stock increasingly in need of renovations, there should be very favorable terms for well-financed investors, especially in high-cost and high-growth areas throughout the West and the South.

November column for Builder & Developer magazine now online

My column for the November 2014 issue of Builder and Developer magazine is now posted online.

For this issue, entitled "Where are the First-Tme Homebuyers?" I was struck by the decline in first-time homebuyers in recent months and wanted to investigate further.  An excerpt:

During the month of September, while both new and existing home sales rose slightly, there was one group which continues to remain somewhat on the sidelines: the first-time buyer. According to the National Association of Realtors®, in September the share of first-time buyers was 29 percent for the third straight month.

Since historically the share of first-time buyers has been closer to 40 percent, given that these buyers have represented less than 30 percent of the market in 17 of the last 18 months, it’s almost certain that this change will have an impact on the housing market in the future. So just where have these buyers gone, and what are their plans for their housing needs?

For now, most are choosing to rent: according to the Census Bureau, the share of households age 25 to 29 who owned their own homes fell from nearly 41 percent in 2007 to 34 percent by 2013, which is great for landlords but not for the neighborhood stability which accompanies higher percentages of homeownership...

To read the entire column, click here.

To read the entire November 2014 issue in digital format, click here.

Where are the first-time homebuyers? Demographic shifts point to delayed milestones.

During the month of September, while both new and existing home sales rose slightly, there was one group which continues to remain somewhat on the sidelines:  the first-time buyer.  According to the National Association of Realtors®, in September the share of first-time buyers was 29 percent for the third straight month. 

Since historically the share of first-time buyers has been closer to 40 percent, given that these buyers have represented less than 30 percent of the market in 17 of the last 18 months, it’s almost certain that this change will have an impact on the housing market in the future.  So just where have these first-time buyers gone, and what are their plans for their housing needs?

For now, most are choosing to rent:  according to the Census Bureau, the share of households age 25 to 29 who owned their own homes fell from nearly 41 percent in 2007 to 34 percent by 2013, which is great for landlords but not for the neighborhood stability which accompanies higher percentages of homeownership.

Not surprisingly, the primary reason they’re choosing to rent for now is economic:  according to the non-profit group Generation Opportunity, unemployment rates for millennials (those born between 1980 and 1995) remain higher than for other age groups.  Even when they do find employment, many jobs are either part-time or offer low, entry-level wages which wouldn’t help them qualify for mortgages.

Considering that the average worker today doesn’t earn the national median salary until age 30 – versus age 26 in 1980 – a four- or five-year delay in reaching traditional milestones such as getting married, starting families and buying homes seems to mirror the temporary disappearance of many first-time homebuyers.  Consequently, if the median age for a first-time homebuyer has been about 31 -- and 47 for a move-up buyer -- any delays in grabbing the first rung of that homeownership ladder are likely to have an impact on future purchases.

In addition, other factors have also been at play here, including tougher mortgage loan standards, a lack of entry-level home inventory, and student loan debt that often must be paid down before buyers can qualify for a mortgage.  Meanwhile, young adults trying to save for down payments must also contend with rising housing costs, with many households paying 30 percent – and much higher in high-cost cities – of their incomes on rent.

Fortunately, despite these considerable headwinds facing young adults, the ongoing speculation that millennials won’t embrace homeownership as much as previous generations simply isn’t true:  It’s simply being delayed.   In fact, according to recent research from Zillow, the dip in first-time home buyers has been much more about long-term changes in family structures that it is about current economic conditions.

If anything, young adults are simply trying to navigate a mortgage system that simply hasn’t kept up with the times.  Given that 90 percent of today’s mortgages are supported by various government programs (up from 40 percent a decade ago), another reason for fewer first-time buyers could simply be a lack of mortgage options which would open up the lending spigot.

Indeed, for married, dual-income couples, the homeownership rate is actually above pre-recession historical levels, whereas it has dropped for the increasingly rare, traditional family structure of two parents who live on a single full-time income.  For young singles, although the rate of homeownership has been mostly flat over the last decade, this rate still seriously lags those of married couples.  Consequently, if the rate of marriage for young adults today stands at about 26 percent – compared with 36 percent of Gen Xers, 48 percent of baby boomers and 65 percent of the Silent Generation at the same age – we certainly shouldn’t be surprised at their delay in settling down and buying homes.

For builders, the challenge is to offer homes today that millennials want, and that means more urban-oriented projects close to transit centers that can effectively compete with upscale rental projects which continue to offer more compelling amenities.

As for the millennials themselves, the future job market is already pivoting towards them, as many of them sat out the poor labor market of the recession by improving their education.  Last year, 34 percent of those aged 25 to 29 held some type of college degree, making them the best-educated cohort since 1968.  With their comfort of the latest technologies and awareness of current cultural tastes, for many employers the combination of these factors at a lower salary than older, more seasoned candidates will prove hard to resist.