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Nicolas Retsinas on the State of U.S. Housing:

After years of record-setting gains, the U.S. housing market is experiencing sharp drops in housing demand and an oversupply of stock according to this year's State of the Nation's Housing report from Harvard's Joint Center for Housing Studies. Nicolas Retsinas is director of the Joint Center for Housing Studies and lecturer at the Kennedy School.

Q: According to this year's State of the Nation's Housing report, changes in the U.S. housing market in 2006 were drastic. What factors have contributed to the market's drop in home sales and home building?

Retsinas: The changes were very dramatic. For the last several years, people have been saying in the United States that the rate of double-digit appreciation was unsustainable. They turned out to be right. In fact, what happened over time is that builders over-built and lenders over-lent. As a result, we built up a large inventory of unsold homes. Once you do that, it really changes the equation. It goes from being a sellers' market to a buyers' market. So we've seen very dramatic drops in both sales and starts.

Q: Do these changes mean that housing is generally more affordable for first-time home buyers?

Retsinas: Not really. Ironically, even though the rate of appreciation is slowing, and even though starts and sales are off 25 to 30 percent year-to-year, what's very interesting is that prices haven't declined precipitously. It's an awfully big country, so there are metropolitan areas where prices are still going up, there are areas where prices are going down, but overall it's flat.

There are a couple of other factors that continue to make housing unaffordable, and perhaps even more unaffordable. One, because of the problems of sub-prime lending, lenders are tightening their credit standards. That is to say, particularly first time home buyers will find it more difficult to get a mortgage, or to accumulate the necessary down payment. More recently, interest rates are going up. For example, if you bought a median-priced home a month ago as opposed to today, you would have paid $70 less. That translates into an added income of about $3,000 a year. So, notwithstanding the flattening of the market, housing is becoming increasingly unaffordable.

Q: What do the changes mean for renters?

Retsinas: In the short term, rents go up, because people who might have been homebuyers with looser credit standards, for example more sub-prime loans, now are not able to get those mortgages, so instead of becoming home owners, they become renters. So they add to the demand for rental units, which drives up the price. There are some markets where that will change. In many markets, like in the Northeast and some places in the Southwest, we have an oversupply of condominiums. At some point those condominiums will turn to rental units, adding to the supply, so that will offset some of it. But there clearly is no drop in rents.

Q: What about the most expensive housing markets, such as San Francisco and Boston? Will current trends significantly affect availability and affordability in areas that saw housing prices skyrocket in recent years?

Retsinas: In the areas you mention on the two coasts, prices essentially doubled in the first five years of this decade. And while they're not in line to increase at the same pace, as I said before, they're not likely to go down. So you'll continue to have this disconnect between the housing market and the labor market. You couple that with our new economy, which produces many, many low-wage jobs, and you can see why we have such an affordability crunch in this country.

Q: What does the report indicate about the long-term housing forecast?

Retsinas: The good news for the housing market is that over the long term we are likely to see a continued growth in households. Indeed we are likely to see the creation and formation of 2 million more households over the next ten years compared to the last ten years, much of that driven by immigration. Since there continue to be constraints on supply in many parts of the country, once we work out this inventory correction, which may take a year or two, you're likely to see a return to a more robust housing market.

Q: What are other significant findings in the 2007 State of the Nation's Housing report?

Retsinas: One key finding is the role of immigration. We know that is a hot political topic, but putting the politics aside, the reality is that foreign born households and children of foreign born households occupy an increasingly important share of the housing market and housing demand. They will account for about 40 percent of the net new households. In the past year they accounted for somewhere between 14 and 15 percent of the home buyers, and in some markets, like the New York metropolitan area, last year they represented 1 out of every 5 homebuyers. So they're not just an appendage to the housing market - and it's not even an issue of social justice or equity - they're a very significant part of the market going forward.

It's worth noting that over the last ten years we have focused a lot of attention in this country on how to increase the rate of home ownership. It is the American dream, and we've talked about how more and more families are able to access that American dream. I suspect in the next year or two, however, the agenda will change. We'll be talking more about sustaining home ownership. How do we keep people in homes? Keep people in homes who desperately took out mortgages that perhaps were not the most advantageous, that had significant risk. How do we make sure that the number of foreclosures doesn't increase, driving people out of homes and further depressing the housing market?

Q: How does the fact of family homelessness in the United States fit in with this idea of the American dream, and how does the current housing market impact that particular problem?

Retsinas: Homelessness is a very sad commentary in a nation with our resources and in a nation that knows how to build homes and that has the resources to build them. The fact that we have homelessness is a disgrace. There is more attention on the subject: there are many communities that have adopted ten year plans to eliminate homelessness. But at the same time, this affordability crunch-causing families to double up, causing families to pay an increasing share of the income for housing-eventually leads to situations where people can't afford housing. While the options they have are not very good, the worst option is being on the streets.