I was honored to serve as keynote speaker for the 2015 Maryland Housing Conference, hosted by the Maryland Building Industry Association and the Maryland Department of Housing and Community Development.
It was also my distinct pleasure to hear remarks from Baltimore Mayor Stephanie Rawlings-Blake. My response to her speech was simply: “Madam Mayor, I am bullish on Baltimore; my company is bullish on Baltimore. Thank you for your leadership.”
Several attendees asked for a copy of my speech, which I thought I would also share with you, followers of this blog. I hope you find it beneficial.
Keynote Speech to the 2015 Maryland Housing Conference
Baltimore, MD | November 4, 2015
Thank you very much. I’m truly honored to be here with you.
When I was asked to speak I initially hesitated because I wasn’t sure that I could contribute much to a discussion about the future of Maryland’s housing other than to offer a bunch of guesses and predictions. Then I realized that since we’re talking about the future, I can predict pretty much anything I want to, and so why not.
The other reason I agreed to do this is to remind everyone that I’m not retired. Now you young people won’t understand this but, as amazing as it seems to me, people ask me all the time whether I’ve retired. Well, I get defensive and they get embarrassed. So let me set the record straight……
Yes, Toby Bozzuto is now the CEO of The Bozzuto Group, but he hasn’t fired me—at least not yet, and he even occasionally asks my advice. (I’m not saying he pays attention to it, but he does ask.)
Now, disclaimers done with, here’s what I hope to do with my fifteen minutes or so. I want to start by giving an overview of the housing market as it exists today, share my understanding of why it is the way it is, and then talk about the future. And of course, I will be touching on affordable housing as part of this.
First, there is no doubt that the housing recovery from the recession, both nationally and in Maryland, has been slower and less vibrant than many expected it to be. The statistics aren’t fun. In 2005, we started more than 2.1 million homes nationally, and we started more than 30,000 in Maryland. In our best year since however, which was last year nationally, and the year before in Maryland, we only got to about half of those numbers.
But even this overstates the recovery in for-sale housing. Rental housing has made up a disproportionate share of the recovery. In fact, national apartment starts in the past year totaled close to 400,000…..levels not seen since the mid-1980s. While Maryland’s apartment recovery did not quite match the Federal pace, we still rebounded to pre-recession levels.
The result of this, of course, is highlighted by the change in the national homeownership rate, which has fallen to 63 ½ %, the lowest level in at least thirty years. And Maryland has performed much the same, with homeownership falling from a high of more than 71% in 2005 to a low today of about 64%.
Let’s talk about why this has happened. There are some who blame the slow recovery of the for-sale market purely on economics. They argue that college debt is too burdensome; that getting a mortgage is too difficult; that down payment requirements are too steep; and, while all of this is true to one degree or another, these folks then conclude that if you were to correct all of these things, everyone would run out and buy a home. Well, I believe those people are delusional!
That’s not to say that economic factors have failed to contribute to the decline in demand for homeownership. They have contributed. But you would have to add to the list I recited at least one other economic factor that is perhaps more important than any of those: and that is the realization, paid for by the painful education of the great recession, that homeownership is not a quick or guaranteed way to wealth. And even if homeownership is a wealth creation vehicle, there is no guarantee of instant and constant liquidity.
I think the Millennials have realized this in a way the generation before them didn’t. Homeownership has gone back to being a lifestyle choice.
So, if it’s not purely economic motivation that has led to the change in the homeownership rate, what is it? I believe it is largely driven by demographics and, what people smarter than me call, sociographics.
First, let’s start with demographics. if you were to do a bar chart in which each bar represented a single age group in America, the largest bar would be made up of 23 year olds. (The next largest bar by the way is 24 year olds.) At the same time, the average age for marriage is later than it has been in a hundred years, today averaging 27 for women and 29 for men.
Now think about that….. How many of you owned homes when you were unmarried or 23 years of age? Let me ask for a show of hands.
Even if you did, the Millennials are different than us. And this gets into the sociographics. As evidenced by the growth of Uber and ZipCar, and AirBnB, this generation, at least at this point in their lives, seems to place a lot less value on owning things than they do on flexibility. As far as housing is concerned, they’re not ready to put down roots, nor do I believe they should be. This is when they need to be flexible and ready to move –for a job, for a mate or for any other reason that makes sense. And it is flexibility and mobility that one trades away when one buys a home.
In addition, the Millennials really value living in town, or at least in an urbanized environment. And I make that distinction because what we’ve seen is that as popular as our nation’s downtowns have been at attracting young people, frequently overlooked is that the planned suburban community with a mixture of residential and retail has also appealed to the young renter.
So, what do I think this all means for the future? First, I am obviously very bullish about the demand for apartments for at least the next half dozen years. While we may have temporarily overbuilt some areas, such as Baltimore City or Rockville, I believe that over the mid-term we who own and rent apartments will continue to do just fine.
In fact, reinforcing this Millennial demand is something I haven’t even mentioned yet, and that is demand from older renters. Now, I don’t pretend that our portfolio of 54,000 apartments is representative of the Nation’s housing stock, but, with that disclaimer, I will note that one-third of our current renters are people older than 40, and almost 20% are people older than 50. And as the baby boom demographic ages – and trust me folks, we are – I don’t see any reason to think this demand will slack off.
So, if I’m so positive about the apartment business, you might well ask me why The Bozzuto Group is still so active in the homebuilding business. Let me tell you in answer that I am equally bullish on homebuilding as well. And there are several reasons for this, as well as a qualifier or two.
First, though they may not believe it now, the Millennials too will age. As they do, at least some of them will marry and have children. I suspect that at the point those children begin to run around the 800 foot apartment, many of their parents will want to have a more conventional home, with more space and even a bit of a yard. Surveys that have been done on this population show a strong desire to own a home that is very much like that of previous generations. And while I don’t completely trust these surveys, I ultimately think their conclusions are correct.
The real question in my opinion is not whether the Millennials will buy but what and where they will buy. Every single day that these people live in apartments in urbanized neighborhoods, they are being educated to live comfortably outside their homes. Let me elaborate…..You can see it when you walk through places like Harbor East, Federal Hill, downtown Annapolis, Silver Spring or Bethesda on a pleasant fall night—the bars and coffee shops and stores are all filled, and the apartment lights are off. In my opinion people are being “Europeanized”—that is, they are learning to live as people in Spain, England and Italy have lived for generations—outside their homes….in the public square.
So, when the Millennials get older, will they be willing to move outside these urbanized areas? And again keep in mind that when I talk about urbanized areas, I’m including mixed-use communities like Waugh Chapel and Annapolis Town Center. If they can find good educational options for their kids, I suspect that many of these people will elect to stay as close to the cities and urban areas as they possibly can. Owning a lawn mower just isn’t a priority for these people. On the other hand, remember the qualifier here—as with the generations before them, it will all boil down to schools. And if the schools in these urbanized area can’t match what is available elsewhere, then the Millennials will follow their predecessors into the suburbs.
So, I’m bullish about the apartment market in the short to mid-term and equally bullish about the homebuilding business in the mid-to long-term. But keep in mind that all of this is dependent upon job creation. As important as we in the building industry like to think we are, we should occasionally recognize that we are but a secondary industry.
We exist only so long as our customers have jobs with incomes that allow them to pay us. And since 2010, until this summer, job growth in Maryland has trailed that of the rest of the country. I believe that anyone running for office for any position in this state, and especially in this city, needs to understand the primacy of job creation. Anyone who doesn’t is like an applicant for a maintenance position on the Titanic. Or in simpler terms, nothing is more important than creating an environment that allows the private sector to create jobs and build more housing in this state. Without jobs, we won’t have to worry about creating any more housing in the state.
Finally, let me touch on affordability and affordable housing. I’ve been involved with creating affordable housing as long as I’ve been in the business. I’ve developed and built everything from public housing, to privately-owned affordable housing using the Section 236, Section 8 and the Low Income Tax Credit programs. I’ve also been involved in affordable housing created through bond financing and through inclusionary zoning. And of course, I’ve developed, built and managed a fair amount of market rate housing—both rental and for sale. Through all of that, there are some observations I’ve made.
First, there ought to be a rule for housing types, in and out of government, like that for doctors—first, do no harm. When you recognize that something like 20% of new home construction costs are directly related to government fees and charges—one has to question whether we really care about affordability at all. Second, the need for affordable housing is always greater than the available supply and there is nothing in sight that will change that. Something like a quarter of Maryland households pay more than fifty percent of their income for housing expenses.
Third, there is no such thing as “low cost housing.” A brick doesn’t care whose house it’s being used for; it still is going to cost the same amount. So, you need government subsidy of one sort or another to create new housing that is affordably priced so that our poorer citizens can afford it.
Fourth, on the other hand, there is nothing written in stone that says affordable housing has to come from new construction. Fifteen years ago, when I was on the Millennial Housing Commission, someone pointed out that the majority of affordable housing that will be available ten years in the future already existed, and it is simply the older, privately-owned stock. And they were absolutely right.
Fifth, housing created using government programs is always more complicated to develop and more expensive to build than similarly designed market rate housing. There are lots of reasons for this, many legitimate, but in my experience, it’s a fact.
So, my conclusion from these observations is that if the government really wants to get the most impact from the limited funds it has available for affordable housing, and it wants to do it in the fastest possible way, the best thing it can do is to increase the number of housing vouchers it makes available to Maryland’s citizens and increase the amount of rent that can be paid under each voucher.
I know these are controversial suggestions both to my friends in the affordable production side of the business and my friends who own market rate properties that don’t accept vouchers. But as the government looks for more effective ways to use its limited resources, as arguments against the concentration of poor people continue, and as tax reform becomes a greater likelihood nationally, I wouldn’t be surprised to see a future with more money for Housing Vouchers and even less for housing production. And as to my colleagues in the industry who don’t accept vouchers at their apartments, I implore you to do so before the state legislature forces it upon us. If we do it on our own, we can still control our properties in a way I’m afraid state legislation wouldn’t allow.
Anyhow, none of this is to say that I believe the government should get out of housing production. On the contrary, both HUD’s mortgage insurance and the Tax Credit program have been very effective in increasing the supply of rental housing, and should be continued. I do question however whether the Low Income Tax Credit program can survive comprehensive tax reform.
So, that’s it. My views on the future of housing in Maryland. Whether you agree or disagree, I hope this will have stimulated some thought. Thanks very much.