The housing market that rises from the current recession's rubble will bear little resemblance to the suburban dream we’ve known for the past 50 years, according to John McIlwain, a senior resident fellow at the Urban Land Institute and J. Ronald Terwilliger chair for housing. 

“As the economy recovers, markets will stabilize, but the old ‘normal’ will not return,” McIlwain predicted in a report presented at a ULI trustees meeting last month. 

National housing prices will fall another 10%, battered by another wave of foreclosures, before they stabilize in the latter half of 2010 or early 2011, according to McIlwain. He noted that in 2008, more than 1.7 million homes were foreclosed or lost by short sale, and another two million were lost in 2009.

Moody's predicts another 2.4 million homes will be lost in 2010, and McIlwain believes that estimate may be conservative, given the growing number of homes that are worth less than the principal balances on their respective mortgages. And by the end of this year, 40% of all mortgages are expected to be underwater, according to Deutsche Bank Securities.

While not every homeowner in this predicament will walk away from his or her house, it only takes one in five doing so to double the number of mortgage defaults nationwide over last year. McIlwain also noted that rising default rates have ripple effects. Unemployed individuals are unable to sell their homes in order to move to new jobs, constraining labor market mobility and economic recovery. Would-be “move-up” buyers can’t trade up because they can’t sell their existing homes. Older retirees may be locked into their suburban homes, limiting their ability to move to smaller, lower-maintenance, or more walkable residences.

In terms of new construction, housing production topped 2 million homes per year in the decade leading up to the bubble, then dropped to only 600,000 starts in 2009. While the number of starts is projected to rise to 800,000 in 2010, this is still below what is needed to meet new household demand when the economy recovers. “The percentage of new housing production that is multifamily will increase as production returns,” McIlwain surmised, since most new households will be Generation Y and immigrant buyers, which are demographic groups that tend to rent in large numbers.

As a result, America’s rate of homeownership, which peaked at 69% in 2004, will continue to fall. The rate dropped to 67.3% in the first quarter of 2009 and will eventually settle somewhere between 62% and 64%, McIlwain asserted, citing estimates by demographer Arthur "Chris" Nelson and real estate mogul Sam Zell.

Here are some additional predictions from McIlwain’s paper, “Housing in America: The Next Decade”:

  • The outer-ring suburbs will continue to offer the least expensive housing, although mortgage savings will be cancelled out by higher commuting costs. “Many who live there will do so not by choice, but by necessity,” McIlwain said. That offers an opportunity for developers to build walkable suburban town centers in the exurbs to serve the needs of those living in outer subdivisions.

  • Older baby boomers are more energetic than their parents and will defer the move to retirement and life care communities by at least a decade or more. As a result, the market for senior housing will grow more slowly than expected.

  • Younger boomers grappling with flat incomes and a loss in home equity will have a tough time selling their existing homes, especially given that the generation behind them (Gen X) is a smaller demographic cohort. The market for large suburban homes will be weak for the coming decade, McIlwain said. “There are already enough large suburban homes to meet market demand for the coming decade, despite the growing U.S. population.”

  • Generation Y will continue to rent far longer than past generations, their buying power constrained by high unemployment and the cost and availability of debt. “Generation Y is at the age of highest new household formation, but is instead living in their parents’ basement, have doubled and tripled up, or gone back to school to weather the storm,” McIlwain said, adding that these younger Americans' attitudes toward homeownership have been altered by the housing crisis and the recession. “They have lost the confidence of prior generations that homeownership is a great way to develop wealth.”

  • Immigrant families will want to move to the suburbs, but may find them too expensive, even after the drop in housing prices.

Jenny Sullivan covers design and community planning as a senior editor at BUILDER. Contact her at [email protected].