Cost burdens and affordability have become two of the most acute, most urgent issues to emerge from the last three turbulent years in the housing sector, according to Harvard’s Joint Center for Housing Studies (JCHS), which released its “State of the Nation’s Housing” annual report this week, estimating that over 2 million renter households have been priced out of homeownership over the past year.
The report, which provides a high-level overview of all the myriad of interrelated factors shifting in housing, honed in on the crisis of affordability, which disproportionately affects certain racial groups and is driven both by a short-term run-up in mortgage rates as well as long-term supply issues and inequality.
“This squeeze that is happening to the housing market—we’ve talked a lot about first-time buyers, and that’s an issue,” said Chris Herbert, managing director of JCHS. “But this squeeze that is happening to renters and particularly low-income renters is squeezing out some really fundamental necessities of life.”
After low-interest rates, a thriving job market and big infusions of pandemic relief monies helped many moderate-income families achieve homeownership, the pendulum now appears to be swinging in the other direction, according to the JCHS report. A family trying to buy a median-priced house today needs $10,000 more income than they did a year ago to qualify, and will pay $500 more per month on their mortgage.
In a webinar discussing the report, Scott Wiener, a California state senator who has championed several high-profile housing bills in the state, joined JCHS staff in decrying the harmful effects of unaffordable housing.
“Even if things ‘cool down’ or decelerate, housing costs are still obscenely high, and it’s causing so many problems—including the fact that we’re pushing people out of our major metropolitan areas,” Wiener said. “I don’t begrudge anyone moving wherever they want to move, but we also know that when people move away from metro areas to other areas…it’s not always the most sustainable thing in terms of the long-term needs of our society.”
Short-term solutions, like lower mortgage rates or policy interventions to help first-time buyers, will only do so much, according to the report. Household formations have slowed, with broader economic uncertainty and more burdens like student loan debt likely to weigh on young people for years to come.
That will not only price people out of housing, but create a market with an overall lower level of household formations, the report said, and therefore fewer home transactions.
“The pandemic era of rapid household growth, fueled by the release of pent-up demand from millennials to form their own households, appears to be nearing an end,” the report reads. “Low population growth is likely for the foreseeable future, leading to both a reduction in household growth and an increased reliance on international and domestic migration to fuel new household formations.”
By the numbers
Starting with the good news, the JCHS report said the market has a solid foundation to build off of in the form of eager potential buyers, who still want to own a home when (or if) they can afford one.
“Homeownership demand persists, evidenced by the rise in loan applications that has accompanied every dip in interest rates in recent months,” the report argues.
But the degree to which renters are struggling to pay for housing costs is a bad sign for these families waiting on the sidelines. Housing cost burdens—defined as spending more than 30% of income on direct housing costs—are at their highest levels in history for renters, meaning that saving for a down payment has become much more difficult for many.
And current homeowners are also more likely to be cost burdened, with a sharp increase in 2021 pushing that rate to almost 20%—the highest since 2012. Black, Hispanic and older homeowners were most likely to be cost burdened, as were single parents.
This is despite record-high levels of housing equity, driven by runaway price appreciation over the last couple years.
“We are seeing that those fortunate enough (to) own homes are really benefiting,” said Rachel Heller of the nonprofit Citizens’ Housing and Planning Association, who also joined the webinar.
But Heller pointed out that any benefit derived from homeownership becomes less of an overall positive if huge swaths of the population are excluded from it.
“It’s clear that we need more homes for the health of our communities, our states and our nation,” she continued. “Is this a moment when we ask ourselves, ‘What do we want for our future?’ And (we) see housing as a piece of that.”
An unexpected burst of new housing starts last month provided some positive momentum for adding much-needed supply, but the report made it clear that adding the right amounts—and the right types—of housing was a long-term challenge.
Only 24% of new construction last year was for homes under 1,800 square feet, according to the report, down from 37% in the late 90s. This is due to “rising construction and land costs, limited lot availability and regulatory barriers like minimum lot sizes that restrict entry-level housing production.”
Clark Ivory, owner of national homebuilder Ivory Homes, told the JCHS researchers that the “largest headwind” right now in his industry is the cost of capital, and predicted a slowdown especially in new multifamily construction in the next 18 months.
“These projects have a sort of a ping horizon to come online, and no deals are really getting done right now because the rates just don’t allow these new—particularly multifamily deals—to pencil,” he said. “You have a much higher cash requirement upfront with these higher rates.”
The run on several regional banks and a subsequent tightening of credit, which was not encapsulated by the report, is going to restrict home builders even further, Ivory added.
Some people—and more precisely, some regions—have benefited from the affordability and inventory crisis. Daniel McCue, senior research associate at JCHS, pointed out that the South is the only region that has seen net migration gains over the last four years, at least partially driven by the affordability and availability of housing.
That also applies at the metro level. Accelerated by remote work opportunities, many smaller cities spread across the country have become hot housing markets primarily due to the fact that people can actually find and pay for a house there.
“A lot of those more affordable metros are in the Southern census region,” McCue said.
The fact that these trends preceded the pandemic would indicate that it was not just remote work or other more recent developments driving the shift, but likely cost was a driving factor as well.
In the end, though, huge geographic areas becoming entirely unaffordable, and having big segments of the population priced out of homeownership opportunities, is bad for everyone. With young people in particular expressing doubts about the prospect of homeownership, some fundamental changes are almost certainly necessary to open up housing and get the market to a healthy place.
Herbert argued that because all of these issues around affordability have been percolating for decades, any proposed solution should anticipate comparable timelines for rectifying them.
“It’s taken us a long time to get into this problem, it’s going to take us a long time to get out. People need to be patient, and they need to persevere,” he said. “There’s no one solution to the housing crisis. People often say, ‘What’s the silver bullet?’ In housing, we need silver buckshot.”
