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August 2022

Housing affordability challenges face home buyers and renters

August 2022

Describing the housing market as being at an inflection point, authors of The State of the Nation's Housing 2022 expect both record-breaking home prices and rents to cool as interest rates climb. They also found troubling racial and ethnic disparities, along with persistent affordability challenges.

Housing ReportThis year's report from the Harvard Joint Center for Housing Studies found that housing cost burdens worsened significantly during the first year of the pandemic, with more households (including renters) classified as cost burdened. (Cost-burdened households spend more than 30% of their incomes on housing costs.)

For homeowners, the cost burdened rate in 2020 rose to 21%, up 1.0 percentage point from the previous year. Among renters, the rate jumped 2.6 percentage points to 46 percent. Overall, 30% of households were considered cost burdened, up 1.5% from 2019. The report indicated rising cost burdens were remarkably widespread when analyzed by race.

Upon examining home price appreciation, researchers found it hit 20.6% in March 2022. That runup marked the largest jump in three decades, with 67 of the top 100 housing markets experiencing record-high appreciation rates.

Northwest Multiple Listing Service, which covers 26 of the 39 counties in Washington state, reported a 16.4% year-over-year price increase overall for March 2022. In the four-county Puget Sound region, the price gains ranged from 13.4% in King County to 24.9% in adjacent Snohomish County.

Rents nationwide also rose, climbing 12% during the first quarter of 2022. "Rents for single-family homes rose even faster, pushed up by increasing demand for more living space among households able to work remotely," stated Daniel McCue, a senior research associate at the Center. He said investors who are buying up moderately priced homes for rental or to upgrade for resale are adding more pressure.

Economist and blogger Elliot Eisenberg, aka "The Bowtie Economist" said investor home purchases peaked at 27.6% of sales in the first quarter of 2022, up from 24.8% from the fourth quarter of 2021. That compares to an average of 16% per quarter in 2019. Non-investor purchases declined sharply - by 33% -- between 21Q2 and 22Q1.

Despite soaring costs, housing demand is growing, fueled by strong household growth throughout the pandemic, with much of the increase attributed to millennials. Also experiencing rapid growth is the number of older-adult households. Long-term, JCHS researchers expect housing demand to drop dramatically, citing declining birth rates, rising death rates, and shrinking immigration.

The report also examined hurdles facing first-time homebuyers. The combination of rising interest rates and prices translates to a spike in monthly mortgage payments. For potential buyers of a median-priced US home, it translates to about $600 per month compared to the previous year. Senior research analyst Alexander Hermann said the typical down payment a first-time buyer would need for a median-priced home is $27,400, adding, "Without help from family or other sources, this would rule out 92% of renters."

Elsewhere in the 48-page report are findings around the widening wealth gap between homeowners and renters (with owners enjoying 40 times the median wealth versus renters) and "troubling" racial and ethnic disparities.

On a brighter note, residential construction reached a new high. Single family starts reached 1.1 million in 2021, surpassing the million-unit mark for the first time in 13 years. Multifamily starts hit a 30-year high, but completion times lengthened due to supply-chain delays. "Together with climbing interest rates, the strong pipeline of new housing should help to slow the rise in home prices and rents," the authors declared.

The Harvard researchers believe the near-term outlook for housing demand is still largely positive, pointing to favorable demographic shifts, low unemployment, and strong wage growth.

Chris Herbert, managing director of the Joint Center for Housing Studies, commented on the correlation of demand and fiscal policies. "There is also the longstanding challenge of producing affordable homes given the high cost of building materials and land as well as the shortage of labor. The lessons learned during the pandemic have led to a number of proposals to greatly expand the housing safety net and provide increased support for first-generation homebuyers. While these measures have yet to be implemented, it is important to continue the policy debate over the best approaches to making housing affordable for all."

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The Harvard Joint Center for Housing Studies advances understanding of housing issues and informs policy. Through its research, education, and public outreach programs, the Center helps leaders in government, business, and the civic sectors make decisions that effectively address the needs of cities and communities. Through graduate and executive courses, as well as fellowships and internship opportunities, the Center also trains and inspires the next generation of housing leaders.