The housing market is at “an inflection point” after a record-breaking year in 2021, according to Harvard’s Joint Center for Housing Studies (JCHS). Higher interest rates have cooled the home buying market and the large number of apartments under construction will likely provide relief in the multifamily market, but the pressure of high housing costs “is unlikely to relent” for lower-income households and households of color, according to the JCHS’s “The State of the Nation’s Housing 2022” report.
"The issues [facing housing] are many: Household formations are strong, but residents are facing unprecedented swings in affordability," says Todd Tomalak, principal of building products at Zonda. "Rising inflation of building product costs, and surging mortgage rates are pricing out first time buyers. The result is a larger wealth gap between renters facing surging rents, those who don’t own a home, and large home equity gains for those who do."
Despite high costs and rising interest rates, the JCHS says the near-term outlook for housing demand is largely positive because of favorable demographic shifts, low unemployment, and strong wage growth. Additionally, supply chain delays are diminishing, with a record number of homes set for completion in the coming months, according to the JCHS. However, the report notes that housing demand will be directly related to the ability of fiscal policymakers to successfully cool inflation without causing a recession.
“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,” says Chris Herbert, managing director of the JCHS. “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 home buyers. While these measures have yet to be implemented, it is important to continue the policy debate over the best approaches to make housing affordable for all.”
Soaring Housing Costs
Despite the favorable near-term outlook for the housing market, the JCHS says the cost of housing continues to climb. Home price appreciation hit 20.6% in March, marking the largest jump in three decades. Sixty-seven of the top 100 housing markets in the country continue to experience record-high appreciation rates. The median home price-to-income ratio reached an all-time high as well in 2021, with the median sale price for existing homes at a level 5.3 times the median household income, well above the previous peak of 4.9 in 2005.
In the rental market, rents increased 12% in the first quarter of 2022, with increases in several metros exceeding 20%. In the professionally managed segment, rents hit a record 11.6% growth at the end of 2021 while rents for single-family housing reached the fastest pace on record in early 2022, increasing 12.4% year over year (YOY) in the first quarter, according to the JCHS. Rents grew by double digits in 116 out of 150 analyzed metro markets in the first quarter of 2022 and by more than 20% in 25 markets.
“Rents for single-family homes rose even faster, pushed by increasing demand for more living space among households able to work remotely,” says Daniel McCue, a senior research associate at the JCHS. “Adding to the pressure, investors moved aggressively into the single-family market over the past year, buying up moderately priced homes either to convert to rental or upgrade for resale.”
Housing Market Supply and Demand
After trailing the pace of household growth for almost a decade, residential construction has finally increased, with single-family starts reaching 1.1 million in 2021—exceeding the million-unit mark for the first time in 13 years. In the existing home market, fewer home were available in January than at any point since the late 1990s. The 850,000 homes on the market to start 2022 represented a 17.5% decrease from the beginning of 2021. Months of supply dipped to only 1.6 months, down from 1.9 months in January 2021.
"[In the] near term, it's important to look through the noise. Home sales is slowing now, but despite this a record amount of new homes are ‘under construction’, which is an immediate pipeline of revenue that will show up for tradesman and building product companies," Tomalak says. "Until that pipeline dries up, building products companies will see revenue growth that outpaces sales and starts. In the longer run – their revenue will align with the direction that housing heads."
The report notes household growth has been strong throughout the pandemic, which in part has contributed to the sharp rise in housing costs. Millennials experienced the largest increase in homeownership growth: An uptick in new household formations among adults younger than 45 added an additional 400,000 annually to household growth over the past five years. The number of older-adult households is also increasing as the baby boomer generation ages. Additionally, the composition of households have become more racially diverse over the past decade: People of color formed 11 million of the 14.5 million households added from the beginning of 2011 to the beginning of 2022. Hispanic, Black, multiracial, Asian, and other race households now account for 35% of all households, according to the JCHS.
A rebound in rental demand has contributed to historic low vacancy rates. In late 2021, the national vacancy rate fell to 5.6%—the lowest quarterly reading since 1984. Vacancies in the professionally managed segment hit record lows, running more than a percentage point below the average in the years leading up to the pandemic, according to the JCHS.
The JCHS says multifamily starts reached a 30-year high, reaching 371,000 units in 2021. Despite the recent strength of multifamily construction, demand has outpaced supply in the professionally managed segment in early 2022, according to the report. While completions are at an annual rate of 349,000 units in the first quarter of 2022, the number of occupied apartments was rising at a rate of 713,000 units.
The JCHS says over the long term, though, housing demand is set to decline “dramatically.” Population growth, the primary driver of household growth, is at a 100-year low as birth rates have fallen, death rates have risen, and immigration has slowed.
First-Time Home Buyer Concerns
Amid rising interest rates and double-digit price increase, the income and savings needed to qualify for a home loan have skyrocketed, raising hurdles for both first-time and middle-income buyers. Potential buyers saw monthly mortgage payments on the median-priced U.S. home increase by more than $600 over the past year. According to the JCHS, the income requirement to afford payments on a median-priced home was $107,500, nearly $28,000 higher than a year ago. As a result, 4 million fewer renter households could afford a median-priced home.
“At today’s prices, the typical down payment that a first-time buyer would need for a median-priced home is $27,400,” says Alexander Hermann, a senior research analyst at the JCHS. “Without help from family or other sources, this would rule out 92% of renters, whose median savings are just $1,500.”
Ongoing Affordability Challenges
Job and income losses early in the pandemic increased the affordability challenges for millions of households. In 2020, the nationwide share of households paying over a third of their income for housing increased 1.5 percentage points to 30%. The increase was larger among renters (2.6 percentage points) than among homeowners (1 percentage point) and was disproportionately large among Black households (2.4 percentage points). Although households with incomes under $30,000 had the highest cost-burdened rates, households earning between $30,000 and $45,000 saw the largest increase in share, up 4.2 percentage points, according to JCHS.
The JCHS report finds evictions have increased in 2022 after the conclusion of pandemic government protections. Filings reached 61,300 in March, 2.5% below the average for the same month in 2012-2016. Evictions in more than half of the cities tracked by the report were back to historical levels.
Growing Housing Inequality
The rapid pace of home price appreciation has widened the wealth gap between homeowners and renters, according to the JCHS. In 2019, the median wealth of homeowner households was $254,900, about 40 times the median wealth for renter households. The report finds that many Black and Hispanic households, because of their relatively low homeownership rates, missed out on equity gains as home prices appreciated. The JCHS found racial and ethnic disparities also exist among those who own homes: In 2019, the median net wealth of Black homeowners ($113,100) was just over a third of that of white homeowners ($299,900), while the median net wealth of Hispanic homeowners ($164,800) was roughly half of white homeowners.