Affordability remains a top concern for the housing market as sharp interest rate hikes have impacted costs for both homeowners and renters, according to Harvard’s Joint Center for Housing Studies (JCHS).

On the for-sale side, home sales and construction levels have declined, while rental markets are experiencing sharply reduced rent growth and rising vacancy rates. Home prices and rents remain elevated from pre-pandemic levels, leaving millions struggling with cost burdens and priced out of homeownership.

“Housing is a crucial engine of economic growth, and investments in this important sector pay broader dividends,” says Chris Herbert, managing director of the JCHS. “As the pandemic highlighted, high-quality, stable, and affordable housing is foundational to widespread well-being and, as such, both merits and necessitates greater public attention.”

The State of the Nation’s Housing 2023 report highlights how rising mortgage costs have pushed homeownership out of reach for millions of renters at a time when millennials are entering prime home buying ages. The high interest rates have also caused a slowdown in the construction of new single-family homes, despite the ongoing housing shortage, contributing to housing cost issues.

“It’s taken us a long time to get into this [housing] problem, and it’s going to take us a long time to get out,” Herbert said during a webinar announcing the findings of the 2023 report. “We need to say ‘yes and’ to all of the things we need to do, and we need to be persistent. We’re going to be persistent with policy, with industry, and with advocacy.”

State of Single-Family and Multifamily Sectors

Concern over the nation’s large and ongoing housing shortage was compounded by a 10.8% decline in single-family housing starts in 2022. The annualized rate of single-family housing starts averaged 876,000 new units in the second half of the year, down 23.2% from the same period in 2021 and well below the 1 million units averaged since 1990.

The decline in activity is more pronounced in the lower-priced segment, largely due to rising construction and land costs, limited lot availability, and regulatory barriers, according to JCHS. Similarly, in the existing-home market, 970,000 homes were available for purchase in March, 42% less than in 2019.

The JCHS notes that in addition to expanding the supply of new homes, a critical issue for the single-family housing segment is improving the existing housing supply. The center says “substantial investment” will be needed to preserve the aging stock and respond to climate change.

The Federal Reserve Bank of Philadelphia estimates that the nation’s housing stock needs repairs amounting to $149 billion, including $57 billion for homes occupied by households with lower incomes. This investment is particularly necessary for 9.5 million homes that have severe structural deficiencies or lack basic features such as plumbing, electricity, water, and heat.

“Multifamily construction continued to rise in 2022 even as rental demand softened,” says Alexander Hermann, a research associate at the JCHS. “Indeed, nearly 1 million multifamily units were under construction in early 2023, the highest rate in almost 50 years.”

Despite the rise in multifamily construction activity, rising vacancy rates, higher interest rates, and tighter lending standards suggest a forthcoming slowdown in multifamily construction, according to the JCHS.

Housing Markets Cool, But Costs Remain High

Demand softened and markets cooled by early 2023 for both the for-sale and rental markets in response to rising interest rates and deteriorating affordability, according to the report.

Home prices began to decline month over month in July 2022 and ticked down from 2.8% by February 2023 from their pandemic peak. Home prices fell year over year in 25 of the largest metro areas tracked by Freddie Mac, with the steepest declines in markets in the West and South regions.

Rent growth has also begun to slow, falling from a record-high 15.3% in the first quarter of 2022 to 4.5% in the first quarter of 2023. Despite the cooling in both sectors, asking rents are up by 24% since the beginning of 2020, while home prices are up by 37.5% over the same period.

A positive ramification of the run-up in home prices during the pandemic is the record-high levels of equity for homeowners, though, with the average homeowner having $270,000 in equity, according to CoreLogic.

“Rent growth slowed over the past year, and home prices declined in a number of areas,” says Daniel McCue, a senior research associate at the JCHS. “Nonetheless, housing costs remain well above pre-pandemic levels thanks to the substantial increases over the last few years.”

According to the JCHS, home prices are unlikely to return to pre-pandemic levels largely due to the low number of homes available for purchases.

At the same time housing costs have elevated, household growth has increased significantly to a rate of 1.9 million per year in 2019 to 2022, driven largely by the strong household formation among millennials, according to the JCHS. However, household formation is likely to slow in the near-term future due to deteriorating affordability conditions and slowing population growth and birth rates.

“The millennial households finally forming their homes is a standout [of the State of the Nation’s Housing 2023 report] and one that allows us to think about some of the generational impacts of what our housing policy needs to be,” Adrianne Todman, deputy security of the U.S. Department of Housing and Urban Development, said during the webinar.

High Costs Push Homeownership Out of Reach

The magnitude of homeownership growth during the pre-pandemic and early pandemic period are unlikely to continue in 2023, according to the JCHS. First-time home buying “plummeted” over the past year largely in response to the increased cost of homeownership and rising monthly mortgage payments.

Monthly payments on the U.S. median-priced home increased from $2,500 to $3,000 between March 2022 and March 2023. The result of the rising payments was a 22% annual decline in the number of mortgages originated to first-time home buyers in 2022, including a year-over-year drop in the fourth quarter of nearly 40%.

The JCHS says rising costs disproportionately impacted potential home buyers of color, who were already much less likely to own households than white households. Black and Hispanic homeownership rates were 28.6 and 25.8 percentage points below white homeownership rates in 2022.

“Right now, we need to produce more homes and be intentional about affordability. We need to preserve the affordable homes that we’ve got, [and] we need to plan for more and remember it’s all about people,” Rachel Heller, CEO of the Citizens' Housing and Planning Association, said during the webinar. “[We need to] listen to people that are experiencing the pain that we are talking about and ensure that we are really putting people at the center and come up with solutions alongside people who are experiencing the problems.”

Between 2019 and 2021, the number of cost-burdened homeowners—defined as those spending more than 30% of their income on housing—increased more than any period since 2005 to 2007, and the number of cost-burdened renters hit a record high level of 21.6 million households.

The rising cost burdens disproportionately impact households with lower incomes, with 86% of households with incomes below $15,000 and 68% of households with incomes between $15,000 and $29,999 defined as cost-burdened. Higher-earning households are also becoming more impacted by rising costs, with 63% of renters with incomes between $30,000 and $44,999 and 34% of renters with incomes between $45,000 and $74,999 defined as cost-burdened.

“We’ve got to be careful to protect our existing affordable housing stock. To serve the people at the very lowest end of the ladder, those that are spending 50% of their income on housing, we have to take the existing stock and protect it,” Clark Ivory, CEO of Ivory Homes, said during the webinar. “Everyone is hurt, but no one is hurt more than those at the bottom end who are spending 50% or more of their income on housing. That’s where we’ve got to make a dent.”

Mobility Is Shifting Housing Demand

Mobility patterns that were dominant during the pandemic period have persisted, with people continuing to move into lower-cost, lower-density areas.

Urban counties in the largest metro areas saw significant population outflows in 2022, though not as severe as in 2021. Counties in the suburbs and small metros gained population, largely due to an influx of millennials at prime home buying ages, many of whom have flexible work arrangements that allow them to live farther from employment centers.

Regionally, the South saw the largest net inflows, led by Texas, Florida, and North Carolina, while counties in large metro areas and states such as California, New York, and Illinois saw the largest outflows. Domestic migration has become the largest source of population growth in 20 states and the largest source of population decline in 23 states, according to the JCHS.