Housing outlook is good, but affordability is a growing problem

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With home prices rising and mortgage rates soaring, the housing industry has now reached an “inflection point,” and for many Americans, the challenges of expensive homes aren’t likely to end anytime soon.

This is according to a new report, “The State of the Nation’s Housing in 2022,” published by the Harvard Joint Center for Housing Studies on Wednesday. The report delves into the economic factors shaping the current home buying and renting landscape.

And while there is some positive news — higher prices are a boon for existing homeowners, higher prices will calm the market — the overall result is that affordability remains a serious problem in the United States, even if housing itself has a strong outlook.

What is happening exactly?

In short, home prices and rents are up in 2021. The report notes that the March 2022 home price hike actually reached an all-time high of 20.6, surpassing its previous all-time high last August. The report further notes that “the rise has been broad-based, with 67 of the 100 largest housing markets seeing record rates of rise at some point over the past year.” The report ultimately refers to the recent trend in home pricing as “unprecedented.”

Rents have also been up, nationally up 12 percent year-over-year in the first quarter of 2022.

Credit: Harvard

According to the report, all of this is happening thanks to “severe supply restrictions”.

Intriguingly, while home prices have risen over the past year, the report also notes that “historically low interest rates” have offset these increases, implying that “home purchases remain relatively affordable in 2020-2021.”

However, that is now changing, thanks to the rapid rise in mortgage interest rates.

Who suffers the most?

The report shows that the jump in interest rates between December and mid-April (and they have risen further since then) equates to a “27 per cent jump in home prices” for buyers.

The result is that first-time homebuyers are currently hardest hit.

“At today’s prices, the down payment a first-time buyer would have to make on a median-priced home—typically 7.0 percent of the sale price to $27,400 in April 2022,” the report notes. Without help from family or other sources, this requirement alone would exclude 92 percent of renters, who average just $1,500 in savings.

Instead, the price hike has been a “blessing for existing homeowners,” many of whom have been able to tap into some of their housing wealth thanks to lower interest rates.

The end result is that this situation has widened the wealth gap between homeowners and renters.

Why doesn’t new construction solve the problem?

The report notes that there is a “strong pipeline” to new construction that will “ultimately help slow the rise in housing prices and rents”. In fact, new home starts reached a 30-year high in 2021.

However, new construction alone will not necessarily make the housing landscape more manageable or affordable in the short term for several reasons. First, most new housing is being added at the upper end of the market, the report notes. This is a fairly common phenomenon, and new housing eventually becomes affordable housing with age, but this still means that new construction will not solve the problem immediately.

Second, there is an ongoing labor shortage, which has been exacerbated by the pandemic.

Finally, local land use regulations make it difficult to build new, higher-density housing. The report noted that some places, such as California and Massachusetts, have chosen to force local communities to accept higher-density housing. However, to date “only a minority of states have taken steps to bypass local land use regulations that limit the size, location, density and affordability of new housing.”

The report concludes that reforms to allow for higher-density housing are “essential”.

What about inflation?

The biggest economic story of 2022 was inflation, which is now at its highest level in four decades. The Fed’s attempts to curb this inflation are driving up interest rates and mortgages.

According to the report, inflation has “increased the pressure” on financially stressed families, making housing more difficult to afford and increasing the cost of materials that go into building homes.

What does the future hold?

While affordability remains a major challenge for housing in the US, the report ultimately concludes that assuming the Federal Reserve’s ability to control inflation “the near-term outlook for housing demand is largely positive.” Challenges will persist, and new construction will take time to keep pace with demand, but the report ultimately indicates that the housing industry is not headed toward disaster.

“Demographic shifts are favorable, unemployment is low, and wage growth remains strong,” the report said. “Conditions on the supply side are also encouraging, with supply chain delays diminishing and a record number of homes set for completion in the coming months.”

Email Jim Dalrymple II

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