U.S. housing market continues rebound, despite increased inequality, says Harvard report

The annual State of the Nation’s Housing report, produced by the Joint Center for Housing Studies (JCHS) at Harvard University, offers an opportunity to step back and assess where things stand from year to year, and this year’s report—the 30th Harvard has produced— paints a picture of America’s housing as increasingly scarce and increasingly expensive.

Housing construction has grown every year since the housing bust in 2008, but the pace of that construction is slowing down as construction material, labor, and land have become more expensive. This has led to fewer homes being on the market, and a worsening housing shortage.

Meanwhile, with the unemployment back down to pre-crisis levels, every generation in the U.S. is looking to buy a house, creating intense demand for housing at a time when there’s little supply, particularly in urban centers. The result is soaring home prices and rents that are outpacing wage growth for low- and middle-income Americans.

Here are key factors highlighted in the report, and how they’re contributing to affordability problems in the U.S. housing market.

Construction costs, land-use regulation slowing down housing construction

Prior to the housing bust, the U.S.had a housing oversupply. Today, the nation faces the opposite problem—a housing shortage. While housing construction has grown every year since the housing bust, that growth is showing signs of slowing.

According to the JCHS’s report, single-family housing construction starts rose by 9.4 percent in 2017, and completions rose by 8.8 percent. Multifamily housing starts, however, fell by 9.7 percent, while completions were up 11.3 percent. The report concludes that while the drop in multifamily is concerning, the pipeline for new homes remains strong.

Homebuilding has been impeded by a few factors, which have also raised the price of housing, particularly for low- and middle-income Americans. The cost of construction material has risen in aggregate by 4 percent between 2016 and 2017, led by the skyrocketing price of lumber. Labor shortages have also slowed the pace of building, in addition to raising the cost, as wages are bid up competitively. Land has gotten scarcer as well, and regulations around what builders can do with that land are preventing density increases in areas where suburban sprawl has hit a wall.

The good news is that after years of builders and developers focusing on the high-end market, construction on smaller single-family homes and manufactured housing continues to rise at a rapid pace. Still, entry-level housing is just 22 percent of single-family housing, below the average of 33 percent between 1999 and 2007.

After years of delaying, millennials enter the homebuying market

While housing construction is plugging along at a modest pace, housing demand has come off its post-crisis lows thanks to millennials finally entering the homebuying market. The share of millennials who live with their parents or relatives is still 26 percent, and there’s another 9 percent of millennials doubled up with non-family. This means there’s still likely another wave of millennials who will form new households and further increase housing demand among the generation.

Meanwhile, aging baby boomers are contributing to huge growth in the 65-and-older demographic, which has grown by more than 7 million households over the past decade. Living longer and more independently than ever, they can stay in their homes longer. As a result, there’s less housing outflow from this demographic than there used to be, contributing to a shortage of existing homes for sale.

The report notes that immigrants contribute to housing demand during expansions, but more importantly, stabilize demand during downturns. Rough 1.5 million foreign-born households became homeowners between 2006 and 2016, offsetting the 1.1 million drop in native-born homeowners.

With President Trump’s crackdown on legal and illegal immigration alike, the Census Bureau is projecting lower rates of immigration than prior to Trump taking office. Still, the share of population growth attributable to immigrants will grow from today’s rate of 42 percent to 67 percent in 2040.

Homeownership bounces back slightly, with seniors in the lead

Overall homeownership rates have finally turned around, buoyed by low interest rates that help first-time buyers to keep up with their mortgage. Viewed through a certain lens, 2017 was a banner year for U.S. homeownership. Roughly 1.1 million more Americans became homeowners, the highest rate since the Great Recession.

Ask anybody testing their luck this summer in the “most competitive homebuying market in history,” constrained by rising home prices, affordability challenges, and a limited inventory, and they may not celebrate that milestone. Surging prices, especially in coastal metros have created stark gaps between cities.

Los Angeles’s homeownership rate is 48 percent, while in Pittsburgh, it’s more than 70 percent. A Los Angeles household making area median income could afford mortgages on just 11 percent of recently sold homes, while In Pittsburgh, even a family in the lowest income group could afford 26 percent of area homes. This gap helps explains the continued lag in young adult homeownership. While the 25-34 age group saw a 0.6 percent increase in ownership last year, their 39.2 rate of homeownership is well below the 45.5 percent rate recorded 30 years earlier.

While millennials and young adults often dominate conversations about homeownership, senior citizens may actually do more to shape the market going forward. Like the U.S. population as a whole, the median age of homeowners rose, increasing from 50 in 1990 to 56 in 2016. Americans over 65 are the only age group who had a higher homeownership rate in 2017 (78.7 percent) than 1987 (75.4 percent).

The graying of homeownership has many important consequences. A 2014 survey found that 88 percent of seniors want to stay put in their current homes as they age. If they stay true to their intentions, they’ll create a huge opportunity for home improvements and renovations focused on accessibility and aging in place. It also puts even more pressure on the market to provide new inventory for millennials.

Rental housing continues to be a tale of two worlds: rich and poor

The slight bump in homeownership last year was mirrored by a slight decrease in the rental population, from 36.6 to 36.1 percent of the population, with the number of renters under 35 falling by 224,000. This suggests improving financial situations have marginally improved the housing market overall, with a slight softening of the rental market.

But like last year, the rental market has increasingly catered to high-end apartment dwellers, while leaving lower-income renters struggling.

Multifamily construction continues to tilt towards the upper end, chasing an expanding market and offering more amenities (In 2016, 86 percent of new apartments had swimming pools, and 89 percent had in-unit laundry). The number of high-income renters grew last year, with those making over $100,000 increasing by 5 percent (19 percent of this demographic was renting, an all-time high). That’s part of the reason multifamily construction, which delivered 336,000 new units last year, has grown at a pace not seen since the ‘70s.

Luxury buildings help offset the rising cost in land and construction, all big factors in sustained increases in the asking rent for new units, which ballooned from $1,090 in 2012 to $1,550 in 2017. The average asking rent for new units in Chicago, D.C., and Miami is now more than $2,000.

This stands in stark contrast to the realities faced by lower-income renters, who have seen available inventory remain essentially unchanged since 2015.

For every 100 low-income renters, only 35 rental units were affordable and available, according to the National Low-Income Housing Coalition, a shortfall of 7.2 million units. In every one of the nation’s 50 major metro areas, low-income renters vastly outnumber the amount of affordable units. Conversions, demolitions, and other losses have severely cut the affordable housing inventory. More than 2.5 million units priced below $800 in real terms disappeared between 1990 and 2016.

Housing challenges a story of inventory shortfalls and great need among fellow Americans

Simply put, housing is too expensive for too many Americans in too many parts of the country. Nearly a third of Americans—and 47 percent of renters—paid more than 30 percent of their income for housing in 2016. Roughly 11 million pay more than half their incomes for housing.

The strain is felt in every corner of the country, and nearly every demographic, from urban and rural to young and old (44 of renters under 30, and 54 percent of renters over 65, are cost-burdened). And the federal government is not providing nearly enough assistance.

According to HUD’s Worst Case Housing Needs report, the number of renters in “very low-income households with severe cost burdens or living in inadequate or overcrowded conditions “ rose from 6 to 8.3 million between 2005 and 2015, and the number of people experiencing homeless increased by 3,800 in 2017 after years of decline.

Since the first State of the Nation’s Housing report 30 years ago, the number of very low-income households has increased by 6 million to 19 million nationally, all while the rental assistance and low-cost housing inventory have shrunk. Without leadership, resources, or concerted effort from all levels of government, this problem is only set to get worse.