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June 18, 2017

State of the Nation’s Housing: Affordability Puts Pressure on Progress

Housing has largely bounced back from the crash, with several key gauges again at healthy, pre-collapse levels, according to the newly released State of the Nation’s Housing report, published by the Joint Center for Housing Studies at Harvard University. A definitive recovery in home prices, growth in home-building and unbridled demand are strengthening the market, the report reveals, but affordability is putting pressure on progress, especially for low- and middle-income households:

By many metrics, the housing market has overcome the worst effects of the housing bust. Nominal house prices have regained previous peaks, construction volumes are nearing their long-term averages, and household growth is becoming more balanced between the owner and renter markets.

– “State of the Nation’s Housing 2017,” Joint Center for Housing Studies at Harvard University

Home prices nationally appreciated 5.6 percent in 2016, resurrecting equity buried in the recession, the report shows—but, when adjusted for inflation, most homeowners have not yet fully realized wealth that was lost. Prices rose in 97 of the nation’s 100 largest metropolitan markets, but prices in 32 of those markets have not beaten their prior peaks. Prices in areas on the East and West Coasts have made substantial strides, while prices in portions of the Midwest and South have fallen behind, contributing to an affordability divide—prices in the 10 metropolitan markets with the most appreciation, in fact, average $575,000, more than four times the average in the 10 markets with the least appreciation.

State of the Nation’s Housing: Affordability Puts Pressure on Progress 1

Home-building, at the same time, netted 1.17 million units—up from 2015, but still down compared to activity in the 1980s and ’90s. The building of single-family homes expanded by 9.4 percent, but the building of smaller single-family homes and townhouses, which are in severely short supply, fell—a trend that has persisted for the past decade. Building continues to be tamped down by regulatory burdens, scarce labor and shrinking available acreage.

“While the recovery in home prices reflects a welcome pick-up in demand, it is also being driven by very tight supply,” says Chris Herbert, managing director of the Joint Center for Housing Studies. “Any excess housing that may have been built during the boom years has been absorbed, and a stronger supply response is going to be needed to keep pace with demand—particularly for moderately-priced homes.”

Though fewer households are cost-burdened—or spending over 30 percent of their income on housing—many are still struggling, particularly renters, according to the report. Over the last five years, the share of cost-burdened owner households has seen a sharper decline than the share of cost-burdened renter households: 6.5 percent versus 1.9 percent.

State of the Nation’s Housing: Affordability Puts Pressure on Progress 2

“The problem is most acute for renters,” Herbert says. “More than 11 million renter households paid more than half of their incomes for housing in 2015, leaving little room to pay for life’s other necessities.”

There is a brighter outlook for the homeownership rate, which could rebound if household formation pans out as predicted, the report reveals. Low-income, minority and renter households are expected to considerably contribute to growth, with affordability playing a major role, specifically, in renters making the transition to homeownership. Forty-five percent of renters can afford the costs for a median-priced home in their area, the report shows—in line with similar findings from a recent analysis that demonstrate renters can afford more than a median-priced home.

“Although the homeownership rate did edge down again in 2016, the decline was the smallest in years,” says Daniel McCue, senior research associate at the Joint Center. “We may be finding the bottom.”

State of the Nation’s Housing: Affordability Puts Pressure on Progress 3

Owner household formation is projected to increase 8.9 million between 2015 and 2025, according to the report, while renter household formation is projected to increase 4.7 million. The report anticipates minorities will comprise the majority of growth in both owner and renter household formation, with Hispanics encompassing a significant share—an estimate potentially stunted, however, by future policy pertaining to immigration, as well as limited mortgage credit accessibility.

Another factor influencing household formation involves generational shifts. The report projects baby boomer households to increase 11.3 million between 2015 and 2015, and millennial households to increase 2.6 million.

The report’s researchers call for the cooperation of government at all levels to ensure homeownership is universally attainable.

State and local government have a central role to play in defining specific community needs, crafting policies, and marshaling resources to support housing solutions,” the report states, “but only the federal government can provide funding at the scale necessary to make meaningful progress to the nation’s stated goal of a decent home in a suitable living environment for all.

– “State of the Nation’s Housing 2017,” Joint Center for Housing Studies at Harvard University

“Meeting this growing and diverse [housing] demand,” McCue says, “will require concerted efforts by the public, private and nonprofit sectors to explain the range of housing options available.”

Source: Joint Center for Housing Studies at Harvard University

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