A new report, “The State of the Nation’s Housing in 2022,” from Harvard’s Joint Center for Housing Studies (JCHS), takes a deep dive into the economic factors affecting today’s homebuying and renting landscapes.
Two Key Factors Contributing to Industry’s “Inflection Point”
- Housing itself has a strong outlook – rising prices are a windfall for existing homeowners and increasing interest rates will cool the market.
- Affordability is a serious problem.
What’s Happening?
The latest report titled “The State of the Nation’s Housing in 2022” researched and published by Harvard’s Joint Center for Housing Studies (JCHS) confirms that both home and rent prices skyrocketed in 2021. Its data states that both home prices and apartment rents soared in 2021 with home price appreciation in March 2022 hitting an all-time high of +20.6 and rents increasing +12% y/y in Q1 2022 alone.
The report referred to this recent trend in pricing as “unprecedented” amid a national housing market with “severe constraints on supply.”
This report also noted that “historically low interest rates” during 2021 essentially counter-balanced home price increases so that “homebuying remained relatively affordable in 2020-2021.”
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Now, of course, all of that counter-balancing has changed, as has affordability, with rapidly escalating interest and mortgage rates.
Who Are Most Hard Hit?
Simply, first-time buyers.
The report states, “At today’s prices, the down payment that a first-time buyer would have to make on a median-priced home – typically 7.0% of the sales price – amounted to $27,400 in April 2022. Without help from family or other sources, this requirement alone would rule out 92% of renters, whose median savings are just $1,500.”
Can’t New Construction Solve the Problem?
The report pointed to a “strong pipeline” of newly built homes that will “help to slow the rise in home prices and rents.”
HOWEVER, new construction all by itself will not make the world of housing more affordable over the short term. Why?
- Most all new construction is adding to the upper end of the market.
- There are labor and supply shortages that lengthen the building timeframe and spur prices further upward.
- Local land-use regulations make it very difficult, if not impossible, to build new, higher density housing. The report states that “…only a minority of states have taken steps to override local land use regulations that limit the size, location, density and affordability of new housing.”
This section of the report closes by saying that reforms that allow/enable high density housing are “essential.”
Impact of Inflation?
Inflation now stands at its highest level in four decades and has a huge impact on affordability. The Federal Reserve’s current efforts are directed towards curbing inflation by raising interest and mortgage rates.
Now, with the combination of sky-high home prices, fast rising interest/mortgage rates, and inflation, financially stressed households are being hit hard and squeezed on all sides. The report states that inflation has “compounded pressures” relating to affordability.
What’s Ahead?
Harvard’s JCHS report underlines the affordability challenge for housing in the US and simultaneously concludes “…the near term for housing demand is largely positive.”
The report states, “Demographic shifts are favorable, unemployment is low, and wage growth remains strong. 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.”
Whew!
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