Harvard report shows strong housing market, but low-income renters struggle

Harvard’s Joint Center for Housing Studies provides an annual deep dive into America’s living situation with its State of the Nation’s Housing report. The 2019 edition, released today, suggests a number of trends both positive and negative continue to create a country of housing haves and have-nots.

The humming economy has led to steady growth in household formation, which in turn has kept housing demand strong. Homeownership is ticking upward as a result, yet the increase in homeownership hasn’t put a damper in rental demand, thanks to a growing number of high-income earners who choose to stay renters.

But there are plenty of downsides to the market, too. Housing supply remains constrained, which is driving up home prices and rents alike, particularly at the bottom of the market. Nearly half of all renters spend more than 30 percent of their income on rent, and even those with the cheapest rents are struggling thanks to growing income inequality. And the worst of it is growing homelessness, especially in high-cost coastal cities.

Here are some of the key points made in the report that are shaping what many are increasingly seeing as an affordable housing crisis in America.

High-income renters keeping rental demand strong while low-income renters continue to struggle

With homeownership on the rise, the total number of renter households is dropping. But there remains upward pressure on rents—which rose by 3.6 percent nationwide, led by growth in the west—for a number of different reasons.

First, low vacancy rates mean landlords can push rents higher, since demand still outpaces supply. Second, the number of high-income renters has risen for eight consecutive years. Between 2017 and 2018, alone, 311,000 new high-income renters entered the market, the latest in a crowd of 4.6 million such renters since 2010.

Third, most of the new production of multifamily housing has been to meet the demand of these high-income renters, meaning less production of low- and middle-income options. In 2018, 29 percent of newly completed multifamily housing units came with rents above $2,050, led by the northeast.

Because low-cost rentals tend to be in older buildings, they’re more at risk of being demolished or renovated into a higher price tier. That’s one of the reasons the supply of low-cost rentals has decreased 17 percent since 2011. Only 9 percent of new apartments in 2018 rent for under $1,050 a month, and less than 4 percent had rents less than $850. Less than 3 percent of new apartments over the last decade have been affordable to a median-income renter. And remember, despite living in what’s technically described as low-rent units, almost half of renters in those units are cost burdened, meaning they spend more than 30 percent of their income on rent.

Housing construction mostly stalls, right as millennials prepare to settle down

When it comes to housing construction in the United States, no news is actually bad news, as the slumps and demographic trends that have hurt housing production appear to limp forward, dragging down the overall housing market. Last year saw modest growth in new units overall, with 1.18 million units completed, a 2.8 percent gain from 2017. Multifamily starts showed anemic growth, but growth nonetheless, rising 5.6 percent year-over-year to hit 374,100 units (this somewhat offset the 3.6 percent decline in completions). In the face of a continued affordable housing shortage, at least the pipeline is growing.

New national single-family home sales rose just 0.7 percent last year, or 617,000 units, a small fraction of the 12 percent gains seen in the last three years. Part of the drop comes on the back of a slowly rising interest rate and stock market dive at the end of the year that deflated consumer confidence. But most of that was due to the protracted slump in production. New construction of single-family homes was down 13 percent, based on the annual averages from 1980 to 2016, suggesting this isn’t a momentary blip.

The housing shortage is especially rough on millennials entering their prime homebuying years. Underproduction and a focus on luxury, high-end product means a continued shortage of starter homes. Small homes under 1,800 square feet represented just 22 percent of single-family completions.

The construction industry would rightfully respond that costs have boomed over the past few years. Residential land costs increased in 80 percent of U.S. counties. Land costs for a single-family home jumped from $159,800 in 2012 to $203,200 in 2017, and land value per acre absolutely skyrocketed in western states that, not coincidentally, have seen big housing shortages: Nevada (up 158 percent), Colorado (96 percent), California (88 percent), Arizona (81 percent), and Utah (81 percent). It doesn’t help that good labor is also in short supply: according to the latest National Association of Home Builders survey, 82 percent of respondents expect the cost and availability of workers will be among their most significant problems in 2019.

In short, a continued single-family housing slump and slow growth in multifamily suggests slow demographic shifts, and a growing preference for renting. The shortage of affordable options isn’t close to being met, and a larger percent of construction outlays are coming from improvement and repair spending. Homeowners, like the American housing market, seem content staying in the same place.

Homeownership: Good if you already own, increasingly worse if you’re buying

The goods news when it comes to homeownership is that, after years of decline, homeownership rates have rebounded over the last two years. In 2018, the national rate increased half a percent to 64.4 percent, roughly even to where things were before the last housing boom and bust. It’s a great time to be a homeowner. Aggregate value of home equity more than doubled between 2011 and 2018, and home equity in the nation tops $15.5 trillion.

The bad news comes for new and aspiring homeowners, who face rising costs on all fronts, especially if they want to live in pricey coastal metros. Real home prices were up 41 percent between 2011 to 2018 and stand within 2 percent of the 2006 peak, according to the FHA. That translates to a real median sales price of $259,300 for existing homes in 2018, up from $177,400 in 2011.

These numbers aren’t altered by the inclusion of high-end homes; the median price for homes in the lowest price tier rose more rapidly than higher-cost units last year.

Adding to the price pressure, the average rate on a 30-year fixed-rate mortgage also rose to 4.54 percent, the highest level since 2010. That hike translates to higher monthly payments, taxes, and insurance; the new owner of a median-priced home pays 47 percent more than they did in 2011. The steady squeeze of rising prices explains why 60 percent of home mortgages in the later half of 2018 involved less than a 20 percent downpayment, and 40 percent entailed less than 10 percent. It’s also while the debt-to-income ratios for mortgages has increased sharply.

If that sounds bad, remember, these are median figures. A household making the median area income could afford less than a quarter of homes sold in 2017 in nine California metros (Los Angeles, Oxnard, Salinas, San Diego, San Francisco, San Jose, San Luis Obispo, Santa Cruz, and Santa Rosa). In Boston, Denver, New York, Portland, and Seattle, that same household could only afford half of the homes sold.

Household growth remains steady, but younger adults still living at home

Households can form when a college graduate moves out of their parent’s house, a couple moves in together, or a couple splits up. It’s often used as a measure of housing demand. The report found that household formation has held steady at 1.2 million new households per year, and projects that rate to continue into the near future.

The steady pace of household formation is being driven by an elevated number of 25- to 34-year-olds living with their parents or grandparents; 10.2 million do so today, more than twice the amount in 2000. People 65 and older are also staying in their homes longer than ever, as a quarter of all households are in this older demographic. Since they’ll need to modify their homes to stay in them and age in place, this points to healthy demand for remodeling.

The racial mix of new household formation is also changing because the share of Hispanic households in growing, lead by younger generations. The identity of new immigrants, who are coming to America with more education than ever before, is also changing, with fewer arriving from Mexico and more from China, India, South America, and Central America.

The report also points to continued struggles for low-income earners. Incomes for the bottom quartile of earners has increased 8 percent in real terms, compared with 12.1 percent for the top income quartile. Poverty is becoming more concentrated, growing fastest at the metropolitan fringe, as rising housing costs and gentrification push low-income earners out of urban cores. That may explain that, at a time when parts of the housing market show strong performance, affordable housing has emerged as a potent campaign issue among Democratic primary contenders.