High housing costs keep stretching budgets, widening wealth gaps and stifling mobility even as more construction eases rent growth and increases supply.
A new study found that the multifamily building surged in March to the highest level since 1988, with completions hitting 487,000 units over the prior 12 months, according to an annual report on the nation’s housing market released Thursday by the Harvard Joint Center for Housing Studies research group.
The new apartments have outpaced even robust increases in new household formations, curtailing rent growth that gripped the United States. during and after the COVID-19 pandemic.
Even so, rents nationwide remain 26% higher than they were in early 2020 and are increasing in three out of every five markets, the study found. The vast majority of the new units cater to higher-end consumers, at least partly due to builders’ increased costs for land and materials.
“The slowdown in rents is coming after a really sharp rate of increase,” Daniel McCue, lead author of the report, told CoStar News. “But rents are still elevated, well above where they were a few years ago, and we’re still adjusting to that.”
Researchers are calling for financial, zoning and other reforms to help make housing more affordable for low- and middle-income consumers.
Builders Are Bullish
Meanwhile, mortgage rates near 7% haven’t dissuaded single-family homebuilding, with an average seasonally adjusted annualized rate of 1.06 million units in the fourth quarter, a brisk pace that continued in the first quarter of this year and is necessary to address years of underbuilding, the report noted.
Builders are bullish on the market for new houses, given the shortage of existing residences for sale driven by homeowners who are “locked in” to historically low mortgage rates obtained during the pandemic. In addition, more buyers are taking advantage of mortgage-rate buy-downs that sellers of existing homes can’t offer.
Despite the recent optimism, middle- and lower-income consumers are stuck paying pricey rents because some can’t afford to buy or own because they're unable to save enough for down payments or handle the monthly payments that are growing due to the high mortgage rates and property insurance premiums.
The U.S. homeownership rate edged up 0.1% last year to 65.9%, the smallest increase since 2016. What’s more, in the first quarter of 2024, a household needed to earn $120,000 a year to afford the nation’s median-priced home, up from an inflation-adjusted $82,000 in the first quarter of 2021, the report found.
“We don’t build starter homes or B-class apartments anymore," Priya Jayachandran, CEO of the National Housing Trust, said on a conference call to discuss the report. "So what we really rely on is that existing housing stock. The challenge is that a lot of that stock is vulnerable to climate change, pressures to convert it or physical obsolescence.”
Widening Income Gaps
The Harvard report also found that while the country saw 1.7 million new households form over the past year, persistent income inequality and wealth gaps meant many of them have been unable to buy homes or find better places to rent.
That’s 600,000 more households than were added each year in the previous decade, on average. Millennials and members of Generation Z born between 1980 and 2009 account for most of the growth.
Income gains have been uneven for these young homeseekers, with the lowest-earning quartile of households seeing increases that are significantly less than for those at the high end of the income range. Meanwhile, the dramatic jump in home equity in recent years caused the wealth gap to grow between homeowners and renters. In addition, renters typically have less cash savings than owners to rely on in a financial crisis, researchers said.
The researchers also highlighted an ongoing decline in people’s ability to move due to high buying costs and a lack of housing supply. Homeowner mobility hit a 40-year low in 2023, according to the U.S. Census’ Current Population Survey. To the extent people are moving, they tend to leave major urban areas for suburbs and, increasingly, rural areas that have lower prices. The South was the only region in 2023 to see growth from domestic migration.
The report blames municipal zoning laws and, in some cases, barriers imposed by lenders, for the nation’s “severe” shortfall of 1 million homes.
“The majority of land in cities across the country is currently zoned exclusively for single-family homes,” according to the report. “Changing these regulations to allow greater densities and more diverse housing types can make the approval process faster and more predictable, in turn reducing costs.”
Housing Growth Efforts
Two initiatives to increase housing highlighted in the report are California’s move to allow housing on 171,000 acres owned by religious institutions and colleges and Massachusetts’ requirement that local governments allow higher residential density near transit stations. The authors also support efforts to shift some office buildings to residential use.
Harvard researchers also noted the need for more manufactured and modular housing.
Production in the manufactured house industry is at less than a third of its level in the 1990s, Relatively few modular residences, which more closely resemble other single-family types, are built because of the capital cost of setting up factories. Building code requirements for modular construction also vary widely from one state to the next.
While zoning restrictions help explain production issues, the manufactured house industry also has lingering perceptions of quality.
“The look of manufactured housing has changed dramatically and doesn’t look like it used to,” McCue said in an interview. “And it’s the only type of housing that has a national code of construction.”
To meet the need for new housing, including at the lower end of the income spectrum governments will need to step up how much they’re willing to provide in financial subsidies while reducing lending barriers, authors of the report said
As an example of such a barrier, the report notes that home equity loans often don’t provide enough financing to cover the cost of accessory dwelling units, informally known as ADUs and granny flats. Typically built behind or attached to an existing single-family house, ADUs have grown in popularity in California and elsewhere.