Cambridge, MA and Washington, DC – The national housing market has now regained enough momentum to provide an engine of growth for the US economy, according to the latest The State of the Nation’s Housing report (Password: SON2016) released today by Harvard's Joint Center for Housing Studies.
Robust rental demand continues to drive the housing expansion, and sales, prices, and new construction of single-family homes are on the rise. Even more important, income growth has picked up, particularly among the huge millennial population that is poised to form millions of new households over the coming decade. At the same time, however, several obstacles continue to hamper the housing recovery—in particular, the lingering pressures on home ownership, the eroding affordability of rental housing, and the growing concentration of poverty.
The national home-ownership rate has been on an unprecedented 10-year downtrend, sliding to just 63.7% in 2015. As Chris Herbert, managing director of Harvard’s Joint Center for Housing Studies, notes, “Tight mortgage credit, the decade-long falloff in incomes that is only now ending, and a limited supply of homes for sale are all keeping households—especially first-time buyers—on the sidelines. And even though a rebound in home prices has helped to reduce the number of underwater owners, the large backlog of foreclosures is still a serious drag on home ownership.”
As these lingering effects of the housing crash fade, home ownership may regain some lost ground, but how soon and how much are open to question. Moreover, the report finds that income inequality increased over the past decade, with households earning under $25,000 accounting for nearly 45% of the net growth in US households in 2005–2015. As Herbert sums it up, “The question is not so much whether families will want to buy homes in the future, but whether they will be able to do so.”
Mirroring the persistent weakness on the owner-occupied side is the equally long surge in rental housing demand, with increases across all age groups, income levels, and household types. With vacancy rates down sharply and rents climbing, multifamily construction is booming across the country. But with strong growth among high-income renters, so far most of this new housing is intended for the upper end of the market, with rents well out of reach of the typical renter making $35,000 a year. Because of the widening gap between market-rate rents and the amounts many households can afford at the 30-percent-of-income standard, the number of cost-burdened renters hit 21.3 million in 2014. Even worse, 11.4 million of these households paid more than half their incomes for housing, a record high. The report finds that rent burdens are increasingly common among moderate-income households, especially in the nation’s 10 highest-cost housing markets, where three-quarters of renters earning $30,000–45,000 and half of those earning $45,000–75,000 paid at least 30% of their incomes for housing in 2014.
Cost burdens are nearly universal among the nation’s lowest-income households. Federal assistance reaches only a quarter of those who qualify, leaving nearly 14 million households to find housing in the private market where low-cost units are increasingly scarce. Low-income households with cost burdens face higher rates of housing instability, more often settle for poor-quality housing, and have to sacrifice other needs—including basic nutrition, health, and safety—to pay for their housing. These conditions have serious long-term consequences, particularly for children’s future achievement. “And compounding these challenges,” added Daniel McCue, a senior research associate at the Joint Center, “residential segregation by income has increased. Between 2000 and 2014, the number of people living in neighborhoods of concentrated poverty more than doubled to 13.7 million.”
The report notes that a lack of a strong federal response to the affordability crisis has left state and local governments struggling to expand rental assistance and promote construction of affordable housing in areas with access to better educational and employment opportunities through inclusionary zoning and other local resources. But as Herbert added, “These efforts are falling far short of need. Policymakers at all levels of government need to take stock of what can and should be done to expand access to good-quality, affordable housing that is so central to the current well-being and potential contribution of each and every individual.”
Here are some key facts from the report:
Construction is Gaining Momentum.
▪ Single-family housing starts rose to 715,000 in 2015, a 10.5% increase over 2014, while multifamily starts were at a 27-year high of 397,300, up 11.8%.
▪ Residential permits increased in 70 of the 100 largest metro areas in 2015, with yearly gains of over 25% in metros including Dallas, Los Angeles, Miami, New York, San Diego, and San Francisco. However there were slowdowns in metros such as Houston, San Antonio, San Jose, and Washington, DC.
▪ Construction of multifamily units is taking on a growing share of the new rental supply, with the number of multifamily starts intended for rent climbing to 370,000 units in 2015, the highest level since the 1980s.
▪ The median asking rent for a newly constructed market-rate multifamily unit built in 2015 rose to $1,381 per month, more than 70% higher than the median contract rent for all multifamily units.
▪ The median size of completed new single-family units hit a record high of 2,467 square feet in 2015. Only 135,000 units (about 20 percent of the total) completed in 2014 were under 1,800, the smallest number and share of units of this size going back to 1999 (See Figure 81).
1 Note: Where facts are supported by figures from the report, the figure numbers are listed.
▪ Housing is a key economic driver. Residential fixed investment (RFI), including both new construction and homeowner improvement spending, generated $600 billion in 2015 or 3.3% of gross domestic product (GDP). This is below the historical average of 4.6%, but an increase from its all- time low of 2.4% of GDP in 2011.
Headwinds to Development Remain.
▪ The construction labor force lost more than 2 million workers between 2007 and 2013, and only 40% of displaced workers eventually returned to the industry; with this decline, a 2015 National Association of Home Builders (NAHB) survey found a majority of construction firms reporting labor shortages in many trades.
▪ Metrostudy data show that the supply of construction-ready land (vacant developed lots) in 50 metro areas shrank by 30% from 2008 to 2013, before settling just above levels posted in the early 2000s.
▪ Residential construction loan volumes rose 4.5% in the fourth quarter of 2015, the 11th consecutive quarter of growth, according to the NAHB. However the Federal Reserve Board’s latest Senior Loan Officer Opinion Survey on Bank Lending Practices indicate some tightening of credit for construction loans.
Home Sales are Strengthening.
▪ New home sales rose 14.6% to 501,000 in 2015 while existing home sales increased 6.3% to 5.3 million.
▪ Existing home sales were bolstered by growth of 7.6% in non-distressed resales coupled with a 10% decline in short sales and an 11% drop in REO sales, according to CoreLogic.
▪ Existing home inventories tightened further in 2015, falling 1.9% to 2.1 million units. Supply is at 4.8 months, which for the fourth consecutive year is below the 6-month level that normally represents a balanced market.
▪ The most affordable tiers of homes have experienced the sharpest declines in the number of for-sale units, as inventories of bottom- and middle-value tier units within metro areas shrank by more than 38% between 2010 and 2015, and by 9% in 2015 alone.
Home Prices on the Rise.
▪ Multiple measures show strong growth in home prices in 2015, with the median price of existing homes up 6.6% in real terms to $222,400 (a new peak in nominal terms), and the median new home price increasing 4.7% in real terms to $296,400.
▪ Home prices nationally are back to 5.3% below their previous peak on a nominal basis, but after adjusting for inflation are still nearly 20% below the peak price.
▪ One million homeowners were lifted out of negative equity due to rising home prices. The number of homeowners underwater on their mortgages dropped from 5.3 million in the fourth quarter of 2014 to 4.3 million in the fourth quarter of 2015— well below the 12.1 million peak at the end of 2011, but still elevated compared to pre-crisis levels.
▪ The average interest rate on 30-year fixed-rate loans held below 4.0% for most of 2015 and stood at 3.6% in April 2016.
▪ Assuming a 10% down payment on a 30-year fixed-rate mortgage, the monthly principal and interest payment for the median-priced home in 2015 was $834, well below the $1,000 average since 1990 (See Figure 22).
Household Growth is on the Rise.
▪ After years of weakness, the pace of household growth has picked up, rising from 653,000 in 2013 to 1.0 million in 2014 and then to 1.3 million in 2015—marking the largest single- year increase in a decade (See Figure 1).
▪ The share of Millennials (25–34 year-olds) living in their parents’ homes is still high, having risen from 17% in 2008 to about 22% in 2014. More recent Current Population Survey data show further increases in 2015.
▪ Over the next 10 years, the millennial generation (born 1985–2004) is expected to form 2 million households per year, increasing the total number of millennial-headed households from 16 million in 2015 to a projected 40 million in 2025.
▪ The number of households age 70 and over is projected to soar by over 8 million, or more than 40%, in 2015–2025.
▪ Minorities are expected to account for more than 75% of household growth over the next 10 years.