The State of the Nation’s Housing 2019 report, published by The Joint Center for Housing Studies at Harvard University, was released June 25. The housing report asks what real estate investors — and anyone invested in U.S. housing — want to know:
Can the market provide a broader and more affordable range of housing options for tomorrow’s households?
The Inventory Issue
Construction recovery since the Great Recession has been sluggish. Builders and lenders are wary of developing with recent memories of housing surplus still fresh.
The housing boom in the early 2000s created an excess supply. According to the Joint Center for Housing Studies (JCHS), “The vacancy rate for housing units for rent or sale began to climb after 2000 from its long-term average of 4.5 percent to a peak of 6.2 percent in 2009, and it took most of the ensuing decade to work off the surplus.”
Although inventory of existing homes on the market did increase at the end of 2018 for the first time since 2015, for-sale inventories remain historically low. Labor shortages and a limited supply, most of which is geared toward the higher-end market, has caused a gap resulting in unaffordable inventory for many.
“The relative lack of smaller, more affordable new homes suggests that the rising costs of labor, land, and materials make it unprofitable to build for the middle market.” (JCHS)
New and existing construction aside, the rental inventory remains sought after in nearly all markets. But given that the Consumer Price Index indicates overall rents increasing “at a 3.6 percent annual rate in early 2019, or twice the pace of overall inflation,” the question of affordability remains unanswered. (JCHS)
Demand Is not Decreasing
Home-ownership is on the rebound with the largest increase among households in the age group of 25–39. More members of the largest generation — the Millenials — are at or near the age of home-buying peaks.
According to the latest Joint Center projections, if age-specific home-ownership rates remained at the same level as in 2018, household growth alone would add roughly 8.0 million homeowners between 2018 and 2028. However, if home-ownership rates increase at a pace consistent with recent trends, the number of homeowners could reach more than 10 million in that time period. (JCHS)
At the same time, a rise in interest rates and home prices plus a tightening of credit, on top of the limited supply of entry-level housing, could put home-ownership out of reach for many more households.
“Even if home-ownership rates continue to increase, low vacancy rates and shifts in the existing stock are likely to prevent a significant softening of rental markets.” (JCHS)
The report indicates renters make up 10.8 million of the 18.2 million households that pay more than half their incomes for housing, and rental market estimates show “an uptick in early 2019, in keeping with Joint Center projections of about 400,000 net new renter households annually over the coming decade.”
Low and falling vacancy rates are keeping the pressure on rents, with the national vacancy rate sliding from 7.2 percent in 2017 to 7.0 percent in the first quarter of 2019.”
Can the market supply housing within the financial reach of most households?
“Even if the home-ownership rate rises by 1.6 percentage points over the decade, the high-end projection indicates that renter household growth will still total at least 2.1 million given expected increases in the adult population. On the supply side, however, conditions at the lower end of the market will remain challenging as millions of low-income households compete for an already insufficient number of affordable rental units.” (JCHS)
If housing costs continue to rise faster than incomes, growth of households and housing demand is likely to slow.
“If current housing supply trends persist, house prices and rents will continue to rise […], further limiting the housing options for many. To ensure that the market can produce homes that meet the diverse needs of the growing U.S. population, the public, private, and nonprofit sectors must address constraints on the development process.”
Additional public efforts will be necessary to close the gap between affordability and production costs of decent housing.