A lack of building coupled with rising prices and interest rates that are falling at a tapered pace are the main drivers of the persisting housing affordability crisis, according to researcher Daniel T. McCue, who carried out the analysis for a recent Harvard University study. When new units were built, which was infrequently, they tended to be more expensive on a per month cost basis, according to McCue.
The new analysis served as an update to the Harvard Joint Center for Housing Studies’ (JCHS) “State of the Nation’s Housing” report, released earlier this year.
Over the previous decade, America lost more than 6 million units in what could be classified as affordable housing ($600 – $1,000/month, adjusted for inflation), while adding nearly twice the amount of what might be considered premium-priced housing units, according to McCue. Less affordable housing is being constructed in favor of more luxury housing, resulting in more cost burdening. This trend was in lockstep with the overall trend of rising home prices on the whole, according to the Harvard data.
“Following in on our storyline from this year’s report is that not only have home prices remained high with the surge in interest rates, but they continue to grow, declining only briefly in 2023,” McCue said. “Home prices (at the) end of 2023 were up over 5.5%, while home prices this year alone, since January, are up 4.6%. So a 4.5% increase in home prices over the course of the year. This is keeping affordability levels very low.”
A number of issues have converged to make affordability a pressing issue, as detailed in the report, including interest rates that remain high. With regard to interest rates, McCue stated: “It’s really raising the bar and pricing out so many potential homeowners looking to buy.”
Another issue impacting affordability has been a steady rate of immigration, which keeps demand constant for a decreased supply. McCue said that a “big ramp up in immigration” is “playing a role in keeping the demand side of housing strong.”
For 40 years, construction outpaced household growth, as detailed in the report. The result was that housing remained affordable, because there was ample supply to go with a stable demand level that didn’t fluctuate rapidly. But in the years following the 2008 crash, construction and household growth grew at the same rate. Now, over the past five years or so, household growth has outpaced construction, resulting in housing shortages and higher home prices, according to data presented by McCue.
In addition to the lack of new builds, rising prices on various other homeownership costs for people who were grandfathered into lower mortgage rates were also identified in the report as a cause of increased financial burden on the market. In particular, the rising costs of property taxes and homeowners insurance were stated to be major stressors on low-income budgets.
The profile of a home that is more likely to be impacted by the rising cost of insurance may also have increased risk of property damage due to climate events, according to McCue. This convergence of trends in the housing market and its adjacent associated costs has put a significant degree of strain on the market at large.
What can be done to ameliorate this all-too-pressing issue? McCue mentioned a few potential solutions in his report. He stated that “places like Charlottesville, Virginia, (are) revising (their) zoning codes to eliminate single-family only zoning. Places like Cambridge, Massachusetts, or Lexington, Kentucky, (are) removing parking minimums.”
Other regions of the country are also taking incremental steps toward increasing supply, as mentioned by McCue. He enumerated that “places like Boston (are) making 150 parcels of city owned land for housing developments.” These types of trends may give some hope in what otherwise seems like a space that is difficult for new buyers to penetrate, and provide some “momentum” toward increasing supply, according to McCue.
Both the Biden/Harris administration and the Trump administration sought to spark more affordable home construction through intervention at the federal level, with Trump creating “opportunity zones” to incentivize developers to build in lower-income areas, and Biden tying federal grant monies to local zoning reforms intended to remove barriers to housing creation.
However, the outlook remains mostly difficult for homebuyers (or renters), especially at lower income levels. As McCue succinctly stated: “The market will never be able to build a unit inexpensive enough to be afforded by a certain segment of the population.”
