It doesn’t matter if you’re owning or renting, buying or selling, or still sitting on the sidelines waiting to join the game. Just about everyonewants to know what’s going on in the housing market.
Because it’s a moving target. While plummeting prices can be a boon for buyers, they can throw sellers into a panic—and, in a worst-case scenario, plunge the world into a recession, as we saw when the housing bubble burst a decade ago. Meanwhile, a lack of new housing coming onto the market can lead to price spikes for both buyers and renters.
That current dearth of new construction is exacerbating a national housing shortage and leading to an increase in prices, according to the recently released annual State of the Nation’s Housing report from the Harvard University’s Joint Center for Housing Studies.
“The major takeaway is that the housing market is strong,” says Daniel McCue, senior research associate at the center. But “there’s a housing shortage brought on by several years of low levels of homebuilding. It’s led to increased competition, which has driven up home prices. And it’s led to [a lack of] housing affordability.”
Here are six key findings from the report.
1. Homeownership rate is rising again
Over the past two years, homeownership has been rising again, hitting 64.4% of U.S. households in 2018. The rate rose 0.5% from the previous year, resulting in an additional 1.6 million households who closed on properties.
That’s fantastic news. The homeownership rate had plummeted during the financial crisis as scores of foreclosures swept through the country. Now it’s back up to what it was from about 1985 through 1995, according to McCue.
“Homeownership had declined a lot,” he says. “So [for many buyers] it was finally having the money and the income to make this happen.”
The bump was primarily thanks to more millennials and young Gen Xers flooding the market. An additional 1.1 million of them closed on properties from 2016 to 2018.
“You have a bigger group of young adults getting older and reaching the ages where they are getting married, having children, and reaching the prime first-time home buyer [point],” McCue says.
The boost in homeownership was in spite of record-high home prices in many parts of the country and rising mortgage interest rates.
In 2012, the monthly median home payment was only $1,176, after adjusting for inflation, according to the report. But just six years later, it had jumped almost 51%, to $1,775 a month.
“The fact that homeownership is rising despite all of the affordability challenges that buyers are facing reflects how important homeownership is to the American dream,” says Chief Economist Danielle Hale of realtor.com®.
2. Fewer folks are renting
Simple math: If the number of homeowners is rising, it means that the number of renters is falling. The number of households renting the roofs over their heads fell by 110,000, to 43.2 million, from 2017 through 2018. That’s in stark contrast to the previous 12 years, when the number of tenants grew by nearly 850,000 households annually.
Increasing rents, going up 3.6% annually in 2018 compared with 3.8% in 2017, may have something to do with it.
“Rents are high and rising,” says Hale. But homeownership tends to be more of a fixed cost as folks know what their monthly mortgage will be. “Renters tend to pay more of their income toward housing than homeowners do.”
But here’s another shift: Renters are becoming wealthier. About a quarter of them now have household incomes of $75,000 or more. That means many are choosing not to become homeowners even though they could afford to do so.
But more middle-class renters, earning between $45,000 and $75,000 a year, are becoming cost-burdened. The percentage of these folks spending more than 30% of their income (which is considered the max folks should pay for housing) shot up from 13% in 2001 to 25% in 2018, according to McCue.
3. The rate of new home construction is slowing
Even with record demand from prospective buyers, the rate of home construction slowed in 2018. Yes, the number of new, completed homes was up 2.8%, to 1.18 million units, from 2017 to 2018, but that growth rate is actually the lowest since 2012, when the recovery from the Great Recession kicked in.
“We’re eight years into the recovery, and we’re still only 75% back to normal rates of home building,” says McCue.
He blames the lack of building to increasing land prices, cumbersome local regulations, and a construction labor shortage that make building more difficult and expensive.
Still, building was more prevalent in some parts of the country than others. For example, home construction starts were up 7% in the West, where the population is growing, and 5% in the South, where land is more plentiful and cheap. But they fell just under 1% in the expensive Northeast, where there’s not as much land available to build on, and dropped 4% in the Midwest.
“Some of that is simply a reflection where people are moving,” says Hale.
4. Homes are getting bigger and less affordable
Most first-time buyers don’t want—and can’t afford—a megamansion. They’re seeking smaller, more affordable single-family houses. But builders aren’t putting them up.
Just 22% of single-family homes clocked in at under 1,800 square feet, according to the report. That’s compared with 32% from 1999 through 2011.
That’s because it’s simply more profitable to put up bigger, more luxurious abodes and sell them for higher prices.
“It’s difficult for builders to build modest-sized, more affordable homes,” says McCue. But “there’s plenty of demand out there for these [homes].”
5. Home sales are slipping
The lack of homes, the rising prices, and the crazy competition may be why the number of home sales is falling. After years of a white-hot, frenzied real estate market, 5.3 million existing (i.e., previously lived-in) residences were sold in 2018. That’s compared with 5.5 million in 2017.
“Home sales declined mainly at the end of 2018, when mortgage interest rates increased,” says McCue. Even the slightest interest rate increase can add quite a bit to a monthly mortgage payment.
But there are now more homes available for sale, even though they tend to be on the more expensive side. The number of homes for sale priced at under $200,000 has dropped, while more properties going for $750,000 or more are coming onto the market, says Hale.
“The biggest increase in inventory is in expensive homes for sale, where demand is the weakest,” she says.
6. Home price growth is also slowing
Buyers shouldn’t get too excited. Home prices aren’t coming down—they’re just not increasing at such a fast pace. Home price appreciation went from 6.5% at the beginning of 2018 to just 4.6% at the end of the year, according to the S&P/Case-Shiller National Home Price Index.
The median home list price is $310,000, according to realtor.com.
“Home prices have gotten so high in so many areas that it was just unsustainable to keep rising at the rates that they had,” says McCue. “Home prices have far outpaced rises in income over the last five years.”