The number of people forming households is back from post-recession lows, but economists are alarmed because housing production is failing to keep up. That shortfall is putting pressure on home prices and rents, which is jeopardizing affordability for modest-income households in markets across the country, according to The State of the Nation’s Housing 2019 report, released on Tuesday from the Harvard Joint Center for Housing Studies.
The number of homeowners has risen significantly over the past few years, buoyed mostly by a growth in baby boomer and millennial households, the report notes. On the other hand, the number of renter households has fallen for the second consecutive year. The renter household is continuing to drop, following 12 preceding years of growth.
But as renters decline, more households are heading into homeownership. However, will there be enough housing to continue to support the shift?
Several factors are contributing to the slowdown in construction, including lot and labor shortages, the report notes.
“The most significant factors, however, are rising land prices and regulatory constraints on development,” says Chris Herbert, managing director of the Joint Center for Housing Studies. “These constraints, largely imposed at the local level, raise costs and limit the number of homes that can be built in places where demand is highest.”
Many newly built homes are geared for the higher end of the market too, Herbert says. “The limited supply of smaller, more affordable homes in the face of rising demand suggests that the rising land costs and the difficult development environment make it unprofitable to build for the middle market,” the report notes.
The share of U.S. households paying more than 30 percent of their income for housing has dropped, but most of that drop has been from homeowners, not renters. Most financial experts consider devoting more than 30 percent of an income to housing as “cost burdened.” As such, cost-burden rates for modest-income renter households is on the rise, the report notes.
The renter household population is decreasing, but that hasn’t stopped the rental market from seeing rents rise at twice the rate of overall inflation, the report notes.
Still, “the growing presence of higher-income renters has helped keep rental markets stable,” says Daniel McCue, a senior research associate at JCHS. The number of units renting for under $800 dropped by 1 million in 2017, which brings the total loss (from 2011 to 2017) to 4 million, the report notes.
JCHS calls for more public, private, and nonprofit sectors to address the constraints on housing production. “Public efforts will be necessary to close the gap between what [families] can afford and the cost of producing decent housing,” Herbert says.