Home sales at highest level since 2006
Total home sales were at their highest since 2006 with 822,000 units sold—a 20.4% increase from the previous year. Due to the persistent supply shortage, however, with yet another year-on-year sharp increase in prices, only high-income households have the financial capacity to purchase homes, further disenfranchising first-time homebuyers, especially renter households of color.
- Tight supply of for-sale homes: With a 29% decline from 2019 to 2020 and a 37% decline from 2018 to 2020, the supply has never been tighter. The pandemic further exacerbated the decade-long effects of the 2008 financial crisis that resulted in underproduction of new units as potential sellers pulled or delayed their listings.
- Extremely quick turnaround times: Compared to the 35 days of the previous year, on average, homes were sold after only 14 days of being listed.
- Demand for homes stayed high due to several factors: the millennial population entering the age to form their own households, a desire for increased private space stemming from pandemic-era confinements at home, and a favorable financial backdrop with record-low mortgage rates.
- Sales volume and home prices have soared in many areas leading to bidding wars and effectively preventing anyone but the highest-income earners from purchasing a home.
- Racial and ethnic disparities in homeownership rates remain high with most first-time home buyers but especially renter households of color finding it difficult to save up enough for a downpayment.
Construction picking up—highest since 2007
For the first time since 2007 the rate of new construction has topped the mark of one million new units!
Underproduction of new homes has been the biggest reason behind the supply crunch. According to estimations by Freddie Mac, the supply was 3.8 million units short of the level needed at the end of 2020. With construction starts reaching just above 1.5 million units between June 2020 and March 2021 at a seasonally adjusted annual rate, a meaningful growth of the housing inventory will become achievable if this pace of construction can be maintained. Based on the Joint Center’s calculations, to meet demand, the annual output will need to be around 1.5 million units for the next ten years. This year marks the first time this target was achieved.
Single family starts have increased from the previous year, averaging 1.16 million units while multifamily starts also recorded a robust 446,000 units. If multifamily construction completions stay in-line with the starts, it will be for the first time that the the 400,000+ mark will be since 1987!
- Restrictive land use and zoning practices (e.g. minimum requirements for lot size, elevation constraints) are the main barriers to increased housing production.
- Consequently, land prices are prohibitively expensive in areas where regulations are particularly stringent, with San Jose ($1.2 million), San Francisco ($945,900), and Honolulu ($786,500) having the highest median land prices in the country.
- Red tape: Multiple approvals for residential developments create additional cost burden on the developer and cause months of unnecessary delay due to slow administrative processes.
- Labor shortages: The cost and availability of construction workforce has been an issue for years. To alleviate the shortage, the steady rise of wages (the average rate is currently standing at $32.25 per hour) may entice more people to enter into construction, especially following pandemic-induced job losses.
- Costly building materials: Developers cited the cost and scarcity of building materials as their main concern – costs have been sharply increasing in the last years and supply chain disturbances during the pandemic have only exacerbated the issue (16% jump in overall input costs from the previous year).
Rental markets stabilizing: moderate growth in rent rates
After a huge initial drop in rental demand at the onset of the pandemic where the annualized growth of rental households fell to nearly half of the previous year’s, the rental market is now back on track to pre-pandemic levels.
- Higher vacancy rates along with a rent drop mainly affected high-end rentals in central urban areas and only temporarily. With the economy reopening, demand is back and it resulted in a slight rent increase from pre-pandemic levels.
- Markets for moderate- and lower-quality apartments remained tight, experiencing a steady growth in rental price throughout the pandemic.
Rent-burden still high, evictions looming
Renters in general and lowest-income renters in particular have taken the brunt of the economic fallout from the pandemic. Overall, 46% of renters (20.4 million) are still cost-burdened and 24% (10.5 million) are considered severely cost-burdened. The cost-burdened category of households have started to move up the income ladder: it's not only low-income renter households being affected (80%) any more but 70% of those earning between $25,000 and $34,999 and nearly 50% of those earning between $35,000 and $49,999 are also at least moderately burdened.
Financial distress paired with the inability to pay rent remain a reality for many households:
- 51% of renter households had lost employment income by March 2021.
- 17% of renter households are still behind on their housing payments.
- Low-income households and renters of color are more likely to be in financial distress.
- Mississippi (27%), Delaware, and Louisiana have the highest concentration of renters in financial distress who are behind with their payments.
- Federal relief programs, such as stimulus checks and the eviction moratorium, have prevented renters from losing their homes, but homelessness was already on the rise even before the pandemic and a wave of evictions can exacerbate the situation.
- Converting vacant hotels and motels into homeless shelters and supportive housing during the pandemic proved an effective response to the crisis, and if these conversations stay permanent, it will increase the overall capacity of emergency homeless shelters.
- The financial situation of many renters remain uncertain. Despite the steadily recovering economy and addition of more 1.3 million jobs between January and April 2021, there were still 7.6 million fewer jobs in February than a year earlier.
Need for repairs & climate resilience
- A third of all occupied homes in 2017 had structural, plumbing, electrical, and heating problems, leaks, and/or pest infestations.
- Total cost of addressing these needs is estimated to be $127 billion (not including the costs of improving indoor air and water quality or removing lead contamination).
- Most in need of repair are manufactured housing units, renter units, and units occupied by Black, Hispanic, and Native American/Alaskan Native households, as well as by people with disabilities.
- The backlog of capital funding needed to repair the existing stock of nearly 1 million public housing units was $70 billion in 2019, or about $3.4 billion per year.
- An aging population presents another challenge where a large number of homes will need to be modified to include critical accessibility features (e.g. no-step entry, single-floor living etc.) in order to enable households with reduced mobility to continue living comfortably in their existing homes.
- The importance of retrofitting older housing for improved energy efficiency has been receiving greater public attention due to climate change, especially since one fifth of the country’s greenhouse gas emissions are from residential energy use.
- Extreme weather conditions are predicted to increase in frequency and homes need to be modified to withstand future disaster events.
- A co-ordinated federal support is needed to address these issues and go beyond disaster recovery to prepare the housing stock for future challenges.
The unprecedented events of 2020 both exposed and amplified the impacts of unequal access to decent, affordable housing. Demand for homeownership is likely to remain robust as the huge millennial generation continues to move through the prime ages for forming households and buying homes. Although the supply of existing homes for sale is at a record low, an expanded supply of for-sale homes would help to slow the meteoric rise in house prices, but new construction also has to pick up substantially to keep homeownership relatively affordable.
View the original report by Harvard University's Joint Center for Housing Studies (JCHS)