As I always say, the housing market is cyclical and very resilient. But which wave are we riding right now? A closer look at the State of the Nation’s Housing 2023 shows the biggest trends in construction, homebuying, and homeownership—and gives a peek into what technologies might be most needed today.
The report, from the Harvard Joint Center for Housing Studies, dives into current market conditions and the outlook for the industry going forward. Of note, interest rates and overall affordability continue to impact the market. Actually, the changes in the housing market and AI (artificial intelligence) in general appear to be giving everyone a bit of a chill. But let’s dive a little bit deeper, looking at where the market is today.
Current Market Conditions
The report suggests that by early 2023, in both the for-sale and rental markets, housing demand tempered, and markets cooled across the country. There are a number of reasons for this.
For one, first-time homebuyers are backing away, as costs are rising. Okay let’s be very clear, housing costs have climbed and buyers are taking a real look at what they are purchasing. Between March 2022 and March 2023, payments on the median-priced home rose from $2,500 to $3,000, as the annual interest rate on 30-year fixed-rate mortgages jumped from 4.2% to 6.5%. This resulted in a 22% annual decline in the number of mortgages originated to first-time homebuyers in 2022, including a year-over-year decline in the fourth quarter of nearly 40%, as more than 2.4 million potential homebuyers were priced out of homeownership.
Breaking this down a bit further, rising costs unduly affected potential homebuyers of color who were already much less likely to own homes than white households. Homeownership rates were 28.6 and 25.8 percentage points below white homeownership rates in 2022.
Next, breaking this out by construction market segments, is one segment of the market fairing a bit better than others? Let’s dig deeper. Single-family housing starts dropped a whopping 10.8% last year. Similarly, in the existing home market, just 970,000 homes were available for purchase in March 2023, 42% less than in 2019. Yikes.
In contrast, multifamily construction continued to rise last year, even as rental demand is down. Nearly 1 million multifamily units were under construction in early 2023, which is the highest rate in almost 50 years. Still, we need to keep our eyes set on vacancy rates, higher interest rates and tighter lending standards because the potential for a slowdown in multifamily construction could also be imminent.
One big trend has followed the pandemic: mobility patterns. People are continuing to move into lower-cost, lower-density areas. Urban counties in the nation’s largest metro areas saw significant population outflows in 2022, although not as much as 2021. All in all, the report suggests domestic migration has become a reason for population growth in 20 states and population decline in 23 other states. States in the South saw the largest net inflows including states like Texas, Florida, and North Carolina.
What Comes Next?
With all this in mind, what is on the horizon for the housing market? The report suggests housing will remain costly for millions of households and that lower-cost housing is needed. In order to achieve this though, we will also need zoning reform to support a broader range of housing types and investments in off-site construction methods that could reduce costs. Prefab construction and other innovative methods could help build homes faster and at a more affordable cost.
At the same time, we also need investment in aging houses. At 43 years of age, the median home in 2021 was the oldest it has ever been, up from 27 in 1991. Naturally, this reserve of housing needs repairs. The Federal Reserve Bank of Philadelphia estimates that number amounts to $149 billion, including $57 billion for homes occupied by households with lower incomes.
Compounded by this fact, millions of homes have been damaged by climate-related disasters. A whopping 14.5 million homes were affected by hazards in 2021, amounting to $57 billion in damage. Looking to the future, it is estimated even more homes are at risk, including 60 million units located in areas with at least moderate expected annual losses. Going forward, we will need to address this segment of the market.
What does all of this mean for builders? As long as homes are costly, construction professionals will likely continue to struggle to expand production at a rapid rate. What we need is lower-cost housing, new zoning reform to enable more off-site construction methods, and remodeling construction to address the aging homes in the market. These are just a few trends present in this report. Perhaps it’s time to consider better, and more resilient materials, improved productivity, and greater skills training of construction professionals in months and years ahead if communities are going to prosper.
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