Affordability Problems Escalating Even As Housing Market Cools
Harvard Releases the 2006 State of the Nation’s Housing Report

(Cambridge, MA) With interest rates rising and speculative demand cooling, the housing boom is coming under pressure, finds this year’s State of the Nation’s Housing report. As long as the economy continues to create jobs and builders trim production to match slowing demand, house prices will keep climbing and the housing sector will likely achieve a soft landing. Although house price growth will likely moderate in many areas, sharp drops in house prices are unlikely anytime soon. Major house price declines seldom occur in the absence of severe overbuilding, major job loss, or a combination of heavy overbuilding and modest job loss. Fortunately, these preconditions are nowhere in evidence across the nation’s metropolitan areas.

Even with higher interest rates and home prices crimping affordability, the lure of house price appreciation continues to draw homebuyers to the market. While the national homeownership rate edged down a tenth of a percent in 2005, it increased in the West and Northeast where house price growth was the strongest. In fact, about 1 million homeowners were added nationally last year. Mortgage innovations such as low-downpayment, hybrid-adjustable, and interest-only loans helped blunt the impact of higher home prices and interest rates. “While homeowners with annually adjusting mortgage rates are facing interest increases this year, including those with expiring teaser discounts, only about one in ten homeowners face higher mortgage payments this year” remarks Nicolas P. Retsinas, director of Harvard’s Joint Center for Housing Studies. Fully eight in ten owners has no mortgage or a fixed-rate mortgage, and most owners with adjustable loans have an initial fixed-rate period of three or more years. Similarly, most interest-only loans extend for at least five years, leaving ample time to move, refinance, or incomes to grow before principal payments start coming due.

But, the report cautions, five years of unprecedented house price appreciation and decades of land use restrictions that make building affordable housing difficult are adding to widespread housing affordability problems. From 2001 to 2004 alone, the number of households spending more than half their incomes on housing increased by 14 percent to 15.8 million. The paradox of today’s housing market is that while more people are building home equity than ever before, slow growth in wages for households in the bottom three-quarters of the income distribution is not keeping pace with escalating housing costs. Amidst a housing boom, it is now impossible to build housing at prices anywhere near what low-income households can afford without subsidies.

Further, the report draws attention to the problems of concentrated poverty. Neighborhood decline is fuelling the loss of affordable housing and exposing residents to poor neighborhood conditions. From 1993-2003 the supply of rentals affordable on a $16,000 income fell by 1.2 million, while in 2001 12 percent of such rentals were operated at a loss.

This year’s report also highlights the significant contribution that the foreign-born and minorities will make to overall household growth. New household projections incorporating higher but more realistic immigrant assumptions suggest household growth will accelerate to 14.6 million over the next ten years from 12.6 million over the last ten. “Strong household growth, combined with record incomes and wealth, will lift housing investments to new highs next decade,” remarks Eric Belsky, executive director of the Joint Center. “Each generation is achieving higher homeownership rates, incomes, and wealth than the one ahead of it, with the leading edge of the echo baby boom now in their 20s and the baby bust now in their 30s starting off on especially high paths. This is despite the fact that each younger generation has successively higher shares of foreign-born and minority household heads with lower average incomes than same-age native-born whites.”

“Even as the housing industry looks past the current softness to robust growth in the decade ahead, the challenges of providing affordable housing for low-income, and increasingly even middle-income households, are clear,” concludes Retsinas. “Slow growth in domestic discretionary spending at the federal level and the reluctance of state and local governments to relieve intense barriers to the production of more affordable housing make the road ahead difficult. Unless governments step up to these challenges, spending on housing will increasingly crowd out spending on pensions and savings among those with low and moderate incomes.”

Harvard’s Joint Center for Housing Studies is the nation’s leading center for information and research on housing in the United States. Established in 1959, the Joint Center is a collaborative unit affiliated with the Harvard Design School and the Kennedy School of Government. The Director of the Joint Center for Housing Studies is Nicolas P. Retsinas. The Center’s research and additional information about its programs and activities are available at www.jchs.harvard.edu.