In June 2023, Harvard University’s Joint Center for Housing Studies released their 2023 report on The State of the Nation’s Housing. We have summarized the highlights from this report so you are informed on the latest housing market trends in the country.

1. The housing market has shown signs of cooling in terms of home prices, rent growth, sales, as well as new construction activity.

With rising mortgage rates, potential home buyers are faced with higher monthly payments. This has led to a decline in home prices in some areas of the country due to slower for-sale housing market activity (in Virginia, home prices are still climbing in most areas). A decade-long slowdown in single-family housing construction, more older adults aging in place, and low interest rate lock-in effect have resulted in the number of homes available for sale to be at historically low levels. Moreover, investor demand for single-family homes, which saw a significant increase during the pandemic, has softened due to higher interest rates, but remains strong. Such activity can further worsen inventory shortages for potential buyers and renters alike. Following the highly active period for the rental market in 2021 and 2022, rent growth and asking rents have declined across the country. Similarly, rental market vacancies have increased in the first quarter of 2023. Finally, while single-family housing construction has seen a recent slowdown, multifamily construction continues to be strong.

Outlook: The for-sale and rental markets are expected to moderate through 2023. Homeowners who were able to lock in low interest rates just a couple of years ago will be reluctant to sell their homes, eventually holding back inventory growth. Home builder sentiment has rebounded in recent months, which is great news for boosting new construction activity. On the other hand, slowing rent growth and rising vacancies is expected to dampen new apartment construction activity.

2. Millennials contributed to household growth in 2022. However, affordability and domestic migration trends are slowing household growth and shifting housing demand, respectively.

During the pandemic, many millennials took advantage of low interest rates, federal stimulus, and suspension of student loan payments to buy homes. This recent surge has shown signs of cooling down. In absence of that, population growth, which remains historically low, becomes the driver for household growth. However, given the slowdown in natural population growth, immigration has become the next best source of population growth nationwide. Furthermore, the latest trends of remote work and affordability concerns have caused a shift towards domestic migration to states in the South and Mountain-West as well as from more populated counties to smaller and rural markets. While incomes have grown in the past decade, households with lower incomes are suffering the consequences of high housing costs.

Outlook: Population growth will become the key driver of household growth, which is approaching low rates due to declining birth rates and increasing mortality rates. Remote work is likely to lead to domestic migration and determine the changing geography of housing demand.

3. Rising interest rates over the last year have made homeownership more expensive.

Housing costs have gone up significantly due to rising mortgage interest rates since last year, which has slowed down the rate of homeownership growth. During the same period, however, home equity levels have hit new highs, while delinquency and foreclosure rates remain low. This, however, does not fully capture the drastic impact of housing cost burdens on the more financially vulnerable homeowners.

Outlook: Elevated housing costs will cause homeownership to remain a challenge. Given the slowdown in home price growth and recent signals that the Federal Reserve is nearing the end of its current series of rate hikes, buyers will have more time to adjust to the new normal. Policymakers will have to address concerns regarding housing affordability, housing supply shortage, and tackle the root causes of the nation’s racial homeownership rate gaps.

4. Rental housing has seen a drop in demand while rental cost burdens have increased.

In a reversal of recent trends, rental market activity has slowed down, and rental vacancy rates have climbed higher. Regardless, there has been an increase in asking rents, a decline in the availability of low-rent options, and a disproportionate amount of new construction activity to shore up high-end rental stock. All this has led to rental cost burdens to be at their highest recorded levels.

Outlook: The current barriers to homeownership will likely support continued demand for rental housing. Newer multifamily construction leans toward the higher end of the market, which will leave low and moderate income earners with fewer affordable renting options.

5. Housing shortage issues continue to worsen and have been met with insufficient affordable housing programs.

Pandemic-era assistance programs are being rolled back at the same time as housing insecurity and homelessness are on the rise. There is a need for investment into the existing housing stock to make it more resilient for an aging population and against the potential challenges of climate change. While there are programs and policies in place to address these housing challenges, there is room for more resources and support.

Outlook: Recent zoning reforms are expected to increase affordable housing options in the long term. However, intervention is required from all levels of the government to solve the affordability crisis. Moreover, potential challenges associated with aging housing stock, climate change, and systemic racism must also be addressed to help communities thrive.

For more information on housing, demographic and economic trends in Virginia, be sure to check out Virginia REALTORS® other Economic Insights blogs and our Data page.