Harvard Housing Study: Cost-Burdened Households at Record High

June 28, 2024

Harvard Housing Study: Cost-Burdened Households at Record High

Despite the spike in multifamily completions in 2023, rents are up 26% nationwide since early 2020 and continue to rise in three out of every five markets, according to the State of the Nation’s Housing 2024 report from the Joint Center for Housing Studies of Harvard University. Demand for rental apartments is anticipated to rise in the coming years due to household formations among the Gen Z generation and immigrants, as well as because of the ongoing challenges of homeownership for first-time buyers.

Cost Burdens and Renters

While attention often focuses on affordability issues that impact homeownership including high mortgage rates, high prices and a lack of homes, the number of renter households that are cost-burdened hit an all-time high in 2023. Half of all rental households (22.4 million households) spent more than 30% of their income on housing and utility costs in 2023, according to the report, up two million households since 2019 and now the highest number on record. Severely cost-burdened renters, defined as those who spend more than half of household income on housing and utilities, hit a new high of 12.1 million households in 2023, up 1.5 million from pre-pandemic levels.

While those figures signal the continued need for affordable multifamily housing, with low-income households with incomes under $30,000 annually accounting for more than half the growth in cost-burdened households since 2019, the issue of affordable rent extends across income levels. The percentage of renters who are severely or moderately cost-burdened rose fastest among households with incomes ranging from $30,000 to $75,000.

While construction of homes for purchase has accelerated, multifamily construction has slowed significantly.

Demographics and Multifamily Demand

Even in the face of high housing costs, household formation continues to be robust and is anticipated to strengthen in the coming years. The U.S. gained 1.7 million households between 2022 and 2023, according to the Housing Vacancy Survey, which is significantly higher than the average annual pace of 1.1 million new households in the 2010s.

Gen Z (born 1995-2009) added eight million households over the past several years as they came of age to move out of their parents’ homes. Many millennials added to household formations in recent years because they delayed leaving home during the Great Recession.

Immigration, which peaked at 3.3 million in 2023 according to the Congressional Budget Office, averaged 919,000 annually in the 2010s. Household formation due to immigration may be delayed because many recent immigrants are asylum seekers facing legal challenges. Even so, immigrants continue to form households, adding to housing demand.

Demand from Gen Z combined with immigrant demand is expected to outpace housing demand from the millennial generation.

Supply Side Economics for the Multifamily Sector

Despite multifamily completions rising by 22% in 2023, the highest annual level in more than three decades, the rental market cooled only slightly, according to the JCHS report. Vacancy rates rose along with operating costs, particularly for insurance premiums. Over the past year, apartment operating expenses increased by 7.1%, led by a 27.7% average increase in owners’ insurance premiums. Net operating income growth fell to 2.8% in the first quarter of 2024, down from 8.1% a year earlier.

New multifamily projects are more difficult to finance because of rising costs of both debt and equity, according to the report. Multifamily starts fell 14% in 2023 to 472,300 units last year, and the decline has only accelerated. The seasonally adjusted annualized rate of multifamily starts dropped from an average of 531,000 units across the first six months of 2023 to just 415,000 units on average in the second six months of the year, and then to an even more modest 343,000 unit average in the first quarter of 2024, according to the report.

A slowdown in multifamily development could lead to a severe shortage of rental units in the future, since demand is anticipated to grow and the U.S. currently faces a housing shortage of an estimated 4.5 million units, according to a recent study by Zillow.

Rent growth is likely to stay flat for the coming year because of the number of apartments in the pipeline, according to the JCHS report. However, declining multifamily housing starts could signal rising rents in the future, particularly as demand for rental housing increases due to the lack of affordability in the purchase market and the wave of young adult Gen Z households who are likely to rent.

“Given the lengthy lag times for multifamily developments from permitting to completion, an extended downturn in construction amid rising demand will risk sparking another period of rapid rent increases similar to the recent run-up that has contributed to the worst renter affordability conditions on record,” according to the report.