The housing market has been one of the few bright lights in the economy during the pandemic. House prices have climbed, homebuilding has accelerated and home improvement activity has been extremely strong as households were modifying their homes to their emerging housing needs. After trailing the pace of household growth for almost a decade, residential construction finally picked up. Single-family starts hit 1.1 million in 2021, exceeding the million-unit mark for the first time in 13 years. Multifamily starts were also at a 30-year high, but supply-chain delays have lengthened the time to completion.

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In recent months, however, higher interest rates have taken some heat out of the homebuying market. Still, the costs of housing continue to climb. Home price appreciation nationwide has been running close to 20 percent so far this year, marking the largest jump in three decades. The runup has been widespread, with 67 of the top 100 housing markets experiencing record-high appreciation rates. With interest rates rising, on top of double-digit home price increases, the income and savings needed to qualify for a home loan have skyrocketed, raising the financial hurdles for first-time and middle-income buyers.

There has been no relief on the rental side, as rents have been rising at a double-digit pace nationally. Rents for single-family homes rose even faster, pushed up by increasing demand for more living space among households able to work remotely. Adding to the pressure, investors moved aggressively into the single-family market over the past year, buying up moderately priced homes either to convert to rental or upgrade for resale. Meanwhile, the surge in the prices of gas, food and other necessities has made matters worse, especially now that most pandemic emergency government supports have ended.

These are some of the key findings from the recently released The State of the Nation’s Housing 2022 from the Harvard Joint Center for Housing Studies. Surprisingly, strong household growth throughout the pandemic contributed to the sharp rise in housing costs. Much of the jump was among Millennials; an uptick in new household formations among adults under 45 tacked-on an additional 400,000 annually to household growth over the past five years. Meanwhile, the number of older-adult households is also growing rapidly with the aging of the Baby Boomers, exacerbating the need to adapt the housing stock and make it more accessible. Over the long term, though, housing demand is set to decline dramatically; population growth, the primary driver of household growth, is now at a 100-year low as birth rates have fallen, death rates have risen and immigration has slowed to a trickle.

Despite the chilling effect of high costs and rising interest rates, the near-term outlook for housing demand is still largely positive. Demographic shifts are favorable, unemployment is low and wage growth remains strong. But housing demand hinges directly on the ability of fiscal policymakers to successfully cool inflation without causing a recession. There is also the longstanding challenge of producing affordable homes, given the high cost of building materials and land as well as the shortage of labor. The lessons learned during the pandemic have led to a number of proposals to greatly expand the housing safety net and provide increased support for first-generation homebuyers.

Copies of The State of the Nation’s Housing 2022 are available for download at no cost at www.jchs.harvard.edu.

Kermit Baker is the chief economist at the American Institute of Architects. He can be reached by email at [email protected].