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With rising home prices and soaring mortgage rates, the housing industry has now reached an “inflection point,” and for many Americans the challenges related to expensive homes aren’t likely to end any time soon.

That’s according to a new report, “The State of the Nation’s Housing in 2022,” that Harvard’s Joint Center for Housing Studies published Wednesday. The report, dives into the economic factors shaping the current homebuying and renting landscapes.

And while there is some positive news — rising prices are a boon to existing homeowners, increasing rates will cool the market — the overall takeaway is that affordability remains a serious problem in the U.S., even if housing itself has a strong outlook.

What exactly is going on?

In a nutshell, both home prices and rents shot up in 2021. The report states that home price appreciation in March 2022, actually hit an all-time high of 20.6, which beat the previous all-time high set last August. The report further notes that the “run up has been widespread, with 67 of the top 100 housing markets experiencing record-high appreciation rates at some point over the past year.” The report ultimately refers to the recent trend in home pricing as “unprecedented.”

Rents also rose, and nationwide were up 12 percent year-over-year in the first quarter of 2022.

According to the report, all of this is happening thanks to “severe constraints on supply.”

Curiously, while home prices have spiked over the last year, the report also notes that “historically low interest rates” have offset those increases, meaning that “homebuying remained relatively affordable in 2020–2021.”

However, that’s changing now, thanks to rapidly rising interest and mortgage rates.

Who is suffering the most?

The report explains that the jump in interest rates between December and mid April (and they have since risen even more) is, for buyers, the equivalent to “a 27 percent jump in home prices.”

The result is that first-time homebuyers are being hit the hardest right now.

“At today’s prices, the downpayment that a first-time buyer would have to make on a median-priced home — typically 7.0 percent of the sales price amounted to $27,400 in April 2022,” the report notes. “Without help from family or other sources, this requirement alone would rule out 92 percent of renters, whose median savings are just $1,500.”

Alternatively, the rising prices have “been a boon for current homeowners,” many of whom have managed to tap some of their housing wealth thanks to low interest rates.

The end result is that this situation has widened the wealth gap between homeowners and renters.

Why can’t new construction solve the problem?

The report notes that there is a “strong pipeline” of new construction that should ultimately “help to slow the rise in home prices and rents.” Indeed, new home starts reached a 30-year high in 2021.

However, new construction alone won’t necessarily make the housing landscape more manageable or affordable in the short term for several reasons. First, most new housing is being added at the upper end of the market, the report notes. That’s a fairly common phenomenon, and new housing eventually becomes more affordable housing as it ages, but it still means new construction won’t immediately solve the issue.

Secondly, there are ongoing labor shortages, which have been exacerbated by the pandemic.

And finally, local land-use regulations make it difficult to build new, higher density housing. Some places, such as California and Massachusetts have opted to force local communities to accept higher density housing, the report notes. However, so far “only a minority of states have taken steps to override local land use regulations that limit the size, location, density, and affordability of new housing.”

The report concludes that reforms to allow higher density housing are “essential.”

What about inflation?

The biggest economic story of 2022 has been inflation that has now reached its highest point in four decades. The Fed’s attempts to tamp down that inflation is what’s driving the rise in interest and mortgage rates.

Inflation has “compounded pressures” on financially stressed households, making it harder to afford housing and driving up the cost of materials that go into building homes, according to the report.

What does the future hold?

While affordability remains a major challenge for housing in the U.S., the report ultimately concludes that assuming the Fed can control inflation “the near term outlook for housing demand is largely positive.” Challenges will continue, and it will take time for new construction to catch up with demand, but the report ultimately indicates that the housing industry isn’t headed for disaster.

“Demographic shifts are favorable, unemployment is low, and wage growth remains strong,” the report states. “Conditions on the supply side are also encouraging, with supply-chain delays diminishing and a record number of homes set for completion in the coming months.”

Email Jim Dalrymple II