By Daniel McCue, Senior Research Associate of the Harvard Joint Center for Housing Studies
November 2, 2022
A sharp rise in housing costs over the past year has stressed renters and pushed homeownership out of reach for many aspiring homebuyers in Greater Boston. This is one of the clear findings coming out of the Greater Boston Housing Report Card 2022. Indeed, as rents around the region soar, the combination of record-high house prices and sharp increases in mortgage interest rates has greatly reduced the number of renter households that can afford the typical home in the region―or even the typical low-end home. Moreover, the drop in affordability has particularly affected Black and Hispanic households, which threatens to extend significant existing racial and ethnic inequities in the region’s housing market.
Housing in Greater Boston is expensive and has gotten significantly more so over the past year. As the Report Card notes, renters in the region―who already pay some of the highest rents in the country―saw asking rents on the typical unit increase 11 percent in the past 12 months. Meanwhile, conditions have gotten extremely challenging for those looking to buy a home. At last measure in September 2022, the value of a typical home in the Boston metro area had risen to $652,000, which is $57,000 higher than a year ago. At this price, the cash requirement for a buyer for even a low–down payment loan (3.5 percent) with relatively low closing costs (3.0 percent) would be over $42,000 dollars (Figure 1). Even low-end homes―those in the bottom third of all home values―in Greater Boston had a typical value of $459,000 in September, according to Zillow, which is up by more than $40,000 from a year earlier. Assuming such a home were available for sale, a potential buyer would need fully $30,000 to cover closing costs and a modest down payment.
But even if a buyer can make the initial cash hurdle to purchase a home in Greater Boston, the steep increase in mortgage interest rates over the last year coming on top of the rise in home prices has made the ongoing monthly payments even more costly. Between September of 2021 and September of 2022, interest rates on a 30-year mortgage more than doubled, rising from 2.9 percent to 6.11 percent. This, in combination with the rise in home prices, lifted monthly mortgage payments on the typical home up $1,400 per month over the past year to $3,800 by September 2022. Adding in property taxes and insurance costs on that same typical home, total monthly owner costs topped $5,000 per month in September of 2022. Costs for low-end homes were similarly affected. Monthly mortgage payments on the typical low-end home in Greater Boston jumped by $1,000 per month, to $2,700 in September. Adding in taxes and insurance, total monthly owner costs on this home were fully $3,600.
The rise in costs of homeownership have greatly increased the income a potential buyer would need to be able to afford payments on the typical home in Greater Boston. Assuming standard underwriting terms that would allow buyers to spend no more than 31 percent of household income on monthly housing costs, a potential buyer would need to have an annual household income of at least $196,500 to afford monthly payments on the typical home in the area in September of 2022―up from $137,100 a year earlier. And for the typical low-end home in Greater Boston, the associated monthly costs of $3,600 would only be affordable to a household with an annual income of at least $138,000.
As such, rising costs have reduced the already modest number of renters in Greater Boston who can afford the typical home. According to the recently released 2021 American Community Survey, a mere 58,900 of the Boston metro area’s 724,000 renter households (1 in 12) had the annual income of $196,500 or higher that is needed to buy the typical home. Meanwhile, just 125,000 renter households (1 in 6) had the $138,000 income needed to afford the typical low-end home in Greater Boston. These figures suggest that the number of renters who can afford the typical home has been cut in half over the past year, while the number able to afford the typical low-end home in the area is down by nearly 100,000 households.
The recent reduction in renter households able to afford to own a home in Greater Boston was most pronounced among Black and Hispanic households. In all, between September of 2021 and September of 2022, the number of Black renter households with incomes high enough to afford payments on the typically priced home in the area dropped 65 percent―from 6,000 households to just 2,100 (Figure 2). Furthermore, the number of Black renter households with incomes high enough to afford the low-end home also dropped 59 percent over the past year, from 14,400 to just 6,000. Meanwhile, the number of Hispanic renter households who could afford the typical home in the area also dropped 61 percent, from 12,200 households a year ago down to roughly 4,700 in September 2022. The number able to afford the low-end home in Greater Boston also dropped nearly in half (47 percent), from 23,000 to 12,200. As shown in Figure 2, these declines outpaced those for non-Hispanic White and Asian renter households.
The disproportionately large declines in ability to afford homeownership among Black and Hispanic households threatens to lock in existing racial inequities in the housing market―inequalities that derive from the legacy of excluding generations of historically disadvantaged groups from being homeowners. Indeed, in addition to its benefits to stability, owning a home has been the primary means for families to build wealth that can be held and passed on to future generations. Supported by home equity, the median wealth of homeowner households was $254,900—about 40 times the $6,270 median for renter households. And in terms of homeownership, the inequalities between Black and Hispanic households and White households are particularly wide in the Greater Boston area. Compared to the 70 percent homeownership rate for White households, the homeownership rate among Black households in the area was just 37 percent and the rate among Hispanic households was just 31 percent. This local homeownership rate for Hispanic households is 20 percentage points below the nationwide rate among Hispanic households, while the local rate for Black households is 7 percentage points below the nationwide rate and the local rate for White households is 3 percentage points (Figure 3). Clearly, increasing homeownership opportunities for Black and Hispanic households in the area will be key to narrowing the wide racial gaps in homeownership and addressing greater racial inequities in wealth. But as mortgage rates escalate, housing costs rise, and inflation drives up costs and hinders the ability to save for a downpayment, becoming a homeowner is becoming more difficult.
For policymakers and practitioners looking to address the region’s wide racial inequities in homeownership, higher costs make efforts more difficult and costly. It is clear that, in order to meaningfully address homeownership rate gaps in the Greater Boston area, opportunities must be extended to more Black and Hispanic households with more modest incomes at a time when homebuying is becoming limited to those with the highest incomes. To reach households of more modest means, the numbers above suggest homeownership programs not only need to provide enough financial assistance to cover the down payments, but also additional funds to drive down monthly costs to sustainable levels that are not overly burdensome to the future homeowners. Such a level of assistance would be substantial, but necessary to make a meaningful difference on homeownership rates and overall housing equality in Greater Boston for people of color.
As the Greater Boston Report Card 2022 confirms, the rise in home prices and interest rates over the past year has made opportunities for affordable homeownership – and all its related benefits – scarce across the region. This has been especially true for Black and Hispanic households, whose homeownership rates are already particularly low in Greater Boston. Rising costs have made the work of reducing the longstanding racial homeownership and wealth gaps much more difficult and costly than a year ago. Indeed, significant efforts and investment will be needed to reduce these persistently wide gaps and achieve more equity across the region’s housing markets.