America’s Affordable Housing Crisis

Several factors are driving the nationwide lack of affordability. Low housing inventory is keeping prices high while low wages are preventing advancements toward homeownership. On top of that, labor shortages, high land prices and restrictive land-use policies are hindering construction, particularly at the middle and lower end of the housing market. Let’s review each contributing factor:

Home price-to-income ratio: Home prices are rising faster than income in 80 percent of U.S. markets. This significant ratio gap is creating a lack of affordable housing for millions across the nation. The Department of Housing and Urban Development recommends households spend no more than 30 percent of their monthly gross income on housing. Those who spend more are considered cost burdened and run the risk of creating financial hardships. According to Harvard University’s Joint Center for Housing Studies’ 2019 The State of the Nation Housing report (“Harvard Report”), 38 million households nationwide are paying more than the recommended percentage. High home prices, rising rent and comparatively low incomes have made it increasingly difficult for many potential homebuyers to save for a down payment and qualify for a mortgage loan.

Lack of middle-market real estate: Housing inventory priced between $200K and $750K, which makes up 60 percent of the market, fell to a record low in 2017. Since then, the demand for middle-market housing has steadily increased while supply remains relatively unchanged. U.S. census records reveal the largest adult generation will soon be millennials. Between the ages of 23 and 38 years old, these young adults are in their prime homebuying years. Still coping with the financial challenges of student loans and credit card debt, millennials are foregoing luxury high-rise homes in major cities. Instead, they’re exploring the suburbs in search of affordable housing.

Meanwhile, the primary focus of housing construction is at the higher end of the market. New housing starts are expected to remain low until 2022 or later. At the same time, according to Freddie Mac the 30-year fixed mortgage rate is holding at historical lows. As a result, existing homeowners are in no hurry to move. Some are refinancing to capitalize on rising equity, while others are taking advantage of rental investment opportunities.  

Labor shortages: The construction industry lost over 1.5 million workers shortly after the 2008 recession hit, and as of today, most have never returned. Those remaining are nearing retirement, while upcoming generations are showing a lack of interest in the field. A recent survey conducted by the Associated General Contractors of America found that 80 percent of construction firms have been unable to hire skilled workers to fill hourly craft positions. The impact: delayed construction and substantial increases in both employment wages and building materials.

High land prices & land-use restrictions: The price of land and land-use restrictions are also contributing factors. The Harvard Report revealed the national median price of residential land per acre for single-family use jumped 27 percent from just over $159K to $203K during the years 2012 to 2017. According to the report, the largest increase was seen primarily in the West: Nevada (158 percent), Colorado (96 percent), California (88 percent), Arizona and Utah (81 percent). Residential zoning and other land-use requirements also impact the development of housing. The location, type, dimension and number of houses have historically been regulated by state and local governments.

Solving the Affordability Crisis

In an effort to solve the affordable housing crisis, local government officials across the nation are implementing legislation. Oregon, with the passing of House Bill 2001, is the first state to eliminate exclusive single-family zoning, allowing developers to build multi-family housing in areas previously zoned exclusively for single-family homes. Minneapolis, Minnesota is following suit as the first major city to do the same. Minneapolis 2040 is a comprehensive plan that, amongst other things, will eliminate zoning restrictions and expand opportunities to increase the housing supply. California implemented the Housing Crisis Act of 2019, which sets out to reduce the time it takes to obtain building permits and curbs the government’s ability to restrict housing development.

Government officials aren’t the only ones stepping forward. At the beginning of the year, Microsoft and Amazon, both headquartered in Washington, pledged millions of dollars in loans and grants to advance the construction of middle- and low-income housing in King County. In recent months, Apple, Facebook and Google joined in the efforts, committing a combined $4.5 billion specifically for housing initiatives in the San Francisco Bay Area and Silicon Valley. The Wells Fargo Foundation also launched a 20-million-dollar Housing Affordability Breakthrough Challenge designed to address problems in housing; namely construction, financing and support services across the nation.

Great efforts have been made to address the housing affordability crisis. We’re seeing policymakers and organizations across the nation implement new solutions – eradication of zoning restrictions, time reduction in securing building permits, and substantial loan and grant contributions. But is it enough? Housing affordability is an economic issue that will require continued efforts at the local, state and federal level. Well-designed policies and procedures will be vital in solving the nationwide affordability crisis. As the fight to protect and preserve the right to affordable housing continues, Ideal Title remains a trusted and valuable resource in your local community. We understand the value of homeownership and we’re here to be a part of protecting the American Dream.