Availability of Affordable Housing Continues to Decline

March 21, 2022

By Joseph Rubin

Housing affordability in America has been declining for years, and the social and economic impact of the pandemic has exacerbated the problem. A recent survey by the Pew Research Center found that 85% of respondents were concerned about the availability of affordable housing, and 49% considered affordable housing a major concern. Among younger Americans and those living in urban areas the concern is even higher. The affordable housing crisis isn’t just about households living beneath the poverty line, although of course that is of great concern. A significant and growing portion of middle-income households is finding home ownership, as well as high-quality rental apartments, out of reach. This article will bring together data from a variety of sources to emphasize the immediate need for government and the real estate industry to address this critical social issue for America.

Data Reveals the Extent of the Affordability Crisis

As reported in our recent article on current real estate trends, home prices, as measured by the Case Shiller national home price index, rose about 19% in 2021 and over 30% in the last two years. According to Federal Reserve Economic Data, the median home price in the United States rose to $408,100 in the third quarter of 2021, up from $358,700 a year earlier. The median home price almost doubled in the last decade, during a period of very low wage growth. In urban centers and fast-growing Sun Belt cities, home prices have risen even faster. According to the National Association of Realtors, prices rose more than 10% in 67% of metropolitan markets in their data set.

The National Association of Home Builders/Wells Fargo Housing Opportunity Index, which measures the ability of households to qualify for a 30-year mortgage without spending more than 25% of their income, fell from 63.2 in the fourth quarter of 2019 to 54.2 in the fourth quarter of 2021. Looking at the problem from a different angle is the NAHB’s 2022 Priced-Out Estimates, which concludes that 87.5 million households are not able to afford a median-priced home. That study assumes a 10% deposit, a 30-year mortgage at 3.5%, and a home payment to income ratio of 28%. Shockingly, this study means that almost 70% of American households have been priced out of a buying a home, and that is before reflecting rising mortgage rates that approached 4.0% earlier in February. The study shows that for every $1,000 increase in home prices, another 117,932 households are priced out of the market. And each quarter of a percentage point rise in mortgage rates (say from 3.5% to 3.75%) excludes another 1.1 million households! According to the St. Louis Fed, mortgage rates increased from 3.09% in mid-March 2021 to 4.16% last week, an over one percent increase, further preventing American households from achieving home ownership. 

The apartment and single-family rental markets do not provide much relief. Yardi Matrix estimates that apartment rents nationally grew by about 18% in 2021 and some cities (e.g., Phoenix, Orlando, Las Vegas, Austin) experienced well over 25% rent growth. Single-family rental rates grew at their fastest pace in 2021. A recent CREFC Housing Affordability Report indicated that half of all rental households in the U.S. are cost-burdened, using a 30% rent to income benchmark. Per a Brookings Institution study, more than 10 million renter households are spending more than 50% of their income on rent. The Joint Center for Housing Studies of Harvard University has mapped the decline in low-rent housing units (less than $600 per month) since 2011. The analysis found that in seven states the number of low-rent units fell more than 40%, with around 50% declines in Texas, Nevada, and Colorado. The number of low-rent units fell 39% in Florida and 24% in California and New York.

The Drivers of the Crisis

According to a recent IRR Viewpoint 2022 report, “we continue to systematically under-produce housing.” After the housing crisis almost 15 years ago, home builders were understandably skittish about ramping up development volume. As a result, it has taken too long to restore the historically required pace of new housing supply to meet demand. HUD and the Census Bureau reported that there were 1.6 million housing starts in 2021, an increase of about 16% over 2020, of which 1.1 million were single family homes and 530,000 were multifamily homes. However, the uptick in home building is fairly recent. For comparison, back in the 1980s and 1990s annual starts were around 1.5 million homes per annum. But from 2008 through 2020 the average annual starts were below 1 million homes. During this same period, 72 million Millennials were attempting to create households. And Gen Z is now emerging as another large population cohort entering the rental housing market. The local supply-demand imbalance is exacerbated when considering the on-going migration between regions.

The supply of homes for sale has also dropped as renters and owners of starter homes are priced out of larger, higher quality dwellings as their families – and their desire to work from home -- grow. The National Association of Realtors estimates that 1 million renter households were priced out of the home ownership market in 2021. A recent Marcus & Millichap report on housing indicated that there were only 850,000 homes for sale nationally in January, as compared to an average of 1.7 million homes at that time of year in the five years prior to the pandemic. This lack of available single family and rental units has put even more upward pressure on prices.

Further demand for rental and owned homes is in the wings. Since the Great Recession, we’ve watched the phenomenon of young adults (ages 25 to 34) living at home with their parents. Staying home reached a peak early in the pandemic: Almost 18% of the entire age cohort according to the National Association of Realtors. And it has only fallen to 17% recently. Unless these young adults choose to remain with their parents even as they marry and have children, there will be tremendous additional demand for housing that currently cannot be met.

Home prices are also higher because of rising land, construction materials, and appliance costs. This is creating a vicious cycle as higher building costs result in higher prices and rents even as supply is increased. And it is a particularly difficult to create truly affordable housing for lower income families without some government support. Moreover, mortgage underwriting criteria remains fairly strict and many families do not have the savings to cover a 10%-to-20% down payment on an average-priced home; especially the Millennial generation that hasn’t had as much opportunity to save because of weaker job markets after the Great Recession and because they have been paying off student debt. As noted above, as mortgage rates begin to rise in combination with higher prices and down payment requirements, the affordability crisis reaches higher into middle-income households.

Seeking Solutions

With historically high inflation and continuing supply chain constraints, envisioning an economical way to accelerate private sector construction of affordable homes and rental apartments becomes more difficult. One would assume that part of the solution would be federal and local involvement. Of course, there are many programs across the nation and the “Consolidated Appropriations Act, 2022” just passed by Congress provides additional funding to many HUD initiatives. There have been many successful community-backed successes at the local level; a collaborative sharing of best practices would certainly be beneficial. Public-private partnerships that incentivize developers and support community growth are critical to making meaningful progress against the combined headwinds of lack of supply, inflationary pricing pressure, and the potential of higher financing costs. Higher density design is gaining momentum in some communities while facing significant resistance in others.

One way to accelerate housing development is the reuse of existing properties that are struggling financially. In today’s market, one thinks of converting malls to residential use, which would typically involve demolishing the current structure and building anew. Another area receiving recent attention is office-to-multifamily conversion. The combination of aging building obsolescence and reduced demand due to changing patterns of office use has forced owners to consider changing course. A recent study by the National Association of Realtors concluded that office-to-residential conversions were economically feasible in 22 of 27 metro markets analyzed. The study estimated that 43,500 housing units averaging 1,000 square feet could be created if 20% of currently vacant square footage in these markets was converted. The markets with the most opportunity were New York, Chicago, and Los Angeles. The report included several case studies of successful conversions around the country. These conversions need local government support for rezoning and community infrastructure. The problem is that many of these conversions are complex and expensive, and therefore require Class A rental pricing. That works for the project’s owner but does little to improve the supply of affordable housing.

National and state legislators have many issues to tackle, not the least of which are the pandemic and geopolitical volatility. Housing affordability may have slipped a notch or two in priority during the past two years. But during that same period the lack of affordable housing has significantly worsened and reached a far larger percentage of American households. The inability to reside in safe, comfortable, and affordable housing, a fundamental component of American life, will have a sustained impact on the social fabric of the nation.

About Joseph Rubin

Joseph Rubin has experience working with real estate transactions, governance and reporting and distressed debt restructuring.