Demographic Bubbles, Shrinking household sizes And Student Loan Debt - Oh My!

Another effort to explore the causes behind the American housing affordability crisis. It's deeper than most everyone thinks.

Source: gettyimages.com

Anyone who writes on urbanism issues had better write about the American housing crisis. It’s completely changed the tenor of the discourse on our metropolitan areas; it drowns most everything else out.

Most often housing crisis pieces are framed around ways to increase housing production and increasing awareness about the need for a variety of housing types in all communities. That’s all well and good. But I still think most Americans – and really, even most urbanists – don’t fully understand the factors that created our current condition. I think most people understand it as the outcome of a housing industry not supplying the housing that our population demands, and then quickly move on to devising ways to increase housing production.

I’m a big believer in the view that understanding and gaining consensus on why a problem occurred, is necessary for developing the appropriate policy strategies to fix them. Nearly two years ago, I published a post I called The Real Reason For America’s Housing Crisis. In it, I said that a huge, often-unacknowledged factor in the housing crisis:

“The nature of housing demand has changed significantly in the last half century. The national shrinking of the typical household size means demand has dropped dramatically since the peak Baby Boom years of the late 1950s and early 1960s. Average household size in the U.S. in 1960 was 3.38 persons. By 2023 that number fell to 2.55 – a 25% drop. With smaller household sizes, the demand for housing has increased relative to our overall population gains. This has led to a two-fold problem: 1) the housing industry has continued building the kinds of large single-family homes that were most in demand for decades, and 2) the housing industry has been late to respond to rising demand for multifamily rental properties (which lagged in construction until the last 3-5 years or so). They’ve begun to fill the void but haven’t yet succeeded.”

Based on the response from subscribers and readers, that post resonated. It became the second-most popular article in the 2+ years I’ve been writing on Substack.

But I’m here to add more to that conversation, and see how you respond.This post actually started as a comment to another Substack, The Sapiens Project by Alan Mallach. If you haven’t seen his work or heard his name, I highly encourage you to check out his Substack as well as his many books. He’s a retired city planner, perhaps most famously as the housing and economic development director for Trenton, NJ. He’s written a lot about social and economic inequality in American metro areas, and the unique challenges and opportunities for so-called “legacy cities”. Two books of his, Rebuilding America’s Legacy Cities: New Directions for the Industrial Heartland (2012), and The Divided City: Poverty and Prosperity in Urban America (2018), I definitely recommend to those who want to understand more of what I generally cover here.

Last week, Alan kicked off a series on the U.S. housing affordability crisis. He started by discussing the rising number of young adults delaying cohabitation and marriage, and living with parents, as a contributing factor. That’s a fair point. But one point he doesn’t seem to account for is the amount of college student loan debt that many college grads bring to their adult lives. Entering the workforce with a six-figure debt load can certainly diminish your housing choices.

Part 2 of his series was posted yesterday. He makes the claim that low-income persons have dealt with a housing crisis for decades, but housing unaffordability didn’t become a major national political concern until the last 10-15 years, when the percentage of cost-burdened and severely cost-burdened renters rose steadily between 1960-2010, yet has been steady since.

Later on, he says that “the crisis is the product of a structural, or systemic, gap between what it costs to provide rental housing, and what low-wage workers in the United States earn” is spot on. This has been the case for decades, accelerating (IMO) since the 1980’s.

I wholeheartedly agree. That was something I recognized during the Covid pandemic, when I realized “essential workers” were given lots of gratitude, but not an increase in pay. Later I said that the next American middle class already exists, it just hasn’t been treated like it.

But I have a different tack. Affordability has reached crisis levels among middle class households because of demographic changes and preference shifts in housing types. And we have a housing finance and development industry that can’t, or won’t, respond to the changing demand.

I’m not a YIMBY (or NIMBY), but this is where I see the YIMBY case. Over the last 40-50 years the U.S. has witnessed big changes in demographic composition: the rise of Millennials as the new largest age cohort; the appearance of Gen Z on the scene; the aging Boomers who are approaching and surpassing retirement age.

While these cohorts have found a place in America, they haven’t found the homes they desired because no one’s building them. Why? Because household sizes have been continually getting smaller since 1960 - 3.33 persons per household in 1960, 2.55 persons per household in 2020. There’s been a steadily rising demand for decades now for smaller housing types yet we still rely on a system that constructs mostly new expensive single-family homes, and filters other housing downward through middle- and low-income groups.

I see a housing demand/supply misalignment that’s getting worse. Boomers and Gen Xers like myself are catching flack because we have more housing than we need (widowed persons, empty nesters, etc.) but also an expectation for what we should receive for them. Millennial singles, couples and small families didn’t want what the Boomers and Xers had. Nor do Gen Zers, who continue the shift preference toward smaller households. They’re having fewer and fewer children.

I’m no finance expert by any means. But I do think the finance infrastructure that supports housing in the U.S. – the banks that fund residential development – has failed to adapt to the changing demographics and housing preferences. To me this was apparent in the leadup to the 2008 financial crisis, when lenders offered mortgages to millions of credit-risky households, only to see them collapse through foreclosure.

What immediately followed? An extended period of high levels of single-family home rentals across the country. The industry’s expectation was that the single-family home rental inventory would eventually recede, become owned properties again, and return to serving as the filtering fuel – the entry-level and mid-level housing that churns so luxury housing can be built. That’s where the industry makes its money.

But that hasn’t happened.

Much of the blame has been placed on NIMBY homeowners who want to “maintain the character” of their single-family home subdivisions, or on the zoning boards, plan commissions and city councils that have been reluctant to adapt their zoning to meet what buyers and renters really want but aren’t exactly saying. YIMBYs have been effective in getting state-level involvement in local zoning matters, especially as it relates to transit-oriented development. YIMBYs have been successful at ramping up the pressure on local governments through their statewide efforts.

There was a time in the 2010s when I thought that the young, educated professionals flocking to cities bore the brunt of this. I saw many of them showing a strong preference for urban living, in trendy neighborhoods with plenty of great rental units and amenities. My thinking immediately went to other neighborhoods that had the same character but missed out on the urban revitalization era. Those neighborhoods could be, I thought, a part of the solution. Proto-YIMBYs responded by saying more housing should be built in the most expensive areas. It would make housing more affordable for them as well. I took that as a disinterest in revitalization – or worse, being labeled a gentrifier.

But I don’t think the real resistance exists at the local level, or state level. The resistance exists in a financing industry committed to the housing development model that made it wealthy and has yet to find a new model as profitable as the old one.

This is a crisis that’s been decades in the making. It started among low-income households and filtered upward, just as the old filtering model took us from tenements to starter bungalows, to newer and more spacious ranch-style homes, then even newer McMansions. But what happens when student loan debt, demographic bubbles and declining household sizes interferes with a model that’s worked for 75 years? A crisis like we have today happens.

I’m beginning to think it’s a misalignment we long ignored when it hurt low-income households but became a crisis when the middle-class was impacted.