Rethinking The Housing Affordability Crisis, Part 1
Source: curbed.com (Janna Morton)
Let’s talk about the nation’s housing affordability crisis.
I recently downloaded some 2023 third quarter data from the National Association of Realtors. Nationally, NAR reported that the median sales price for existing family homes from July-September 2023 was $406,900, up 2.2% over the previous year. But when you look at the data sorted by metropolitan area, the magnitude – and yet, specificity – of the housing affordability crisis becomes clear. Six west coast metros – San Jose, Anaheim, San Francisco/Oakland, Honolulu, San Diego and Los Angeles – rank among the top eight in median sales price. San Jose leads the way with a staggering $1.85 million median sales price, followed closely by Anaheim ($1.31 million) and the Bay Area ($1.30 million). Honolulu, San Diego and Los Angeles are part of a select group of metros with median sales prices above $900,000.
But it doesn’t stop there. NAR tracks median sales price data for 221 metro areas, of which 53 have a population of 1 million or more people. Large metros like these, particularly on the east and west coasts, make up 18 of the 29 highest median sales prices. From New York to Seattle, from Boston to Miami, home sale prices (and rents) continue to skyrocket, with no end in sight.
So yes, the affordability crisis is a national phenomenon that started out on the coasts and has moved inland. However, if you’ve been following me for any time, knowing that I write about cities and urbanism, you’re probably aware I’ve rarely written about the housing crisis at all.
Why? I’ve spent my entire life living in the Midwest, the nation’s most affordable region. At $304,900, the Midwest trails well behind the median sales prices of the West ($623,100), the Northeast ($467,700), and the South ($369,300). I’ve lived in the Chicago metro area for more than 30 years. Chicago’s the third largest metro in the U.S. after New York and Los Angeles, which also rank eighth and 20th respectively by median sales price. Meanwhile, Chicago has the 89th highest median sales price ($365,100). Chicago is perhaps the most housing-affordable big metro area in the nation.
I live in upper-middle class suburbia, where housing costs are higher than I’d like, but not obscene. In Chicago, there are areas with super-high prices and rents, but there are still very affordable, very good neighborhoods available. I’d wager that Chicagoland’s negligible growth rate has as much to do with our costs as anything. The same can be said for all of the Midwest.
I’d also add that I don’t own, I rent, and I’ve been in the same place for 14 years. Bottom line, my housing situation is fine; it could be better, but I don’t feel necessarily constrained because of high housing costs. I make a good salary as a department head of a suburban municipality, and my wife makes a good salary as a health care professional. I honestly feel I could live nearly anywhere I would want to in this market. That’s the great advantage of living in the Midwest.
And that’s just it – living where I do and seeing that housing costs might reflect decisions made by individuals more than broader economic forces, gives me a different perspective on housing affordability. But it might have a lot to do with my unique perspective on today’s housing crisis. It simply hasn’t touched me personally.
I know that the affordability crisis hits many people in many other markets very differently. I understand the pain felt by people who see their housing dream slipping away. I recognize the impact of the affordability crisis on cities. More cities are becoming victims of their own success, where only the wealthiest residents can afford to live in them.
That’s why I endeavor to understand how this happened and how it can be fixed.
The Housing Crisis – Conventional Causes
There are some conventional explanations for the housing affordability crisis in America. They generally have a basis in economics. Here are the generally accepted ones I find:
The post Great Recession collapse in housing production. The easy financing of the 2000s housing created an oversupply of housing. However, after 2008, homebuilding came to a screeching halt for the next 5-7 years. The collapse in housing construction created a supply deficit that only worsened once Millennials, the largest generation cohort in American history, sought to establish their own homes. By one estimate, the nation is short some 3.2 million homes based on household formation and homeownership rates by age cohort.
Zoning, specifically widespread single-family zoning. Zoning came into being as a tool that would separate land uses (i.e., separating housing from manufacturing) to improve quality of life. Zoning became popular as builders and residents saw it as an effective tool of exclusion, either by race or class. Zoning also set in place the defensive, protect-property-values mindset known as NIMBYism.
High interest rates, low inventory. Perhaps a more contemporary explanation for high housing prices now. High interest rates reduce the ability of developers to get the financing needed for construction. Low inventory means less housing choice for buyers or renters.
Excessive government regulation raises the cost of housing production. The entitlement process, public hearings, permitting, and the delays they create, drives up the cost of housing.
Household incomes haven’t kept up with housing costs. There’s been widespread economic growth over the last 25 years, but that hasn’t always been reflected in household incomes.
A reliance on “filtering” to create affordable housing. Filtering is the process of new housing coming online that appeals to buyers, allowing them to move upward and sell their home to someone else. A lack of construction keeps the filtering process from working, and raises prices on homes that would’ve otherwise been sold at a discount.
The Housing Crisis – Unconventional Causes
There are, however, a number of explanations that are rarely discussed but carry as much weight – or more – as economic explanations. These explanations tend to be social, behavioral, or cultural in nature. Here are some:
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 3.33 persons. By 2023 that number fell to 2.51 – 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. Also, both points above point to a general trend toward more urban qualities being desired by buyers and renters.
The financing tools for creating housing supply hasn’t changed as much as the demand has changed. Banks were quite comfortable with the financing models that made suburban subdivisions work, until they didn’t. The rental-to-homeowner ratio is changing.
Aversion to subsidized housing. The divisive, race-driven implementation of low-income public housing, beginning in the 1930s, turned middle class support away from subsidized housing. Concentrated poverty and social isolation gave public housing – and its residents – an unfortunate stigma. The general failure of large-scale public housing led to its disappearance, without an acceptable alternative. Housing vouchers were meant to serve as the key means to making housing affordable to many, but discrimination against voucher users is rampant – and generally unenforceable.
Aversion to gentrification. Increasingly the housing supply that new young buyers and renters want is in cities, but 1) such inventory is limited, and 2) people want to avoid the “G” tag. There’s a willingness among young buyers and renters to move into stable and successful urban neighborhoods, but less so to engage in improving struggling neighborhoods.
“We want what we want, where we want it.” Related to the gentrification point above, this drives prices up for the most in-demand city neighborhoods. Developers are quite fine with meeting that demand when possible. Affordability gets left on the sidelines.
Geography. The metro areas of New York, Los Angeles, the Bay Area and Seattle have always struck me as being far more geographically constrained than people give them credit for being. New York City was founded on the small island of Manhattan. It’s surrounded by ocean, bays, rivers and the adjoining wetlands. Los Angeles has less water constraints but has mountains and desert. The Bay Area and Seattle have similar water constraints as New York as well as the mountain constraints of Los Angeles. When places are in high demand, but buildable land is in short supply, prices are bound to rise.
Now let’s compare the conventional, economic causes with the unconventional, social/behavioral causes. To my eye, the conventional causes are explanatory efforts to rationalize the unconventional causes I list above. The unconventional causes could be viewed as either rational or irrational. However, outside of the geography explanation, the others are based on the preferences and biases of individuals in the homebuyer or renter market.
Each social/behavioral preference or bias – expressing a preference for living in a smaller household even as our financial system is generally geared to creating larger ones; avoiding admittedly less desirable areas for fear of being near low-income or subsidized housing residents, or sparking the flames that sets off gentrification; and insisting that more housing construction, where you want to live, is the answer – shrinks the universe of potential homes to consider, and raises prices in the places that people who make those choices choose to look.
When it comes to housing, our preferences and biases shape demand, and the institutions and structures that supply it. And this is a theme I will explore in future posts on the topic.