The Economist: Will Housing Ever be Affordable Again?

Perhaps surprisingly, the Colorado metros with the highest percentages of cost-burdened households are Boulder and Pueblo

When I hosted a focus group on housing opportunities for homeless individuals suffering from severe and persistent mental illness, Michael stood up in the audience and said, “Look man, what I really want is a bigger box and to be left alone.” He wasn’t speaking figuratively.      

While Michael represents the most tragic end of the spectrum, a study by Harvard’s Joint Center for Housing Studies (HJCHS) reports 48 percent of all renter households in the U.S. are cost-burdened – meaning they pay more than 30 percent of their income in rent. In many cities, more than 30 percent of renter households pay at least half their income in rent. 

As much as this frustrates civic leaders, the alternative is worse. Communities not challenged by affordable housing typically contend with a lack of jobs. Affordable housing and jobs are interrelated. We hear a lot about housing affordability in Denver, yet according to HJCHS, the Colorado metros with the highest percentages of cost-burdened households are Boulder and Pueblo. Fort Collins and Colorado Springs are also more cost-burdened than the Denver metro area. Clearly, incomes are a major part of the equation.  

Demand outpaces supply in the housing market, resulting in higher prices relative to incomes. When looking at the housing market in general, research by Trulia notes the level of homebuilding is by far the greatest factor creating “for sale” inventories as the housing stock increases.  Homebuilding also tends to increase the supply of rental housing as inventories become more plentiful. Despite single-family housing being built at the fastest pace this decade, we still need more new homes under 1,800 square feet, including condominiums and townhomes. This would bring more people into ownership, thereby lessening demand in the rental market. 

By historical standards, the number of investor owners is increasing. The National Association of Realtors reports only 60 percent of all homes sold were to primary owner occupants. Nineteen percent were sold to investors and 21 percent to second homeowners who increasingly rent their homes in the vacation market. This growing second home and vacation market decreases the stock of rental housing.

In 2015, there were 310,000 new apartments built in the U.S. Most of these are Class A apartments affordable to households with steady, moderate incomes. It appears we are approaching levels of new construction that should begin to soften rents throughout the rental market as the number of privately financed, unsubsidized units are approaching levels not seen since 1988. So far, however, we have not hit that threshold, and every indication is that demand remains strong given millennials entering the housing market and the lack of new smaller homes being built.

While government agencies work hard to create affordable housing opportunities through subsidies and tax credits, the resources are insufficient. The solution should come from the market and at the local level where we, unintentionally, obstruct affordable housing for the cost-burdened.  Housing is like most things in our economic lives: The wealthier (above average income) get the newer things, and everyone else gets what’s more affordable. This is not bad or good — it’s the way life and markets work. As housing and neighborhoods get older, they depreciate physically and tend to move more toward the rental market. The more depreciated the overall neighborhood, the lower the rent.  Historically, many homes “unsuitable” for owner occupancy were reconfigured into several small apartments. This is seldom permitted in today’s world.

Accessory dwelling units (ADUs) are a partial solution. These new versions of “mother-in-law” apartments can be a great source of affordable housing. Taking this notion one step further, many urban lots in Colorado are large enough for tiny homes to be added to the lot. The actual cost of constructing the average tiny home is approximately $23,000, and many homeowners could use the additional income from a rental.

There are numerous other ideas to use obsolete space such as vacant retail facilities or urban lots. Unfortunately, whenever an opportunity being investigated is geared to lower incomes, it takes longer to determine how to achieve adequate private and social returns. This is where government, nonprofits and private for-profit capital need to work together, and where we need to overcome NIMBYism (not in my backyard). 

For several reasons, including home value preservation, we fear people of lower economic status being our neighbors – even when they are teachers or first responders. But if we have the political will to let the market work in more unfettered ways, rents can level off and decline relative to incomes in the future. Hopefully, Michael will get more than “a bigger box” in the process.

Categories: Real Estate