Discussions held in the past month, spurred by increasing housing prices, demonstrate an urgency to solve the affordable housing crisis with policy. The Bipartisan Policy Center (BPC) addressed the nation’s housing supply in their State of the U.S. Housing Market event Sept. 1. Experts concluded that housing unaffordability has reached a crisis state, but the low-income housing tax credit (LIHTC) and the expansion of housing choice vouchers can increase housing supply.
On a similar note, Harvard’s Joint Center for Housing Studies (JCHS) addressed on Sept. 16 the impacts of inflation, unemployment and rising interest rates on for-sale homes and rental housing markets. It concluded that regulatory reform, housing subsidies and emergency assistance are needed.
During the BPC State of the U.S. Housing Market event, experts from Zillow and the National Multifamily Housing Council (NMHC) discussed the for-sale and rental housing supply. Overall, the housing supply has been a concern since 2010, a result of the Great Recession. Both Jeff Tucker of Zillow and Caitlin Sugrue Walter of NMHC agreed that the shortage of entry level homes is a result of the decline in construction and the shutdown of the home building industry during the Great Recession. Both experts said that the United States has a structural deficit of homes, and this deficit worsened due to lack of housing supply going into the pandemic.
Drawing on Zillow research, Tucker said that in the for-sale housing market, sellers are now asking for more while buyers are bidding less, which is a consequence of homeownership now costing 60% more than last year. Walter said that in the renter housing market, rent has increased by 4.5% year over year and 4.3 million apartments are needed by 2035 to meet demand. The United States needs 600,000 homes at different price points to combat the current rental shortage.
The shortage of entry level owner-occupied homes is driven by land use and zoning regulatory barriers on single-family homes. This presents significant obstacles to developers constructing such starter homes. A recent New York Times article by Emily Badger says the absence of these homes contributes to the housing crisis. Many communities have replaced smaller, more accessible single-family homes with larger, more expensive homes because there are so many costs to the developer. Badger also discusses the rising land costs, construction costs, government fees and local rules. She includes the community preferences that deter builders, such as rules banning vinyl siding or requiring two car garages. Tucker also mentions these local zoning rules by citing the example of single-family zoning that requires a minimum lot size as a developer roadblock.
On a looming recession, fear of a housing recession is not unfounded, however unlike the 2008 recession, homebuyers today have good credit and affordable mortgages. Tucker says that if a recession were to happen, it would not be a recession triggered by the housing market. In 2008, credit issues occurred due to mortgage foreclosures, and this was propelled by bad lending practices. Homebuyers today have fixed rate mortgages with a low chance of credit risks, and delinquencies and foreclosures are at historic lows.
The experts from Zillow and NMHC gave two improvements for the U.S. housing market. A developer driven supply solution is to enhance the LIHTC and establish a middle income housing tax credit (MIHTC) to make the construction of homes affordable to low-income households and those households earning just above traditional limits feasible. On the rental demand side, the housing choice voucher program should be expanded to accommodate those who cannot rent without government assistance.
The JCHS released a report in June 2022 on the state of the nation’s housing, however, the housing market has changed since then. The report was based on data from 2021 and there have been substantial changes in the economy and the housing market in 2022. Generally, increasing inflation, interest rates and unemployment rates have contributed to the higher costs of housing in the United States. The JCHS update on the State of the Nation’s Housing included the following changes to the housing market and economy. Nominal home prices reached new highs at a 21% year-over-year increase in spring 2022 while rents in large metropolitan markets increased by double digits, in some metropolitan markets an increase of 20%. The deficit of the housing supply and increase in demand caused vacancy rates to fall to a new low not seen nationwide since 1984. The inventory of for sale homes hit an all-time low in January and February with 850,000 existing homes for sale. Investors have contributed to the supply deficit by purchasing 28% of single-family homes in the first quarter of 2022.
The JCHS says that a primary solution is to increase housing construction; however, many developers have felt the rising construction materials costs, which has led to a record number of homes still under construction. Housing construction has historically not caught up with household growth for a decade now, according to JCHS.
To solve these affordability issues, JCHS emphasizes the importance of several strategies. First, implement regulatory reform at the state and local levels that allow developers to build homes affordable to households earning just above traditional affordable housing income limits. Next, expand and enhance housing subsidies on both the supply and demand side, specifically for the lowest income households. Governments on the state, local and federal level should continue to implement emergency assistance used during the pandemic to prevent evictions and foreclosures.
Evidence from BPC and JCHS have demonstrated that the affordable housing crisis has reached a point where policy intervention is needed. Demand for housing is outpacing the housing supply, and developers need a solution that makes construction more feasible. Inflation, increasing interest rates and unemployment rates have caused home prices to reach historic highs. Both webinars provided research-based evidence for enhancing the LIHTC, enacting the MIHTC and expanding housing choice vouchers as well as emergency rental assistance. Recent congressional hearings have also shown bipartisan attempts to solve the urgent matter of affordable housing. Congress is expected to pass a continuing resolution to fund the government until Dec. 16, which provides an opportunity for an omnibus spending bill. This spending bill, expected to be bipartisan, could create a vehicle to extend expiring tax provisions, including the 12.5% LIHTC allocation increase that expired at the end of 2021. With the Senate and the House back from recess, a year end tax bill could also provide a vehicle for affordable housing policy and solutions to the aforementioned issues as well as housing provisions not included in the Inflation Reduction Act.