As the problem of housing affordability worsens across the country, higher-density development such as townhomes can open the door for many prospective home buyers.Lexington Homes
The nation’s housing affordability crisis might very well come to a head this year with Not In My Backyard proponents facing off against the foot soldiers of the Yes In My Backyard movement.
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So how did we get to this point? A shortage of housing inventory, a deepening construction labor shortage and high land costs are fueling the crisis, according to Robert Dietz, chief economist for the National Association of Home Builders.
“Affordability is getting worse,” he said. “We’re definitely in the first half of it.”
The NAHB/Wells Fargo Housing Opportunity Index shows that the peak of housing affordability was reached in 2012 when 78% of new and existing home sales were affordable for a typical family based on their incomes and current interest rates. By the third quarter of 2018, that score of 78 had plummeted to 56, meaning only 56% of home sales were affordable.
NAHB’s projections show that in 2019 the index is likely to fall below a level of 50.
The rise in home prices and mortgage rates has led to the monthly mortgage principal and interest payment rising more quickly than family income, eroding home buyer affordability.
Dietz says numerous potential home buyers retreated from the market in the second half of 2018 when mortgage rates neared an average basis of about 5%. The ongoing growth in home prices has hamstrung the demand.
“We have multiple years where home price growth was rising faster than income growth,” Dietz said. “That was occurring because there was a lack of resale inventory as well as a lack of new construction inventory, which in turn was caused by a labor shortage, lack of housing lots and other kinds of higher construction costs. So it’s been on this kind of a slow decline. 2018 was the year where there was a really noticeable effect on housing demand.”
Low-cost rental housing also is becoming increasingly hard to find. While renters’ median housing costs rose by 11% between 2001 and 2016, their incomes fell by 2%, according to Harvard University’s Joint Center for Housing Research.
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“Typically, people will rent before they buy,” said Dietz. “If rents are high and the rental market is tight, then it becomes harder for those households to save for a down payment and buy a home.”
Frank Nothaft, chief economist for CoreLogic, a data analytics company, said lots of people are buying homes, but it has gotten much more financially burdensome for first-time home buyers to buy homes, especially in high-cost markets.
He said, “If we look around the country in some of the high-cost markets along the East Coast and West Coast, such as Boston, New York, Washington, D.C., Seattle, San Diego, San Francisco, Los Angeles and Portland, Oregon, it has become more challenging for a young first-time home buyer Millennial family to be able to afford to buy. It’s not to say none of them are buying. Certainly some of them are doing very well income-wise and can afford to buy, but at the margin, it’s become more challenging.”
Nothaft said that if you combine the effect of the rise in home prices with the rise in mortgage rates over the last year, that works out to about an 18% increase in the monthly principal and interest payment to buy the same house today that you could have bought last year with the same amount of down payment.
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“The typical family has not had income growth of 18%,” he said. “Some lucky families had it, but your typical family is not seeing that.”
Dietz believes the housing market will continue to have sluggish growth this year in single-family construction and relatively flat apartment construction.
“It’s ultimately going to be about how we use land in this country,” he said, predicting that 2019 will be the year where those who are in the Not In My Backyard (NIMBY) movement, opposing new development, are going to be increasingly at odds with the Yes In My Backyard (YIMBY) movement, supporting new housing.
“A lot of the people who oppose additional construction, whether it’s for single-family homes or townhouses or apartments, are often existing homeowners who have a home and are not a prospective first-time homebuyer,” said Dietz. “That’s why I think the YIMBY movement is going to have growing support among Millennials and ultimately Generation Z, who are trying to get a toehold in the rental market and become first-time home buyers. That’s really the pivot point where the housing market is at.”
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Of course, some affordability issues are more complex, Dietz said, driven by geography in some higher-cost markets.
“If you’re land constrained because you’re up against water or the market is constrained by mountains, you’re really running low on land, that contributes to the factor,” he explained. “But some of it is policy driven. If there are large impact fees or lots of different building code requirements or zoning laws that require you to use more land than the buyers actually want in terms of a yard, those factors make it more expensive to develop housing.”
If geography is the case, Dietz said there are some solutions.
“If it’s a high-density area where it is geographically constrained because of water, then we need to be looking at more high-density, owner-occupied housing,” said Dietz. “That would include townhouse construction.”
Markets that can add housing at an affordable level, particularly entry-level townhouses, are the markets that are going to grow, he said.
“Those are the markets that are going to allow young people to establish roots and buy a home and grow a family,” said Dietz. “Ultimately, that’s going to be good for those local businesses because they are going to be able to grow their labor force in a market that’s suffering labor shortages in just about all sectors.”