The shortage of affordable housing in many areas of the U.S. is a catastrophe for renters and those seeking to purchase. The lack of affordable housing is an insurmountable obstacle to those who would otherwise purchase a home; and those folks–mostly in the 25-45 age group–have no alternative to renting, which increases the demand for an inadequate supply of rental units.
Media coverage and the slick characterizations offered by some politicians lead many to believe the culprit to be the Federal Reserve, which has raised interest rates by over five percentage points during the past 16 months. While those rate hikes have unquestionably had an impact on mortgage rates and the cost of buying a home, blaming the Fed for the lack of affordable housing is naively myopic.
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While interest rate fluctuations impact market dynamics, they represent merely one element of a number of factors that have created the current lack of affordable housing. To be sure, there were periods of higher mortgage interest rates in the 1970s, 1980s, and 1990s. People were able to afford those higher mortgage rates because the other factors that created the current catastrophe were not present. Specifically, those factors include the following:
1. Inadequate Infrastructure. There has been insufficient new infrastructure completed to maintain the development of residential real estate at a pace necessary to meet the demand created by a growing population. In many areas, the construction of new infrastructure has been accomplished through various mechanisms (like Melo-Roos bonds in California) that pass the cost of infrastructure development on to the homebuyer and add significantly to the costs of the new home.
2. The Oligarchy of Home Builders. The post-World War II home building boom ushered hundreds of small developers who quickly reacted to consumers' demands, preferences, and cost sensitivities. These home builders were in business to make a nice living for themselves and their families and to contribute their efforts and energies to people achieving the "American dream of homeownership." Starting with the 1981-1982 recession and continuing through the 1990s, there was a significant consolidation of developers in the residential real estate industry. Small and medium-sized builders were either driven out of business or acquired by larger developers. This cycle continued well into the 21st Century. Hence, the residential building industry is now controlled by a few, very large, publicly owned companies. Those companies are able to control pricing. Furthermore, their overriding objective is to maximize profits for shareholders and salaries for corporate officers.
3. Investors Purchasing Scarce Supply. Individual and institutional investors have for many years "competed" in the market with new home buyers. The investors have unequal purchasing power and are able to acquire residential properties that would otherwise be sold to younger adults and families. The investors then either rent or resell the property at a profit. Not only does this increase prices, but also it undermines the supply of homes available to the average home buyer.
4. Average People in the 25-45 Age Group Cannot Afford to Buy. In the late 1940s, 1950s, and 1960s, the middle class was assisted in purchasing homes through the GI Bill. People went from the military to college or trade school without having to pay tuition and then had government assistance in purchasing a home. Since the end of the draft in 1973, the percentage of people who have these benefits available to them has dwindled. At the same time, most college graduates are saddled with enormous student debt. And there has been low wages and little upward mobility among those in the 25-45 age group. These people do not have the ability to save for a down payment or qualify for a mortgage loan.
These factors can only be corrected through government action. The governmental policy focus must return to facilitating the accomplishment of the American Dream of home ownership. Federal, state, and local governments must undertake a coordinated and concerted effort to provide the infrastructure necessary for an adequate level of new home development. That infrastructure cannot be borne by the home buyers if a sufficient supply of affordable homes is to be developed.
The monopoly enjoyed by the oligarchy of large, publicly traded home builders must give way to the resurgence of smaller developers who are focused on building homes for the middle class. Federal and state incentives can be fashioned to attract a new generation of developers, who are capable of achieving the steady volume of homes necessary to meet the demand. Likewise, federal, state, and local restrictions should ensure that home buying is reserved for those who intend to live in the home–not investors.
Government policy must also address the ability of those in the 25-45 age range to afford home ownership. There must be reform in the cost of college and trade school education and relief to those who are already burdened with a stifling amount of student debt. Likewise, there must continue to be a concerted government effort to facilitate wage growth in all sectors. People deserve to be paid a living wage, whether that is accomplished through collective bargaining or otherwise.
Finally, for those who are skeptical of the collective will to accomplish these changes, it bears emphasis that the U.S. can accomplish a substantial integration of zero-emissions technology in the construction of infrastructure for new home development and the new home development itself. The clean energy provisions of the Infrastructure Investment and Jobs Act of 2021 highlight the possibilities.
George Cooper Rudolph is a preeminent lawyer in Southern California. He has almost five decades of experience in real estate and business law. Mr. Rudolph's expertise in real estate includes all phases of development: acquisition, entitlement, construction, marketing, sale, and financing at each level.
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