As many readers are well aware, the United States is experiencing a housing crisis. While supply isn’t keeping up with demand, wages aren’t keeping up with rents. According to Apartment List, the national median rent growth across the United States increased by 13.8 percent from January 2021 to July 2021. This jump is more than double the overall inflation rate and approximately quadruple the rent growth recorded pre-pandemic. The country needs to add two million housing units per year to accommodate a population that grew by 7.4 percent over the past decade, according to the recently released data from the U.S. Census Bureau. But last year, the United States produced only 1.3 million housing units. This dislocation in demand and supply is explained by regulations and delays in permitting, rent control in large cities, labor shortages in the construction industry, and restrictive zoning. In this article, Matthews™ explores how the United States got to this point, the factors hindering affordable housing construction, and the available solutions.
Why The U.S. Has an Affordable Housing Crisis
The dialogue relating to affordable housing usually surrounds supply. Based on today’s estimates, the National Low Income Housing Coalition believes there is a shortfall of almost seven million affordable rental units available for lower-income families. At the current production pace, approximately 110,000 affordable units per year are needed to meet this demand. According to state law, housing is defined as “affordable” if it is less than 30 percent of a household’s gross income. Nearly half of the 43 million renter households in the United States are cost-burdened, meaning they spend more than 30 percent of their income on housing. In today’s market, housing prices are soaring beyond reach and market rents in major metros are also reaching this peak. Data released by Realtor.com suggests that monthly mortgage payments for a starter home now costs less than renting a similar-sized unit in four of the 50 largest U.S. metros.
Nearly every major market in the United States is severely undersupplied with affordable housing. The inflationary pressures brought on by the pandemic have made it increasingly difficult and more expensive to build and operate these communities. Therefore, even with the large amounts of multifamily construction, developers target the luxury or young professional class to meet their cost-revenue ratio. Around 80 percent of the units delivered in 2020 were luxury rentals, but only one in five renters represent affluent people.
This income shift has reduced the number of households that can afford market rents, thereby contributing to the demand for affordable housing. But developers cannot meet this demand due to the rising costs of labor and materials, which means affordable housing is expensive to build, disincentivizing developers to deliver more. Further, local zoning and related laws make it hard to navigate the current development landscape in many communities and provide the density needed to make a project work. These reasons, and more, are why America has an affordable housing crisis.
What Caused a Shortage of Affordable Housing
There are eight main barriers to building affordable housing – Costs, NIMBYism, lack of government support, urban design/planning barriers, social issues, economic factors, demographics, and preservation.
Construction, Labor, & Management Tools
The cost of lumber alone doubled at the beginning of 2021. Data from Skender, a Chicago-based construction firm, expands on how much demand for commercial real estate construction materials increased. The steepest hike was refined petroleum products, such as gasoline and asphalt, which rose a whopping 143.2 percent between April 2020 and April 2021. The second steepest hike was lumber which rose 89.7 percent during that same time, and third, steel products, which were up around 70 percent. Although some material pricing has stabilized since April, like lumber, other commodities’ prices are up and availability is often bleak. The rising cost of lumber alone adds nearly $13,000 to the market value of multifamily units. This translates to renters paying an average of $119 more per month to rent a newly built apartment, according to the National Association of Home Builders.
The industry is also facing an ongoing labor shortage and wage growth is anticipated to continue growing as employers compete for a minimal pool of workers. To address the shortage, builders would need to ramp up their annual production by 60%.
On top of developers paying double the cost for materials and labor, many operators and owners struggle to overcome the high operating expenses. To reduce costs, there is a trend where construction is shifting from high-density metro areas to more affordable regions, which accelerated at the beginning of the pandemic due to other factors. Lower land, labor costs, and regulatory burdens in suburban and exurban markets make building more appealing in these communities. In addition, the work from home hybrid has persuaded workers to flock to these areas to experience lower housing costs, providing continued support for these new suburban communities. The suburbs generally provide larger units at more affordable monthly rents.
Delays in Permitting & Entitlements
There has been a pullback on construction starts and schedules due to external market factors causing delays. There isn’t just one overarching cause for these increases in construction timelines, rather a combination of factors ranging from permitting, entitlements, and professional services to economic uncertainty, construction financing, and health and safety concerns. In a recent report by National Association of Home Builders, 75% of multifamily developers report construction delays in jurisdictions where they operate, up from 57% in October 2020. Also, 80% of respondents reported material delays as builders contend with shortages of appliances, lumber, and windows and doors.
NIMBYISM, Zoning Regulations, & Government Support
As cities try to spur development to create jobs and affordable housing, NIMBYism frequently hinders the process. The main defense is the host of adverse effects when affordable housing is built in communities. For example, the housing of cost-burdened families is said to decrease the desirability of neighborhoods, increase traffic, exacerbate sprawl, degrade the environment, among other things. The rapid rise of zoning regulations and the corresponding “not in my backyard” sentiments among residents and landlords has increased property values and added to the cost of housing.
In effect, this is restricting the creation of more housing, affordable or not. However, even if communities were open to increasing affordable housing, there’s no adequate financial support to offset development costs. There’s simply a lack of support for comprehensive plans, housing elements, and financial programs needed from the government to address affordable housing for those most in need. Further, many criticize that affordable rental housing is a low funding priority for the government, placing further burdens on the developers’ shoulders.
How Can the Affordable Housing Crisis be Solved?
As evidenced by the information presented, there is a constant struggle between making affordable housing projects work and developers making a profit. Over the years, some programs have been introduced to bring life and housing back to impoverished areas, including the Opportunity Zone Program and rent control regulations.
The opportunity zone provision encourages investment and economic growth in economically distressed communities, offering federal tax incentives to the taxpayer who invests in a property located in one of these zones. On the other end of the spectrum, rent control is enacted across certain states in the U.S. to regulate the amount a landlord can charge a tenant for rental housing. Rent regulation policies have evolved over the years to create more affordable housing options and simultaneously protect tenants who live on a fixed or low income. However, many investors oppose rent control as the industry personally experiences how such regulations, including repair negligence, results in decreased property value and development and investment hindrance.
The Biden Administration has spoken out regarding the proposed 2022 Budget Resolution, which focuses on increasing supply by making more funds available to support the construction and preservation of affordable housing units, both for multifamily and single-family homes. The details are yet to be determined, but many agree that this isn’t a debate over the need but rather the how.