The U.S. Housing Crisis: An American Nightmare

What is the American Dream? James Truslow Adams first defined it in his best-selling 1931 book, Epic of America. He described it as “that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement”. The belief is based on the possibility of upward mobility achieved through hard work and sacrifice. Today, homeownership is considered one of the biggest indicators of attaining the American Dream, symbolizing financial success and independence. A recent survey conducted by Bankrate.com, a financial services company, found that 74% of Americans say owning a home is a higher measure of achievement than attaining a college degree, raising a family, or having a successful career (Schmidt, 2022). Unfortunately, housing affordability has transformed the American Dream into an American Nightmare for millions across the United States.

The Housing Affordability Crunch

Several factors have been identified as fueling this housing affordability crunch. According to data from the Federal Reserve, there is a rising demand for housing with limited supply. In January 2022, Figure 1 shows that active house listings in the US dropped 60% since 2020 while Figure 2 indicates that the national median sale price for a single-family house increased 25% sparked by the high demand (Schaeffer, 2022).

Figure 1:
Figure 2:
 Source: Federal Reserve Bank of St. Louis
 Source: Federal Reserve Bank of St. Louis

Since the mid-2000s, following the Great Recession, there was a significant slow-down in the production of single-family homes as many homebuilders went out of business. In the aftermath of this financial crisis, many millennials delayed homeownership. But as they entered the housing market, the housing deficit started to grow. And during the Covid-19 Pandemic with its low interest rates and quarantines, housing demand increased while supply dwindled (Arnold, 2022). And recently, the National Association of Home Builders reported that more permits for new construction have been issued, but actual construction is being delayed due to higher priced materials, supply chain problems, and rising interest rates (McGahey, 2022). Consequently, many developers across the country are discouraged from building smaller, more affordable homes and are constructing luxury homes to cover the increased costs while making a profit (Arnold, 2022). This shift has caused a mismatch between the type of housing being built and household demand leaving an even lower supply of low-cost homes.

Additionally, a housing deficit has been fueled by recent increases in interest rate. The Consumer Price Index (CPI), which is a barometer of inflation, is the highest it has been in 40 years. In response, the Federal Reserve Board has initiated a series of interest rate increases through the end of the year. The Federal Reserve is using a “soft landing” approach, which looks to gradually decrease demand, reducing price increases, and ultimately inflation without causing a recession. These higher interest rates impact housing in two ways. First, the cost of home-buying increases, making homeownership more difficult, especially for first-time buyers, as the cost of a monthly mortgage payment increases. Since last year, mortgage rates have been on a steep climb with rates at less than 3% a year ago to almost 6% in June. If rates reach 7% by the end of the year, there would be an additional cost of over $800 per month. Secondly, high interest rates escalate the cost of financing new construction, further impacting housing production (Kingsella & MacArthur, 2022). Figure 3 illustrates the rising trend of housing underproduction in the US.

Figure 3:

Another factor affecting housing affordability is soaring rent prices. As more people are pushed away from buying homes, there has been an increased demand for home rentals, which has resulted in an upward rise in rent prices. According to the Bureau of Labor Statistics data, renters across the U.S. have seen an average rent increase of 18% over the past five years, which outpaced inflation. Between 2017 and 2022, the cost of all goods and services increased by 16% due to inflation. These higher rental costs have been a hardship for many, especially low-income families (McGahey, 2022).  The 2022 Out of Reach report by the National Low-Income Housing Coalition finds that “In no state, metropolitan area, or county in the U.S. can a worker earning the federal or prevailing state or local minimum wage afford a modest two-bedroom rental home at fair market rent by working a standard 40-hour work week”. In 2022, a full-time worker needs to earn an hourly wage of $25.82 on average to afford a modest, two-bedroom rental home in the U.S. This Housing Wage for a two-bedroom home is $18.57 higher than the federal minimum wage of $7.25. In 11 states and the District of Columbia, the two-bedroom Housing Wage is more than $25.00 per hour. A full-time worker needs to earn an hourly wage of $21.25 on average in order to afford a modest one-bedroom rental home in the U.S. Renters with the lowest incomes face the greatest challenge in finding affordable housing. The average minimum wage worker must work nearly 96 hours per week to afford a two-bedroom rental home or 79 hours per week to afford a one-bedroom rental home. Figure 4 shows the disparity between national fair market rent for a one and two-bedroom home and rent affordability for low-income families.

Figure 4:

In 2021, The National Low Income Housing Coalition found that ten million low-income renter households routinely spend more than half their incomes on rent. It has been determined that households who spend more than 30% are considered to be cost-burdened and unable to afford other necessary living costs. Cost-burdened low-income households with children spend 13% less on food, 40% less on healthcare, and 23% less on transportation than families with similar incomes living in affordable housing and severely cost-burdened households with children spend 77% less on healthcare than peers in affordable housing. The average renter saves less than $500 annually, which does not allow for retirement savings or emergencies. (Joint Center for Housing Studies, 2019). Therefore, for these millions of Americans, just renting a basic home has become a major challenge, so actually purchasing their own home would be completely unaffordable.

The Economic Effects of the Housing Crisis

Real estate and the housing market play an important role in the U.S. economy. Economists and housing policy experts agree that high housing costs do not only affect those who can’t afford them but have a significant impact on employers at the federal and local levels, small businesses, and wealthy homeowners. Both the public and private sectors rely on low-wage workers. When people move away from an area because of high costs, labor shortages can cripple these sectors, adversely affecting local economies. Many cities with ample job openings lack affordable housing needed by many workers, and areas with cheaper housing don’t have an attractive labor market. In addition, the lack of affordable housing limits consumer spending, which accounts for two-thirds of the economic activity in the U.S. Cost-burdened individuals will consume fewer goods and services, which will further dampen the economy (Schweitzer, 2020). Furthermore, there is a widening economic gap between existing homeowners as their wealth continues to grow and families who struggle to afford housing. Homeownership builds long-term wealth, so the children of homeowners are more likely to be homeowners, and this cycle can worsen wealth inequality for future generations (Choi et al, 2018).

Also, housing instability has been found to affect the health and well-being of children and families significantly. When families cannot pay rent and move repeatedly or experience homelessness, the health-related costs of mothers and children are increased due to more hospitalizations, ambulatory visits, dental procedures, and mental health care. Infants and children have higher risks of being in poor health and becoming developmentally delayed. Research from Children’s HealthWatch at Boston Medical Center estimated that health care and special educational costs totaling $111 billion over ten years could be avoided if all families with children lived in a stable home. The study states that a housing opportunity gap is created with “long-lasting ripple effects in our healthcare, education, carceral, and economic systems”.

According to the National Low-Income Housing Coalition 2022 Report, the shortage of affordable housing costs the American economy about $2 trillion a year in lower wages and productivity. Without affordable housing, families have limited opportunities to increase earnings, curbing consumer spending, which results in slower GDP growth. Researchers estimate that the growth in GDP between 1964 and 2009 would have been 13.5% higher if families had better access to affordable housing. This would have led to a $1.7 trillion increase in income or $8,775 in additional wages per worker.

Solutions to the Housing Crisis

Finding solutions to the U.S. housing crisis has been a challenging task. In May 2022, the Biden Administration released a Housing Supply Action Plan, which includes initiatives that aim to close the housing supply gap in five years. The plan proposes legislative and administrative action to construct and preserve hundreds of thousands of affordable housing units, assist renters with high rental costs, and boost homeownership opportunities. The plan seeks to:

  • Provide incentives for cities to implement local land use and zoning reforms. 

The administration will reward jurisdictions that enforce policies that promote density.  Removing or reducing regulatory zoning policies can allow more homes and apartments to be built. Single-family areas can be re-zoned to allow for multiple housing units per lot, multiplying the housing capacity of neighborhoods.

  • Deploy new loan products for manufactured housing and accessory dwelling units.

Innovative construction methods would be used to replace traditional ones in order to increase building productivity while reducing time and costs. The manufactured home or ADU are built-off site and transported to a given location and one set up in one day. This form of construction is 15-20% cheaper than regular construction (Coleman, 2021). Builders would be given financial incentives to build these smaller homes that are affordable for first-time homebuyers. Possible incentives include federal support and subsidies, better terms of construction lending, and tax abatements.

  • Improve on new and existing financing to include affordable multifamily options.

The plan directs the Department of Housing and Urban Development (HUD) to work with state and local governments to use pandemic relief funds for affordable housing including: developing multifamily housing, creating permanent supportive housing, providing rental subsidies, and homeowner assistance. In addition, reforms are proposed to the Low-Income Housing Tax Credit (LIHTC), which provides credits to private investors developing affordable rental housing, and the HOME Investment Partnerships Program (HOME), which provides grants to states and localities that communities use to fund a wide range of housing activities.

  • Ensure foreclosed properties will be made available to owners who will live in them and nonprofits for 30 days before opening them to large institutional investors.
  • Grant additional federal tax credits for low-and middle-income homebuyers.
  • Work with the private sector to finish construction of incomplete homes by addressing supply chain challenges and improving building techniques

The budget of the Housing Supply Action Plan includes: $25 billion to expand rental assistance to an estimated 300,000 households, $65 billion to preserve public housing for its 2.5 million residents and future generations, and $15 billion in the national Housing Trust Fund to build or preserve more than 150,000 units of affordable, available, and accessible homes for people with the lowest incomes.

One of today’s biggest public policy challenges is creating affordable housing for all. A housing supply increase with decreased housing costs could result in greater consumption of other goods and services that stimulate growth and employment gains in other sectors, resulting in a multiplying effect. Acclaimed sociologist and author Matthew Desmond states that “It is hard to argue that housing is not a fundamental need. Decent, affordable housing should be a basic right for everybody in this country. The reason is simple: without stable shelter, everything else falls apart.” With an aggressive housing plan at the forefront, there is a new hope for the economic revival of all Americans. 

References:

Arnold, C. (2022). There’s never been such a severe shortage of homes in the U.S. Here’s why. NPR.

https://www.npr.org/2022/03/29/1089174630/housing-shortage-new-home-construction-supply-chain

Children’s Health Watch. (2021). Filling the Housing Opportunity. Boston Medical Center.

https://childrenshealthwatch.org/filling-the-housing-opportunity-gap/

Choi, J., Goodman, L., & Bai, B. (2021). Four ways today’s high home prices affect the larger economy. Urban Institute.

https://www.urban.org/urban-wire/four-ways-todays-high-home-prices-affect-larger-economy

Coleman, Alison. (2021). Tackling The Global Housing Crisis: Is The Future Modular? Forbes.

https://www.forbes.com/sites/alisoncoleman/2021/05/21/tackling-the-global-housing-crisis-is-the-future-modular/?

Joint Center for Housing Studies of Harvard University. (2019). The State of the Nation’s Housing. 

https://www.jchs.harvard.edu/state-nations-housing-2019

Kingsella, M. & MacArthur, L. (2022). Housing Underproduction in the U.S. Up for Growth.

https://www.upforgrowth.org/underproduction

National Low Income Housing Coalition. (2022). Out of Reach Report.

https://nlihc.org/oor/about

McGahey, R. (2022). Inflation, Soaring Rents, and the Housing Crisis. Forbes. 

https://www.forbes.com/sites/richardmcgahey/2022/03/25/inflation-soaring-rents-and-the-housing-crisis/?sh=ffaf08316f57

Schaeffer, K. (2022). Key Facts about Housing Affordability in the US. Pew Research Center.

https://www.pewresearch.org/fact-tank/2022/03/23/key-facts-about-housing-affordability-in-the-u-s/

Schmidt, G. (2022). Homeownership Remains the American Dream, Despite Challenges. New York Times. 

https://www.nytimes.com/2022/06/02/realestate/homeownership-affordability-survey.html

Schweitzer, A. (2020). Why The Housing Crisis Is A Problem For Everyone, Even Wealthy Homeowners. NPR.

https://www.npr.org/local/305/2020/01/13/795427706/why-the-housing-crisis-is-a-problem-for-everyone-even-wealthy-homeowners

The White House Briefing. (2022). President Biden Announces New Actions to Ease the Burden of Housing Costs.

https://www.whitehouse.gov/briefing-room/statements-releases/2022/05/16/president-biden-announces-new-actions-to-ease-the-burden-of-housing-costs/

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