Housing Affordability Crisis: Trends, Impacts, and Solutions

Understanding the current housing affordability crisis requires an in-depth look at its causes and impacts on various demographics and industries. Let’s look at the factors driving the crisis, including inflation, rising interest rates, and supply shortages as well as the effects on homeownership rates in cities like Huntsville, the implications for businesses and their employees, and potential solutions to mitigate the issue. From tax incentives for investors to encouraging smaller home construction, the following sections provide insights into addressing the housing challenges faced by many Americans today.

Understanding the Housing Affordability Crisis

Housing affordability is at a multi-decade low for several reasons. The first reason is inflation, which has resulted in higher prices. We have record prices almost every year due to inflation, but there has been a significant increase from the Covid money influx starting in 2020, leading to nearly a 40% rise in home prices.

The second main reason for this affordability crisis in the US is higher interest rates. We've seen higher prices due to inflation and money printing over the past few years, but when combined with higher interest rates, the cost of borrowing money to buy a home has increased. Most people borrow money for their first, second, or third home, and this combination has worsened the affordability crisis. Previously, interest rates were in the high 2% to low 3% range. Now, we're averaging around 7% on a 30-year mortgage, with rates reaching as high as 8%.

Interest rates have more than doubled in the last few years, and higher prices and interest rates have created the current affordability crisis. Typically, higher interest rates would soften the real estate market, so what has created this unique situation? The difference lies in the lack of supply, which dates back to the Great Recession. Builders slowed down production, and banks stopped lending, resulting in fewer homes being built while the population continued to grow. Over a decade and a half, this has led to a deficit of about 6 million homes across the US. Even with reduced demand, there is still not enough supply.

Prices are always influenced by supply and demand. Despite lower demand, the insufficient supply has caused prices to continue rising, contributing to the housing affordability crisis. Additionally, rising interest rates have exacerbated the crisis not only through higher rates but also through a mortgage rate lockdown effect. Many potential sellers with rates in the high twos or low threes are not motivated to sell their homes if they have to trade for a rate around 7%.

Decline in Huntsville's Housing Affordability

The most recent housing affordability index numbers for Huntsville came in at 89. A score of 100 means the median household income can afford the median-priced home. So, a score of 89 means the median household income cannot afford the median-priced home. Anything below 100 indicates less affordability, while anything above 100 indicates more affordability.

In the past, Huntsville often scored well above 100, in the 160 to 180 range, making it a highly affordable place to live. Now, with a score of 89, we are less affordable than before. The US average is slightly better at 96. Despite this drop, Huntsville is still more affordable than many comparable and larger cities that we compete with economically. While we are less affordable than we used to be, we remain more affordable than many other competitive cities vying for jobs, industry, and business.

Addressing the Housing Affordability Crisis

This housing affordability crisis has created challenges for many businesses. Large companies have contributed to this crisis by driving up home prices in their areas. The "Amazon effect" illustrates this well; whenever Amazon announces a new plan or enters a new city, real estate prices rise. Their workers often struggle to afford these higher prices. To address this, Amazon has invested $3.6 billion to preserve about 35,000 affordable homes. This initiative could set a new trend across the US. Affordable housing near workplaces is crucial for attracting and retaining talent. Amazon is leading the way with this effort, and we can expect to see similar initiatives from other companies in various cities.

Another trend to address the affordability crisis is the construction of smaller homes. The average size of new homes is decreasing year over year. We will likely see more two-bedroom and one-bedroom homes being built. Builders, both locally and across the US, are already discussing this shift. In the Huntsville market and nationwide, this push for affordability means many individuals and families, especially first-time homebuyers, will have access to homes in the lower $200,000 price range.

The Decline of the Middle Class and Homeownership

The housing affordability crisis in the US is causing the middle class to shrink. We need to do everything we can to protect the middle class and the dream of homeownership in the US. Homeownership rates are declining, dropping from 66% to 65.6%.

This 0.4% decrease may not sound significant, but it translates to about half a million fewer homeowners. This is a substantial decline in homeownership dreams and wealth-building for US citizens. Homeowners have an average net worth of $396,200, compared to only $10,400 for renters.

Solutions to the Housing Affordability Crisis

How do we solve this housing affordability crisis? One challenge is that we can't undo inflation, and the money has already been printed. So, what can we do moving forward as a country to address this issue?

One solution is to provide tax incentives for investors to sell their homes. Many homes in this country are owned by investors, most of whom own between one and nine properties. If we motivate these investors to sell, it could increase the inventory of starter homes, benefiting first-time homebuyers.

Another solution is to offer incentives and reduce regulations for builders to boost home production in the US. Unfortunately, builder confidence has recently declined, and home production is decreasing when it needs to increase to close the gap of 6 million homes. Even reducing this gap by 600,000 homes per year would take a decade to solve the problem. We need to encourage builders to continue production to prevent the problem from worsening and improve it over the next decade.

A third solution involves legislation targeting hedge funds that own over 100 units. As more hedge funds enter the homeownership market, it reduces opportunities for middle-class and first-time homebuyers. Addressing this could help preserve homeownership dreams for these groups.

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