The Time Has Come
5
Many Solutions,
No Answers
When evil spirits returned to invade her family’s home again, the little girl in the Poltergeist sequel famously warned, “They’re baaaaack!” In a similarly horrifying way, “housing costs and availability” returned as the top social/political issue in this year’s Emerging Trends survey, topping “political extremism” and “immigration policy” by wide margins.
Housing affordability was also very much on the minds of many of the industry leaders interviewed for this report. Thus, it returns as a top trend for the 2025 edition of Emerging Trends, as it has for eight years running.
“We have a pronounced housing shortage in the United States, which is hard to imagine how it’s going to go away.”
Yet the national housing affordability crisis—er, condition—continues to deepen and intensify. Here is how bad housing affordability has become: it has emerged as a prominent issue in the U.S. presidential election for the first time in memory, maybe since the end of World War II. Both major-party candidates are highlighting the issue in their speeches and platforms and proposing measures to improve the situation (albeit using diametrically opposed approaches). Given what was said in our industry interviews, American society does not seem willing to accept the issue to persist as just an ongoing condition.
While the growing attention is welcome, prospects for improvements still seem bleak, particularly in the near term. As the chief investment officer of a major CRE investment management firm said, “We have a pronounced housing shortage in the United States, which is hard to imagine how it’s going to go away. There’s only really one way to solve that problem, which is to build. But it’s hard to see how that’s going to happen. That doesn’t bode well for affordability, but it does bode well for rental housing versus ownership housing, absent all-of-a-sudden loosening of credit standards.”
Worrying Trends for Homebuying
Housing affordability remains near all-time lows as home prices continue to set record highs. The average home price nationally is about 50 percent higher than at the onset of the pandemic, more than twice the increase in median worker earnings. The Wall Street Journal estimates that nearly 10 percent of homes have an estimated value of $1 million or more, more than double the 4 percent share recorded before the pandemic. Not long ago, a million dollars was a shorthand benchmark for luxury housing, but that figure now represents merely an entry point in many markets.
Mortgage rates are even more problematic for homebuyers. Mortgage rates remain stubbornly high, even though they are beginning to edge down. Although well off their peaks registered in the fall of 2023, when 30-year fixed-rate mortgages were nearly 8 percent, rates are still some two-thirds higher than in early 2020 before the pandemic.
In an ironic and unfortunate twist, the Fed’s effort to bring down inflation arguably compounded the problem. First, the high interest rates brought the home resale market to a virtual standstill. Homeowners stopped putting their homes up for sale because they would lose their low-interest mortgages. Housing turnover and the available inventory both plunged, driving up prices still further for the few available homes.
High interest rates also helped drive up construction costs on new units, discouraging new home production. Deliveries of single-family homes remain well below their long-term average and well below the level needed to keep pace with household growth. The anemic pace of units started means the pipeline of new deliveries will not be increasing anytime soon.
Finally, the Fed gauges inflation with a metric that includes an imputed homeowners’ cost, called owners’ equivalent rent (OER). For technical reasons, OER is a lagging indicator, so the Fed relied on outdated data for an expense that homeowners do not even actually pay—it’s imputed! Thus, many economists argue that the Fed not only exacerbated affordability but also prolonged the misery since the inflation gauge that excludes OER had come down to the Fed’s target long ago. With the expenses associated with operating a home—including insurance, heat, and maintenance—also rising faster than earnings, it’s no wonder that affordability has fallen to historic lows.
Better Trends for Renters
Though the U.S. homeownership rate now surpasses the level immediately preceding the pandemic, it is still well below the rates recorded in the years before the global financial crisis (GFC) and has been falling since late 2022. The steep rise in the cost of purchasing a home has kept many households renting, by either choice or necessity. Rents jumped sharply in the years following the pandemic as the number of renter-occupied units in the country rose far faster than population growth. Rent growth averaged almost 5 percent annually nationwide from 2019 to 2023—not nearly as much as the spike in home prices, but substantially more than income growth.
As noted in the supply trend (Building Boom, Tenant Boon) and the chapter 2 multifamily overview, the apartment market dynamics are changing thanks to an unprecedented burst of new supply coming to market. Excluding the unusual circumstances of the lockdown, rents are falling for the first time since the housing market collapsed in the GFC. With record completions this year, rents should continue to trend down, but the gains for renters have been modest.
Even with these slight declines, the U.S. Census Bureau calculates that almost half of renter households are considered “cost-burdened,” spending more than 30 percent of their income to keep a roof over their heads. Worse, an unconscionable quarter of renters pay at least half of their income on rent. Not only does this high rent burden leave little for groceries and other necessities; it effectively locks households into renting permanently because they cannot save for a downpayment.
Getting to Yes
As the chief investment officer quoted above put it, the simple solution to address affordability is to build more housing. A consultant to housing developers adds, “Supply and demand does work. The ability for us to add supply to housing is the single most important thing that we can do to control escalating unaffordability—wherever that housing is added on the spectrum. It’s not just adding more affordable housing, although that’s important, but adding housing period creates a filtering.” (Filtering is the process through which older housing stock becomes more affordable as it is sold by owners who move into newer, more modern housing stock introduced into the market.)
This critical insight is not new. However, years of declining affordability demonstrate that this solution is much easier said than done. Local regulations and delays remain the biggest impediments to supplying developed land to homebuilders. In response, governments, builders, and housing advocates are advancing a variety of approaches.
- Tweaking zoning and environmental regulations: More states and local governments are experimenting with eliminating single-family zoning, raising the potential for denser neighborhoods and more affordable units.
The Twin Cities of St. Paul and Minneapolis, Minnesota, provide an outstanding example of contrasting approaches to making housing more affordable. In recent years, Minneapolis adopted various measures to increase the production of higher-density housing, while St. Paul opted to rely on rent control. One interviewee, a CRE economist, said, “It’s a great natural experiment where you get these two cities right next to each other. Minneapolis got rid of single-family zoning and allowed the market to deliver what the market wanted, at least to some degree. And rent growth was more muted during that period than in St. Paul.” Indeed, Minneapolis is enjoying a significant expansion in multifamily projects that are adding hundreds of new units, while housing production has slowed markedly in St. Paul.
In California, where more than 95 percent of residential land is zoned exclusively for single-family homes, the state legislature enacted a bill in 2021 allowing for lot splitting. The law’s future is uncertain as a judge ruled it unconstitutional early in 2024. However, California’s Assembly Bill 2011, which took effect in 2023, provides for easier and expedited approval for affordable and mixed-use housing on commercially zoned land.
Many states have relaxed restrictions against Accessory Dwelling Units (ADUs) including California, Montana, Washington, and New York, among others. Sometimes called granny flats, ADUs are small residences situated on the same lot as the primary dwelling. These units offer distinct living spaces separate from the main house, enabling homeowners to offer housing to family members or tenants. ADUs help expand housing options, thereby enhancing the availability of affordable living arrangements.
- Smaller homes: Another approach to bring down costs is to make houses smaller, and that is also happening. The Census Bureau reports that the median size of single-family homes has been trending down since 2015 and now is at its lowest average since 2010, dropping 355 square feet to 2,164 square feet. The National Association of Home Builders expects the trend to continue. The association reports that over one-third of U.S. homebuilders decreased the size of the homes they built in 2023, and a quarter anticipate constructing even smaller homes this year.
Still, the counter “McMansionization” trend also continues and plays a role in reducing the availability of smaller affordable homes. A study by the Metropolitan Abundance Project, for example, found that over one-third (37 percent) of new single-family homes built in Los Angeles County in 2020 were more than 3,400 square feet, and the proportion reaches two-thirds in more affluent cities, with both figures up significantly in recent decades.
The reality is that the high cost of permitting and the extended time required to secure approvals incentivize developers to build at higher price points to recover their investments. Said one developer, “Either you’re building larger housing for fewer and fewer people that can afford housing, or you’re shrinking the size—because when you’re building housing, it’s chunk price, not price per foot. And [that’s] why townhomes are so popular.” - OK, boomers: Another huge opportunity is providing options for the enormous number of baby boomers who will soon need housing to age into (see the discussion in chapter 2). In many markets, seniors have few options beyond aging in place. That works for some healthy seniors, but many need housing that comes with graduated care. “The housing stock should be turning over more than it does here,” said one developer. “We don’t produce enough of it. We don’t have places for people to age down into.”
A National Problem
Housing affordability is no longer confined to large coastal cities. Virtually every metro area in the country is suffering from a shortage of affordable for-sale and rental housing. With the problem so widespread, the issue can no longer be tackled locally but requires a national approach.
As already noted, politicians are finally taking notice, and both major-party presidential candidates are proposing policies to expand the supply and bring down costs. One wants to build 3 million new housing units by providing subsidies for homebuilders and buyers. The other wants to expand production through deregulation and by making federal land available for housing construction. Both parties also want to reduce some types of housing demand to free up homes for others. The Democrats want to limit investor purchases of single-family homes. The Republicans want to restrict the ability of undocumented immigrants to buy or rent homes.
There is no shortage of solutions, as we have outlined here and in prior editions of Emerging Trends. The answer seems to depend more on summoning the collective will to get things done.