How to Solve the Housing Crisis

Dale Wills

Last Updated: April 1, 2024

There is a lot of talk about the housing crisis in America. This is not particularly surprising. Homeownership is synonymous with the American dream, and for many Americans, owning a home is the embodiment of that dream fulfilled. 

Substantial public and private resources are earmarked for making that dream come true, with countless professionals putting energy into making homeownership possible for as many people as possible. These include federal and local governments alongside employers trying to support their employees in achieving homeownership.

However, we are seeing an increasing challenge in affordability, especially as you get closer to cities. The affordability issue arises because there is a lack of inventory; there simply is no more land to build on. As a result, construction needs to become denser and costs escalate when building within cities, making housing out of reach for many.

People are having to move further out into the suburbs to afford a home. This situation stems from various factors including interest rates, supply chain issues, labor costs, government regulations, and access to capital among others. There really is not a single solution because there are so many variables at play. While the reasons for affordability vary, it is an issue facing most regions in the United States.

Affordability is a Funnel

The issue with affordability can be looked at as a funnel: as houses become more expensive, fewer people can afford them. Inflation has made costs more expensive which means our cost of living increases too. Therefore, higher wages are needed just to afford living due to inflation effects on prices including home prices.

Government regulation also plays a role; new codes applied make houses more costly to build and amenities provided by cities and communities cost money too which contributes towards making houses more expensive.

Then there is the supply issue - what are people buying if they want to buy today? What is even available? This also drives up prices making it harder for people to afford homes.

The pandemic brought unique challenges. Issues that could have never been predicted by even the most grizzled financial vet, even those with more than a few cycles under their belt. Initially, during the pandemic, there was a widespread fear of the unknown, leading many people to cut back on spending.

This included holding off on buying houses fearing unemployment or other impacts from COVID-19. Unsurprisingly, this led to fewer house purchases (temporarily). However, once remote work became normalized everyone jumped back into buying again.

Again, we saw demand spikes similar to the growth we saw with lumber prices skyrocketing six or seven hundred percent due to higher demand. Slowed production during the initial panic phase of the pandemic caused everyone re-evaluate their housing needs.

Many prospective homeowners sought larger spaces to accommodate remote work setups causing even further increases in demand thus driving up home prices even further. Across the board all commodities involved in constructing houses saw price increases, oil included. An amazing amount of oil goes into building houses, overall creating a perfect storm of conditions contributing to the current housing crisis faced today.

Housing Does Not Stand Alone

We are seeing how deeply intertwined the housing market is with broader economic factors, especially in relation to oil prices and the pandemic. Most of your flooring, siding, shingles, and even parts of your electrical and plumbing systems rely on oil products for their creation.

When oil prices rise, the cost of these materials also increases, making it more expensive to build a house. It is not that home builders were making significantly more money; it was just that everything became pricier to construct a home.

Remote Work Effects

Moreover, we have observed a notable shift in lifestyle due to an increase in remote work since the pandemic began. This change has allowed people to live in different places since they no longer have to worry about commuting.

Consequently, when designing houses, we now often consider whether someone will be working from home and if they will need an additional room for this purpose. Adding another bedroom increases costs as well, impacting overall affordability.

Migration Patterns

On top of these changes in how we live and work, there's been significant migration across states. People are moving from more expensive states to those where living is more affordable, if their jobs allow them to work remotely. For instance, many have left high-cost areas like San Francisco seeking homes where their dollars stretch further—like Texas—which has seen rapid growth due to its relative affordability.

Interest Rates Matter

However, interest rates play a crucial role too. As they rise—often in response to inflation—it impacts what people can afford. A jump from a 3% interest rate to 7% can drastically reduce the price range of homes available to potential buyers without changing their monthly payment amount. This situation discourages current homeowners from selling because moving would mean securing a new mortgage at a higher rate than their current one.

This dynamic has resulted in low existing inventory levels as many choose not to sell but rather stay put because it does not make financial sense to move. Therefore, those looking into buying homes find themselves leaning towards new construction since there are fewer existing homes on the market.

The current housing demand is significantly driven by first-time homebuyers or those experiencing major life events necessitating a move—like job changes or marriage—since second or third-time buyers are less inclined to enter the market under these conditions due primarily to the higher interest rates affecting what they can afford compared with their existing situations.

Cash (Buyers) Are King

Now, our firm is less affected by the consumer that is paying cash. This typically involves more expensive homes or retired couples. For instance, a prospective buyer might have their big, beautiful house and be ready to downsize because they do not want to deal with the stairs anymore.

If their house is paid for, moving does not concern them as much since interest rates are not going to affect them necessarily. With that said, it is crucial to acknowledge how significantly interest rates are impacting affordability.

There is a substantial difference in what a buyer can afford when the interest rate more than doubles. This situation puts many people on the sidelines either because they cannot afford anything anymore or they choose not to move due to these rates.

Employment and a Rising Cost of Living

Employment factors also play a significant role. The cost of living has increased compared to a year and a half ago, meaning daily survival costs more with our basic needs. As such, construction workers and other real estate professionals need higher wages to support their families which in turn affects the cost of housing.

This drives up prices because we (collectively) need to provide them with a livable wage. The simple fact is that wages are not keeping pace with inflation which exacerbates the problem for many families trying to buy their first home.

Regional Variations and Household Formation

Household formation also influences this scenario considerably and varies geographically. In areas like the Mountain West where average family size tends to be larger, there is a demand for bigger homes compared to places like the East Coast where smaller families might not prioritize large spaces as much.

We are seeing changes in household dynamics too – two-income households have become almost universal due to affordability issues unlike in previous decades where single-income households were more common.

Zoning laws can also greatly impact housing based on geographical location. Regulations and red tape involved can make development extremely difficult and costly, directly affecting affordability.

For example, developing property can take significantly longer in some states compared to others due to these regulations. Onerous rules can add costs at every step from permitting fees to impact fees aimed at funding community amenities like parks and trail systems.

These elements combined illustrate why certain areas are experiencing severe affordability issues while others might offer more accessible housing options due largely to differences in regulatory environments and market dynamics.

Texas vs. California

To drive this point home, consider the cases of Texas and California in relation to affordable housing. In Texas, you can buy a house including the land and permits for much cheaper than you could build just the house per square foot in California, not even considering those additional costs. This affordability has a cascading effect on wages and living expenses.

If a house in parts of Texas might cost $250,000 while the same house in parts of California might go for $750,000, the wage needed to afford these homes varies significantly. As a result, workers in Texas can afford to accept lower wages because their living costs are not as high as they would be in California. This means that building a house becomes less expensive since an electrician or any other worker does not need as high of a pay to afford living there.

Building for Different Stages of Life

Regarding aging in place and creating communities for all life stages – from first-time homeowners to senior living facilities – some stats show that its adoption has not been as widespread across the United States as anticipated.

While some projects have seen tremendous success, others have not fared well. Personal preferences often play a significant role in where people choose to live. Being close to family and grandchildren may outweigh the benefits of living within such lifecycle housing communities.

There is also a noticeable trend where people prefer living among others with similar lifestyles or at similar life stages. Age-restricted communities are quite popular among those who prefer quieter neighborhoods without children playing on the streets. These communities cater specifically to retirees looking for peers with whom they can share activities like golfing or pickleball.

There is also some concern about institutional investors buying up large quantities of single-family homes. Some believe that these purchases exacerbate the housing crisis by making it more difficult for individuals to obtain homes due to increased prices. However, it is worth noting that less than 3% of home purchases are made by institutions nationwide; although it may “feel” higher and varies by area.

Homeownership is One Option

Keep in mind that not everyone desires homeownership. Reasons vary but might include temporary work assignments or the financial implications tied with short-term ownership versus renting. It is important when discussing housing options and market impacts that we consider these diverse needs and preferences alongside broader economic trends.

In day-to-day operations, we often encounter misconceptions about the housing market and the role of institutional investors. Many people believe that everyone wants to own a home, but this is not always the case. There are numerous reasons why individuals might prefer to rent rather than buy.

For some, it is about not being ready to settle in one location or forming their first household without the readiness for homeownership. Others might want to live in a house but haven’t been able to save enough for a down payment.

It is crucial to understand that demonizing institutional investors owning houses is a political mistake. Not everyone desires homeownership, and by limiting institutional investors' ability to purchase homes, we could exacerbate the affordability crisis.

Consider someone assigned temporarily in an area who opts not to buy; their alternatives are limited mainly to renting apartments or houses. If we were to restrict 2 or 3% of the U.S housing stock from being available for rent, these individuals would have no choice but to flood into apartment complexes, thereby displacing those who can only afford such living arrangements.

This displacement chain reaction would ultimately harm our society's most vulnerable members by worsening the affordability issue. Contrary to popular belief, institutional investors do not own as significant a portion of homes as some might think.

From our experience managing rental properties, we have observed that while most apartment renters aspire towards homeownership due largely to various constraints like saving for down payments or improving earning potential, many house renters do not share this aspiration – at least not immediately.

Therefore, it is misguided to assume that all renters wish for homeownership when this simply is not reflected in reality. The push against allowing institutional investors from owning homes could severely compound our existing affordability crisis, disproportionately affecting those least equipped to handle such challenges.

We have spent countless hours fighting legislation aimed at banning institutions from owning homes in Minnesota. These proposed laws would have led directly to making it illegal for an LLC (a common structure used by many real estate investors) to own residential properties which could result in thousands becoming homeless overnight. This would happen because existing rentals owned by LLCs would need to be vacated if such legislation passed without provisions grandfathering current arrangements.

Despite efforts to explain potential consequences to legislators, including how planned projects converting newly built houses into rental units would halt since they'd become unfeasible under new restrictions, lawmakers repeatedly failed to amend their bills.

To us, this indicated a fundamental misunderstanding of the impact of proposed changes to the housing market, particularly regarding rental availability and affordability. Our position and our continual advocacy has one ultimate goal: enhancing access to affordable housing options across socioeconomic spectrum.

How to Solve a Housing Crisis

The housing and affordability crisis is a multifaceted challenge that requires innovative solutions and policy adjustments to ensure affordability and access for all Americans. Economic factors, lifestyle changes, migration patterns, and governmental regulations play significant roles in exacerbating the issue, and solutions need to be just as diverse to make a dent in this widespread problem.

Addressing this crisis demands cooperation across public and private sectors to adapt strategies that cater to evolving market demands. By fostering an inclusive housing market, we can mitigate the crisis's effects and support both homeownership and rental options as viable paths to stability and happiness.

Interested in becoming an investor with Centra Capital Partners?

Get In Touch

  (763) 230-4001

Contact Us