Economic Impacts to the Real Estate Market
The Affordability Crisis of the United States 65% of people nationwide say they can’t afford to buy a home and saving for that down payment doesn’t look to be getting easier anytime soon. Over the past decade, home prices have greatly outpaced the growth in wages throughout the country. Research from the advocacy group Home 1 recently reported: 11 million Americans spend more than half their paycheck on rent. Harvard researchers reported last year, nearly 50% of renters were cost-burdened which is defined as spending 30%+ of their income on rent. This over burdened group was below 25% in the 1960's.
The National Low-Income Housing Coalition noted that a renter working 40 hours a week and earning minimum wage can afford a two-bedroom apartment (i.e., not be cost-burdened) in zero counties nationwide. In other words, it isn’t possible.
Even as the economy has continued to expand and the housing market rebounded from the Great Recession, Americans face widening inequality. For so many, there is an inability to make ends meet, as wages remain flat compared to the increase in our cost of living.
The overly simplistic answer to reduce cost is, of course, to add more supply. But the reality is significantly more complicated than simply jump-starting residential development. A variety of market forces, policy decisions, and demographic changes have converged to make building affordable housing a difficult and politically fraught, proposition.Continue reading to learn about the main factors driving up the cost of housing.
Demographic Changes Baby boomers are living longer and far more independently than previous generations. They’re also significantly more likely to be living alone which means less housing stock has been freed up by elderly people. In many cases, boomer homeowners are opting to trade down which increases competition for entry-level homes with younger generations. This applies upward pressure on prices of homes in the lowest price tier.
The foreclosure crisis of 2008 hit Generation X hardest, and many in and around middle age had their credit damaged and their nest egg wiped away. During the last decade many have repaired their credit in the rental market, leading some Gen Xers to venture back into home ownership. This has added demand in the housing market from an age group, that historically, would already own homes. Furthermore, the continued presence of Gen Xers in the rental market is driving down rental supply and driving up rents.
Millennials, who grew up in the shadow of the Great Recession, have had a harder time finding high quality jobs and thus often live with their parents for longer. Those 1980's millennials that are now in their thirties are encountering competition for entry-level houses from the generations before them—including older people who have already built up equity in existing homes. As with Generation X, the millennial generation's continued presence in the rental market is driving up demand.
Rising Costs of Materials, Labor & Land The Bureau of Labor Statistics tracks the price of raw materials with its producer price index, which has risen 20.2 percent since the 2008 financial crisis. The price of lumber alone has fluctuated wildly in recent years, at times reaching more than 2x the cost of what it was in 2008, according to a monthly lumber price index from Random Lengths. Lumber can represent anywhere from 5 to 10 percent of the cost of building a home, and the rise in lumber prices is in part a result of a decades-long trade dispute between the United States and Canada.
Another factor is the increased price of undeveloped land in and around urban centers, where work is concentrated, and demand is high. Many home builders and developers have focused on the high-end luxury housing market due to higher profit margins, which means home builders are constructing fewer entry-level and starter homes. When such starter homes are built, their prices are ultimately bid up because demand far exceeds supply.
While the rebounding housing market has meant more housing starts and more apartment buildings breaking ground, a persistent labor shortage is driving up costs and cutting into margins for these projects, adding to significant economic pressure for developers to focus on luxury units. These units can turn a higher profit, but are built at the expense of affordable housing, rather than in addition to it. According to a 2018 survey by the National Association of Home Builders, 84 percent of the organization’s members believe the cost and availability of labor is their biggest issue, even with the industry adding roughly 256,000 new construction jobs over the last year, per the Bureau of Labor Statistics. This leads to competitive bidding for specialists like home framers, electricians, plumbers, masons, carpenters, and HVAC installers.
Affordable Housing “Not in my Backyard” problem Restrictive zoning codes are often an effective tool in the fight against new construction and densification, because they adeptly suppress housing supply even as demand rises. Whether by limiting the height of new buildings or deciding that large apartment buildings need a minimum number of parking spots, these restrictions make construction more difficult and more expensive. San Francisco has been well known for impeding new construction through these methods, which has led to the region’s severe housing shortage.
The rapid rise of these types of regulations—and the corresponding “not in my backyard” or “NIMBY” sentiments among residents and landowners—has increased property values, added to the cost of housing, and made it harder for workers to chase opportunity by moving into fast-growing areas with high concentrations of open jobs. Though it’s great for current homeowners who see the value of their houses rise thanks to a lack of supply; such restrictive practices hurt the wider economy. A study published last year by the University of Chicago’s Booth School of Business estimates that the U.S. economy is potentially 14 percent smaller as a result of constraints on housing development.
Following local,regional and national economic & social trends is a vital practice to remain aware of influences to our real estate market.
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