You may be in an area of the country where it is quite difficult to find a house to purchase. Many places this is a seller’s market where the seller has more leverage on prices and terms than the buyers do. Freddie Mac estimates the U.S. is about 2.5 million units short based upon the long-term growth projections. The Urban Institute believes the situation is at crisis levels with annual shortfalls of 350,000 units a year due to underbuilding since 2009. New-home construction has not kept up with population growth. To understand the issue better, consider the following factors.
· Housing starts total 1.3 million units in 2019. The 50-year average is 1.6 million units a year. Housing starts have been constrained after the recession due to shortages of land, labor, and materials.
· The U.S. housing stock is aging with the average house age in 2016 at 37 years old. Now, over 50% of U.S. houses were built before 1980.
· Today, millennials total 73 million people and baby boomers total 72 million people. As the older generation ages, many are trying to downsize houses. Millennials are beginning to buy homes.
· The average seller has lived in their house for 8.3 years this year; this is a record high.
· After the housing crisis, from 2007 to 2016, 31% of the growth in single family houses are rentals.
· Note all this is occurring at a time when interest rates remain low and the availability of housing loans is plentiful.
The deficit in house prices is driving prices higher for buyers and for renters. The median existing house sale price in March 2019 was $259,400. This is the 85th consecutive month of year over year price gains. Rental prices are increasing as new rental stock is not growing as quick as population growth. Additional inventory will help open up the housing markets to more possible buyers who have been priced out. More rental stock will help moderate lease rates.
Nationally, the crisis seems to be hitting the lower ends of the market harder. Homes priced below $200,000 dropped by 8%. Low priced inventories remain tight with only a three-month supply of homes priced below $100,000. The upper end, with prices above $750,000, which is more than twice the national average price, is seeing more inventory with listing growth of 11%.
One area of softening demand has come from foreign buyers. According to the National Association of Realtors, Chinese buyers, which made up 25 percent of all foreign residential buyers in 2017, purchased 56% fewer homes in 2018 compared to the previous year. Foreign investors from other countries have also pulled back on their appetite for U.S. residential assets. A combination of the double-digit price increases and strengthening of the U.S. dollar have made these houses more expensive. Also, slowdowns of other countries’ economies and clampdowns by some authoritarian governments on allowing foreign investment from the home country have also played a part in dropping demand.
Though some drop in foreign demand helps price increases, solving the problem will involve many different actions. On the builder side, creating more affordable units should help the lower price end of the market. Perhaps more townhomes that allow for more units to be placed denser may help. Prefabricated homes where part of the home is factory built to lower some of the cost may be another option. This could drop construction time in half, but the public needs to get beyond the stigma that prefab housing is a sacrifice of quality compared to regular frame built. Buyers also need to be patient when buying a newly built homes if they put a contract on a new unit that is just beginning to be built.
Another option may be to use the new opportunity zones, one of the biggest tax breaks in decades which started with the tax overhaul in 2017. The zones offer tax breaks to investors who improve property in one of around 8,700 designated areas nationwide. Investors can reduce or postpone taxes from stocks, businesses, or investments by reinvesting them into these areas. If they make “substantial improvements” and hold these for over 10 years, they may avoid taxes on future profits. Designated zones are areas where over 30% are in a poverty status and unemployment is at 1.5 times the national average.
Brett Theodos of the Urban Institute summarizes the possible impact of opportunity zones. “The incentive is linked to appreciation, so its more likely to be used to build property assets that will appreciate over time.” Some options are starting new businesses or building more multifamily housing. This may help increase housing supply and lessen the pressures of low housing inventory.
The Richmond, Virginia Association of Realtors created the Partnership for Housing Affordability, working with lawmakers to develop more affordable housing for the city. The group created a community land trust to purchase and hold tax-delinquent properties which are turned over to nonprofit organizations to remodel and sell. The land trust retains ownership of the land tract. If the property is sold to an income qualified buyer, the land price is not included in the house purchase price. When the house is sold years later, the owner keeps half of the appreciation and the other half goes to the land trust.
Kansas City and Longmont, Colorado have created veterans as a population group with housing needs. Both areas are creating tiny houses which are furnished that are available to homeless vets. Vets can live in the homes rent-free while accessing onsite services to address employment and health needs. As they secure solid employment and become healthy, they transition into permanent housing.
In our current national housing situation, there are many different strategies which will need to be followed to help increase supply, stabilize prices increases, and create more housing opportunities for those who have been shut out of the housing market due to unaffordable housing with the current position of supply and demand forces.