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How Did the Housing Market Get So Unaffordable for So Many?

The worst housing bubbles appear in places with local government restricts the supply of new homes through zoning and other initiatives. Want to really get a great look at this, read Sowell's book at the housing lead recession of 2008. To ignore history is....


Honestly, a must-read if you're interested in how government impacts housing.


How Did the Housing Market Get So Unaffordable for So Many?

Recent volatility in home prices and rents has been a long time coming. Fixing it will require abandoning outdated policy frameworks.


By Paul Williams, WSJ

Dec. 12, 2022 8:00 am ET


For years, housing affordability was largely an issue that plagued the working class in urban areas. But in recent years, the problem has spread well beyond the working class and is now firmly entrenched in the middle class.


A survey from the Pew Research Center released this year showed a 10-percentage-point increase since 2018 in the share of Americans—now one in two—who see the availability of affordable housing in their area as a serious problem.


Plenty of statistics confirm that housing has become less affordable. Rental costs in the inflation index have risen more than 7% this year, nearly double the prepandemic trend. Home prices jumped 20% year-over-year on an annualized basis during the pandemic buying surge. And many tens of thousands or even hundreds of thousands of homes would have to be built to match recent job growth in certain regions in the U.S.


Those figures alone, however, don’t tell the story of what happened, how it happened or who it happened to—they only tell us the result. But if we scratch a little below the surface, it reveals that the recent volatility in the housing market has been a long time in the making, and that achieving stability will require leaving behind outdated policy frameworks.


Homes in San Francisco. During the 2010s, California’s economy added more than 2½ jobs for each home that was built in the state, creating conditions for a housing crisis.


To start, let’s step back about 20 years to the mid-2000s, when a housing boom led to generational highs across the sector in terms of building permits, investment and employment. We were building a lot of homes. But when markets became aware of just how much risk was really packaged up in mortgage-backed securities, the housing industry crashed. The selloff began and everything plummeted—investment, home buying and home building, to name a few.


There were foreclosures and forced sales, and from 2006 through 2010 construction workers were laid off in droves. In fact, from peak to trough, the number of people working in residential construction was nearly halved, and it took all of the 2010s for the housing industry to recover to precrash levels of investment and employment. As a result, not enough homes were built during that decade, even as tons of jobs were created in coastal economic hubs such as New York, San Francisco and Seattle. Considering that California added more than 2½ jobs for each home it built over the decade, the state’s well-known housing crisis should come as no surprise.


In the spring of 2020, as the pandemic took hold and many businesses made the switch to working from home, swaths of people left coastal economic hubs and moved to smaller and more inland cities and towns—particularly in the Sunbelt, but also in places like Boise, Idaho. Analysis of these trends found that remote work was an important driver of the population changes, and that generally people moved from more-expensive places to less-expensive places, an indication that many workers in coastal job hubs had had enough.


In the regions that experienced the largest surges in demand, we saw record low inventories of homes and record long lines of would-be home buyers hoping to take advantage of record low mortgage rates. These factors, coupled with historical underbuilding, drove home prices higher, expanding the affordability crisis to the point where it ensnared more of the middle class.


Apartments for lease in Austin. Renters faced steep increases in many cities, but there’s a bright spot: Many new homes and especially apartment buildings that were started during the pandemic-era building surge haven’t been completed yet. When they hit the market next year, they should help with affordability.


Renters, too, faced exorbitant rent increases in many major cities, especially those that attracted many new residents during the pandemic. Industry data showed spot prices on the rental market surging 10% to 20% annually in 2021 and 2022. Such increases are unsustainable for many middle-income and low-income households, and can drive longtime renters from their homes.


Of course, one of the reasons people were attracted to regions such as the Sunbelt is because housing is easier to build there. Indeed, many of the metropolitan areas with the highest population growth such as Atlanta and Dallas saw corresponding increases in the number of housing permits issued—a healthy response to the influx of new neighbors.


Midway into 2022, however, the Federal Reserve put the kibosh on the boom. With its aggressive rate increases and the selling of assets on its balance sheet—including mortgage-backed securities—the average 30-year fixed mortgage rate has roughly doubled, from just over 3% at the beginning of the year to about 6.5% today. As monthly mortgage payments have climbed out of reach of more potential home buyers, demand for homes has fallen, and home prices are beginning to fall, too, in many markets. More critically, new building has fallen, which is the opposite of what is needed to achieve housing-price stability in the long run.


One glimmer of hope is that many of the new homes and apartment buildings that were started during the pandemic-era surge in building haven’t been completed yet. Homes are taking longer to build these days because of supply-chain disruptions. And for multifamily apartments, it is taking longer still. When these homes and apartment buildings come online in 2023, the boost in supply should help with affordability, especially in the most constrained markets.


New prescription

Pulling back the curtain on these housing trends reveals questions that policy makers are going to be pressed to consider.


First is the wisdom of using interest-rate increases to tame inflation when housing is one of the sectors most sensitive to credit availability. We certainly can’t afford a repeat of the underbuilding phenomenon of the 2010s if we want to improve housing affordability.


Second, whether our current policy—“deal with it”—is the best response to Americans subjected to unpredictable housing-market shocks and resulting rent hikes. The rent increases that many households faced during the surge are likely here to stay, as rents are notoriously “sticky”—quick to rise and slow to fall. As a result, policy makers are being asked whether it’s time to reconsider basic regulations on rent growth, which are customary in many European and Asian countries.


Third, the land-use and zoning regimes that have governed housing production in our cities and suburbs for decades ought to be rewritten for the 21st century. As any economist will tell you, the only certainty in the economy is fundamental uncertainty: We can only guess where the next booms in job growth might be, and we can’t predict shocks like the pandemic. So if we want longer-term stability of housing prices, our cities and suburbs must be more elastic and allowed to grow in response to demand.


Finally, we know the housing sector is highly cyclical—it has famously been said that “housing is the business cycle.” There are certainly some benefits to this, such as the booms in investment, jobs and wages on the upward part of the curve. But we might also take a cue from some of our peers in Europe and Asia, and consider public-sector programs that build housing for a range of incomes, from the working to the middle class, across the business cycle.


Moving into 2023, we have a few things to look forward to. Some moderating of rental inflation is likely, as new housing, especially apartments in cities, is completed and comes online. The pandemic-induced volatility in the housing market is coming to a close. But the question of how—or whether—we plan to build more stability into the housing market remains.


Mr. Williams is the founder and director of the Center for Public Enterprise, a think tank. He can be reached at reports@wsj.com.

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