America is in a housing crisis. The average list price of a U.S. home is now 25% higher than the medium home value. More Americans are renting than at any point over the last 50 years. Rent in hundreds of U.S. cities now represents as much as 45% of total consumer expenditures.
This housing crisis is an eminent threat to our economy. The cities most negatively impacts by housing costs increases are also the cities driving American economic growth. 15% of America’s counties covering cities like San Francisco, New York, Chicago, Austin, Seattle, Portland and Denver generate almost two-thirds of annual gross domestic production.
High housing costs are also reducing consumer buying power. Consumers account for 75% of our country’s economic activity. The more they have to spend on housing, the less they have to spend with other businesses.
Increasing our affordable housing stock, most especially in our high growth cities, is mission critical if America is to achieve 3% economic growth.
Zoning is a two edged sword in addressing affordable housing. One edge of the sword is to use zoning to protect common interests and community values. Examples include zoning to protect green spaces or zoning to preserve neighborhood values. A growing tension is emerging as the demand for affordable housing confronts legacy zoning to protect neighborhoods and green spaces.
The other edge of zonings’ sword is to foster economic growth. Favorable zoning is used to enable property development for a “higher and better” use. However, too often America’s current zoning generates more affluent housing at the cost of sufficient affordable housing levels.
An obvious solution is to implement zoning, most especially in high economic growth cities, that encourages the financing of affordable housing without reducing green space or destroying neighborhood values. Two critical zoning steps increasingly being pursued are:
- Zoning properties within a fifteen minute walk of a public transit hub in a manner that enables affordable housing financing
- Zoning commercial properties for mix uses that include affordable housing.
Three steps to encourage affordable single family housing
The Great Recession is at the root of our single family housing crisis. The Great Recession drove home ownership to the lowest percentage in 25 years. Today, over 13% of Americans rent single family homes.
Driven by public policy mitigation of Great Recession impacts, single family home investing has grown as an alternative to investing in stocks and bonds. Two steps that would reverse the Great Recession’s impacts on single family affordable housing and homeownership are:
- Normalizing interest rates. The Federal Reserve took extreme action to lower interest rates in response to the Great Recession. Their efforts succeeded as measured by record high stock prices and record high housing prices in high growth communities. Normalizing interest rates would deflate both the stock and housing market as investors shift money from real estate and into bonds. A return to 5% bond yields on 10 year Treasury bonds, and 7% mortgage interest rates, would still enable home mortgage financing while increasing the supply of homes as investors rebalance their investments between real estate and bonds.
- Local taxation to encourage affordable housing. A tax on affluent housing, use to fund tax incentives for affordable housing, would create an economic incentive for affordable housing. One path is to place a higher tax rate on affluent housing and use these tax revenues to rebate property taxes for owner occupied affordable housing. A related path would be to place an additional property tax on new construction that does not include increases in affordable housing units.
Reopening America’s borders to Hispanic construction workers would be a third key step toward growing affordable housing. Hispanic workers leaving the job market is a major reason why there is a shortage of construction workers. Reopening this job door will lower the cost of construction and enable affordable housing.
Affordable housing is America’s crossroads
We are a nation of unequal housing fortunes. This divide in wealth and spending power threatens all. Sustained economic growth requires majority participation by Americans. A lack of affordable housing is retarding, and could kill, the economic growth of America’s mega cities that now generate approximately 66% of annual Gross Domestic Product.
Public policy is required to address zoning, taxation, worker availability and legacy Great Recession interest rates that limit affordable housing supplies. No one bold step will achieve an increase in affordable housing supplies. A first step requires a consensus that a lack of affordable housing is robbing America’s of its economic growth potential. The next step requires a coordinated public policy effort at the local, state and Federal levels.