Homeownership

Can America Keep Up with Changing Housing Needs?

By Alanna McCargo, Vice President of the Urban Institute’s Housing Finance Policy Center

CFA’s 2018 Financial Services Conference featured a Nov 30 plenary panel discussion titled “Can America Keep Up with Rising Housing Needs?”  Our guest blogger Alanna McCargo, Vice President of the Urban Institute’s Housing Finance Policy Center, moderated the panel and prepared this summary.  Copies of the panel presenters’ slides can be found here

One of the toughest housing issues we are facing across the country is having enough housing to meet the needs of all the renters and homebuyers. In the decade since the Great Recession there has been much focus on the changing needs of housing consumers, shifting demographic trends, the rising cost of rental properties, and the many barriers to accessing credit to buy a home. Rents have increased, access to mortgage lending products has been tougher, and saving money for a down payment to purchase a home has become more challenging as home prices have risen. At the same time, the population is changing rapidly as baby boomers age, millennials reach homebuying age, buyers become more racially and ethnically diverse, and living arrangements change.

This is still a difficult time for the housing markets, and many issues persist, with the focus shifting to housing infrastructure and how it will keep pace with future demand and demographic changes. I was able to explore these important questions with a panel of experts during an in depth and illuminating discussion at CFA’s Financial Services Conference in Washington on November 30 that included Doug Bibby, President and CEO of the National Multifamily Housing Council, Marisa Calderon, Executive Director of the National Association of Hispanic Real Estate Professionals, Rob Dietz, Chief Economist of the National Association of Home Builders, and Elizabeth Kneebone, Research Director from the Terner Center for Housing Innovation.

Key issues and constraints were discussed with an eye toward how to break down barriers and how supply-side innovation and technology might play a role in speeding up construction, and potentially reducing costs. The general sentiment from the experts was that innovations are happening, but the time it will take to scale up enough to meet the growing demand, especially for the vast amount of affordable housing needed, will be very long and effective solutions very late. Some of the key takeaways from the panel discussion include:

Population Growth and Changing Demographics

Future population projections make it clear that construction has not been keeping pace with the new household formation growth anticipated over the next 20 years. Urban Institute projections show that by 2030, new renters will outpace new homeowners.  While there will still be more owners than renters overall, the homeownership rate will continue to decline. The last decade has proven to be one of soaring rental demand, but many households are still working toward becoming homeowners. Much of this is driven by new household formation and the growth of the Hispanic population and multi-cultural millennials who are aging into household headship age. In addition, the housing needs of the aging population will continue to change, particularly as over 20 million baby boomers decide if they will stay in their homes, or need to move to more accommodating housing.

Notable in the discussion was the demographic trend and fast-growing Latino population, accounting for 51 percent of US population growth in 2017 according to US. Census Bureau data. Both Hispanic and blacks populations, who stand to make up a large share of future homebuyers given their outsized rental participation today, face significant barriers to homeownership. These barriers are driven by shortages of affordable housing inventory in markets with dense Latino populations, as well as challenges Latinos and blacks face with accessing traditional mortgage credit and in saving for down payments, insufficient documented income, and insufficient credit scoring or credit files to qualify for a mortgage.

A Decade of Insufficient Construction

The level of single-family construction has been notably low, with new home starts in 2017 at below average levels compared to years prior (Harvard JCHS, 2018 Report). Slow growth in construction of single-family housing appears to be ahead according to NAHB forecasts and the size and density of new single-family housing changing as well. We looked at data showing the townhouse market share expanding rapidly, likely in response to growing land/lot costs, more density, and affordability of townhomes. Multifamily housing starts have also leveled off after a ramp up that happened after the markets crashed and rental demand surged. The construction strength in multifamily rental simply has not addressed the needs at the lower more affordable end of the market, and the supply shortage of affordable rental units is quickly growing into a rental supply crisis. NMHC research suggests we need 4.6 million more apartments by 2030. We briefly discussed the changing rental market as many formerly owner-occupied single-family homes have been converted to rental units in recent years. While single-family rental is the fastest growing part of the rental housing market today, it has not mitigated the shortage of newly built apartments at any scale.

Construction & Development Constraints and Costs

Our panel examined what single-family and multi-family housing supply looks like, where the constraints are in each sector, and what is changing. In both sectors, constraints include the labor market’s diminishing capacity, and the rising costs of land and construction materials like lumber which are having a big impact on the pace and affordability of new construction. In addition to the hard costs of construction and development, we discussed the impact of the changing regulatory environment on construction and development, which is up over 29 percent for single-family and over 30 percent of multi-family development costs in the past five years. These regulatory costs are a result of building codes, land use and environmental regulations, and regulatory fees related to zoning requirements. These constraints were cited and quantified in a 2018 NMHC/NAHB study on the cost of regulation. Hard costs of labor and construction materials make up the bulk of the housing development costs in a typical project, and these costs are intertwined with macro-economic forces of trade in key construction materials like lumber and steel and immigration policy for a US construction labor industry that relies heavily on immigrants in the workforce.

Innovations to Increase Affordable Supply

A noteworthy part of the panel discussion was around the role technology and innovation in construction and how design in housing might shape the future.  There was general optimism about a gap that methods like pre-fabricated or manufactured housing might fill in the affordable housing space.  But the panel agreed that concerns about scale, as well as issues related to hard costs, financing, and production which also are constraints for site built construction, will be challenges for the manufactured housing industry.  The panel also discussed the growing need to address the existing aging housing supply around the country and the need to redevelop existing structures for different use. This is a question that many cities and rural towns around the country are grappling with as their housing stock ages and requires extensive renovation and rehabilitation. The old housing in this country is some of the most affordable, and finding innovative ways to keep it affordable is one of the key challenges home builders and renovation experts must address.

The question of how to keep housing affordable with the rising costs of materials, labor, and land is a unifying issue for the industries that supply this space, and more importantly for millions of consumers, particularly low- and moderate- income households and communities of color, who will need access to affordable rental and homeownership in the future. The ongoing mismatch between housing needs and housing availability will present itself in different ways in communities across the country.  A national policy discussion that plans for how to address  the mismatch should continue and be elevated. After all, we are talking about the most fundamental need for every household in America: a home.

Alanna McCargo is Vice President of the Housing Finance Policy Center (HFPC) at the Urban Institute, a non-partisan social and economic policy research firm.  She leads HFPC’s outreach efforts including its public, philanthropic and private partnerships, new programs, and development to expand the reach and impact of the centers research with public policymakers, communities, and practitioners. McCargo also serves as Executive Director of The Urban Institute’s Mortgage Servicing Collaborative. Over the past 2 decades, she has held leadership roles with CoreLogic Government Solutions, JP Morgan Chase, and Fannie Mae. She currently serves on the board of directors for Doorways for Women and Families, and previously served on the advisory committee for Washington DC Habitat for Humanity and on the board of the Women in Housing and Finance Foundation.