The Affordability Crisis creates Millions of Renters

How investors help Millennials who want to live in a house and build a family

Protest lack of affordable housing in Santa Clara County

The U.S. is facing a severe housing affordability crisis that affects millions of Americans across the country. The cost of living has risen faster than income growth, making it harder for people to afford their basic needs.

The housing market has been especially affected by a combination of factors, such as low supply, high demand, rising interest rates, and land use regulations. In this blog post, we will explore the causes and consequences of the housing affordability crunch, as well as some possible solutions for people and investors.

One of the main drivers of the housing affordability crunch is the mismatch between supply and demand. The U.S. needs about four to five million more homes on the market than it has right now, according to 2022 estimates.

However, housing construction has slowed down due to shortages of labor and building materials, as well as restrictive zoning and permitting rules that limit where and how much housing can be built.

Meanwhile, demand for housing has surged as more Americans moved to the suburbs during the COVID-19 pandemic, seeking more space and lower density. The pandemic also triggered a work-from-home boom that reduced the need for commuting and increased the preference for larger homes with dedicated office space.

The imbalance between supply and demand has pushed up home prices to record levels. The national median sale price for a single-family home jumped 25% from $327,100 in the fourth quarter of 2019 to $408,100 in the fourth quarter of 2021.

The greatest increases were in the West, Midwest, and Northeast. Home prices are rising faster than wage growth in 80% of U.S. markets, making homeownership less affordable for many Americans.

Homeownership rates have increased slightly since 2019, reaching 65.5% in the fourth quarter of 2021, but they are still below the historical peak of 69.2% in 2004. Moreover, homeownership rates vary widely by race and ethnicity, with Black and Hispanic Americans having lower rates than White and Asian Americans.

Another factor that affects housing affordability is interest rates. Interest rates have a direct impact on the cost of borrowing money for mortgages, credit cards, car loans, and other types of debt. Interest rates have been rising since late 2021, as the Federal Reserve has raised its benchmark rate several times to combat inflation and cool down the overheated economy.

The average long-term U.S. mortgage rate reached 7.49% in October 2023, the highest level in over two decades. Higher interest rates make it more expensive to buy or refinance a home, reducing the pool of potential buyers and putting downward pressure on home sales.

Higher interest rates also make it harder for renters to save for a down payment or qualify for a mortgage, keeping them trapped in the rental market.

Renters are also facing a housing affordability crunch, as rental vacancy rates have fallen and rental prices have risen.

The vacancy rate for rental units fell from about 10% in 2010 to 5.6% at the end of 2021, indicating a tight supply of available rentals. The median rent for a one-bedroom apartment in the U.S. was $1,300 in January 2024, up 13% from a year ago.

Over 40% of renters are cost-burdened, meaning they spend more than 30% of their income on housing costs. Renters are also more likely to face eviction or homelessness due to income shocks or landlord decisions.

The housing affordability crunch has serious implications for the well-being of individuals, families, communities, and the economy.

Housing affordability affects people's health, education, employment, mobility, wealth accumulation, social cohesion, and civic participation.

People who struggle to afford housing may have to compromise on the quality, location, size, or safety of their homes. They may also have to cut back on other essential expenses, such as food, health care, transportation, or education.

They may face stress, anxiety, depression, or physical illness due to housing insecurity or instability.

They may have limited opportunities to access jobs,

What is the role of government in this issue?

The government plays an important role in addressing the housing affordability crisis at different levels: federal, state, and local.

At the federal level, the government serves primarily as a funder, providing financial resources through federal tax policy such as the home mortgage interest deduction, direct subsidies such as assistance to low-income renters, and indirect subsidies such as tax credits (LIHTC) to builders of affordable homes.

The federal government also regulates the mortgage market and sets standards for housing quality and fair housing practices.

The federal government can also support research and data collection on housing markets and policies, and coordinate with other agencies and stakeholders to monitor and respond to emerging housing challenges.

At the state and local levels, the government has more influence over land use and zoning regulations, which affect the supply and location of housing.

State and local governments can also provide incentives or requirements for developers to include affordable units in their projects, or create dedicated funds or programs to support affordable housing production or preservation.

State and local governments can also collaborate with regional partners and nonprofit organizations to address the housing needs of specific populations or areas.

The government can play a positive role in increasing the supply of affordable housing and improving the well-being of households, but it also faces some challenges and trade-offs.

For instance, some federal policies may have unintended consequences or create perverse incentives that undermine housing affordability goals.

For example, the home mortgage interest deduction benefits mostly higher-income homeowners and encourages them to buy larger and more expensive homes, which may increase demand and prices.

Some federal subsidies may also be insufficient or inefficient to meet the needs of low-income renters or homeowners.

Moreover, some state and local regulations may restrict housing supply or increase costs by imposing excessive fees, delays, or restrictions on development.

Some state and local policies may also create spatial mismatch or segregation by limiting the availability of affordable housing in high-opportunity areas.

Therefore, the government should carefully evaluate the impacts and effectiveness of its existing policies and programs, and consider reforms or innovations that can better align incentives and outcomes for housing affordability.

The government should also balance the interests and preferences of different stakeholders, such as homeowners, renters, developers, landlords, advocates, and communities, and seek to promote equity, diversity, and inclusion in housing markets.

When we look at the overall situation concern is rising. Today, some of the most influential people in the financial industry warn about the affordability crisis and the rising debt level:

Jamie Dimon says Washington is?facing a global market "rebellion" ?because of the tab it is racking up, while?Bank of America ?CEO Brian Moynihan believes it's time to?stop admiring the problem ?and instead do something about it.

And despite the issue being the “most predictable crisis we’ve ever had" according to former Speaker of the House Paul Ryan—a summary Dimon agrees with—it's an item that isn't yet top of the political agenda.

Housing, construction, cars, and any other interest-rate sensitive sectors will be "disproportionately" impacted by an attempt to rebalance public debt, William G. Gale of the Brookings Institute told Fortune.

"Higher government debt will tend to raise interest rates," the author of Fiscal Therapy: Curing America’s Addiction to Debt and Investing in the Future said.

"If government creates debt, it has to be financed somehow—taxes or money creation. If debt gets out of hand, money creation historically has been the (false) solution as it is easier to issue money than raise taxes but often more disastrous in the long term."

Any rise in interest rates will shock younger generations coming up the housing ladder over the next few decades.

Those younger generations, especially Millenials and Gen-Z interested in working from home, having a better work-life balance, and struggling to get into home ownership will be the core community of our tenants in the future.

That’s why investing in cash-flowing properties in the right areas remains to be a great strategy.

We as Ideal Wealth growers and fellow investors will be important to help these younger generations get into homes, even if they can’t afford to own them.

All the debt discussed today will have to be paid for with interest, which leads me to believe that interest rates will have to come down to more affordable levels in the next 3 years. When they do we will be ready to refinance the properties we have acquired since 2022 and make them even better-performing assets.