Housing Costs Money

By: Sharon Wilson Géno, NMHC President

View and share the web version of this blog here: https://www.nmhc.org/news/nmhc-news/2024/housing-costs-money/

This seems like an obvious statement: It costs money to build housing, including the cost of construction materials, labor, land, permits and fees and a host of other things. Once built, there are a myriad of operating costs such as utilities, insurance, state and local taxes and, in the case of rental housing, staff to process applications and support residents. It also costs money to maintain housing by ensuring that mechanical systems are operating, repairs are made timely and, as time goes on, updates are made to keep communities in line with modern standards.

In recent political debates about how to resolve our national housing crisis—putting the blame on “greedy corporate landlords,” pushing for “top down” solutions or advocating for additional costly regulations—so many ignore the fact that housing costs money. Where the money comes from is often an afterthought or given virtually no thought at all.

In fact, many do not understand that, except for a handful of relatively small government programs targeting affordable housing, our government does not provide money to build the housing we need. Instead, the money to create more housing supply comes from private lenders, banks, pension plans, life insurance companies and other investors willing to take the risk associated with multiyear construction schedules, escalating costs, unpredictable interest rates and economic uncertainty in exchange for a reasonable expected return. As such, we need to continue to create an environment where housing is a good investment if we are going to build the homes America needs.

In a recent paper by Alexei Alexandrov and Laurie Goodman of the Urban Institute, “Place the Blame Where It Belongs: Lack of Housing Supply Is Largely Responsible for High Home Prices and Rents”, the authors argue that our housing challenges stem directly from a lack of supply, as opposed to scapegoats such as developers and institutional investors. The article recognizes that the problem is acute, and there is no one solution, by pointing out some truths:

1. Housing Demand Is Not Based on Ownership or Rental – This election season, we see politicians on both sides define “the American Dream” as homeownership only, leaving out the over 100 million Americans who call rental housing home. Proposed policy solutions have been heavily weighted toward homeownership; however, as the authors state, “overall housing demand is the same whether a household owns a home or rents from a landlord.” We need financial incentive for both in order to create more housing.

2. More Housing Benefits Everyone – Much has been made of the fact that many of the new homes developed, both for homeownership and rental, target the higher end of the income scale. Developers are sometimes shamed for this fact, although the decision of what market segment is targeted is driven, in part, by the money source and anticipated rate of return on housing investments. Money can choose to invest in the stock market or other industries, if the risk/reward for housing investments does not meet expectations. Decades of research shows that the new market-rate housing of today is the affordable housing of tomorrow; thus “policymakers should try to make housing more affordable where possible, but more housing is always better than less.”

3. Increased Institutional Investment in Housing Is Not a Cause of the Housing Affordability Crisis – While the average American may not know it, it is likely that they are invested in, and making money from, residential real estate through their 401(k), pension, bank or other “institutional investor.” The fact is that “[if] a household rents, the landlord, whether institutional or mom-and-pop and whether single-family or multifamily, simply reflects the household’s demand in the marketplace. Thus, it is hard to argue that institutional rental operators drive up home prices over any reasonable period.” The authors further cite research indicating that more institutional investment in housing can make renting cheaper over time by creating economies of scale and reducing the cost of operation.

4. More Federal Financial Incentives to Localities to Remove Barriers to Housing Could Be Effective – Many of the barriers to creating the housing supply we need are within the jurisdiction of local governments, which, for far too long, have disincentivized the building of more housing and increased costs by creating local zoning codes and other regulations that make it difficult and cost prohibitive for housing supply to keep pace with population growth. These laws have also been used to constrain population growth and exacerbate racial and economic disparities in many communities. The authors suggest that the federal government could play a stronger role in offering more “carrots” (financial incentives) and “sticks” (enforcement actions) to push localities to make housing production easier.

As housing is front and center on the political agenda this fall, many of the conversations miss the most important underlying question: How can we leverage the funds needed to build the housing America needs? While government, largely at the federal level, has played an important role in the housing market through the government-sponsored enterprises (GSEs), the tax code, and HUD and Rural Development programs focused on supporting low- and moderate-income households, these programs do not work without significant private investment. These programs also need cooperation from state and local government, mom-and-pops, small businesses, institutional investors and a multitude of sources in between to be effective. As the Urban Institute paper points out, the housing shortage is significant, and the “blame game” misinformed. We need everyone at the table working together to solve this problem.

Based in Washington, D.C., the National Multifamily Housing Council (NMHC) is where rental housers and suppliers come together to help meet America’s housing needs by creating inclusive and resilient communities where people build their lives. We bring together the owners, managers, developers and suppliers who provide rental homes for 40 million Americans from every walk of life—including seniors, teachers, firefighters, healthcare workers, families with children and many others. NMHC provides a forum for leadership and advocacy that promotes thriving rental housing communities for all. For more information, contact NMHC at 202/974-2300, email the Council at [email protected], or visit NMHC's website at nmhc.org.