Housing prices continue to climb to new heights for renters and homebuyers of all incomes. Some have raised concerns about a housing bubble, ready to burst as it did in 2007, triggering the deepest and longest recession since the Great Depression. The housing crash was caused by an artificial expansion of demand through the proliferation of highly leveraged toxic mortgages that were badly underwritten. Over the following decade, we grew a deficit of nearly two million homes that were never built.
Despite recent record home building of single-family and multifamily homes, housing prices are rising rapidly, driven by supply shortages, and making shelter less affordable for everyone across the income spectrum. This is as true for rental housing as it is for homeownership. We’re all in this together.
The Case-Shiller House Price Index (HPI) was up 18.8% year-over-year in November, and the Federal Housing Finance Agency’s HPI was up 17.5%. This is higher than the peak before the crash that triggered the Great Recession. Rents are as bad. Year-over-Year rents are up 17.8% nationally. Rent increases are occurring everywhere, from Phoenix, AZ (27.9%) to Greensboro, NC (23.2%). Even Omaha, NE, saw rents rise 10%. Rents in New York City went up 33.5%.
As a result, shelter costs are driving inflation ever higher. Over the past 12 months, the Consumer Price Index rose at an annual rate of 7.5%, the highest since 1982. As White House economists wrote last Fall, “shelter makes up nearly a third of the basket for CPI inflation, and 40 percent of the basket for core CPI that excludes the volatile food and energy components. As a result, even small increases in rent and home prices can, in principle, have noticeable effects on overall inflation.” And since housing is a lagging factor, we can expect to see the impact rise even more.
Several complex factors contribute to this stubborn trend. These include the housing supply deficit, the supply chain crisis and new pressures on household formation as adult children move out of their parents’ houses after moving home during the pandemic. Another fact that can’t be discounted – divorce. Respected housing economist Bill McBride recently suggested that a rising divorce rate caused by the pandemic could be a factor in household growth, despite the smallest population increase since 1918.
As I wrote here last May, inflation has an extremely regressive impact, hurting low- and moderate-income people much more than those with high incomes. Purchases of consumer goods are a much smaller part of high-income budgets. For first-time homebuyers, the impact is severe. For every one percentage point increase in mortgage rates, monthly payments go up 13-14%.
Unfortunately, the primary tool to control inflation is the Federal Reserve Board’s ability to increase interest rates, and that’s bad for housing. While rising rates may be good for leveling off housing price growth, it will make it even harder for those who need a mortgage to afford a home. And it may curtail homebuilding, adding to the supply shortage and undercutting efforts to reduce costs. Falling supply in a market still short of inventory despite record home building, combined with constricted demand, does not offer a good prognosis for recovery. And let’s be clear, rising interest rates will do nothing to improve the global supply chain or rising energy costs.
I’ve depressed myself, and writing this was my idea! So let’s focus on solutions. Here are five policy options to help increase housing supply that we can take action on now.
Two pieces of legislation in the Build Back Better bill have strong bipartisan support and will help increase the supply of affordable housing without stoking inflation. In fact, their impact is likely to be counter-inflationary.
The Low Income Housing Tax Credit (LIHTC) is the most effective affordable housing tool in the federal government. A public-private partnership, it has bipartisan support. It has created nearly 3.5 million affordable units, serving 8 million households since 1986. The Affordable Housing Tax Credit Improvement Act would increase the annual LIHTC allocation by 50 percent over the current level. It would also expand access to LIHTC by using Private Activity Bond financing more efficiently, an important tool for states to create capital for housing development.
Another tool for increasing the production and rehabilitation of affordable housing is the Neighborhood Homes Investment Act, which also has strong bipartisan support. While our primary focus has been on home prices that are too high, in many areas of the country, they are too low. In cities throughout rural America and the so-called “rust belt.” This innovative proposal would provide tax credits in these communities, closing the “appraisal gap,” making these projects feasible and creating more inventory for entry-level homeownership in the process.
These bills don’t need to wait for Build Back Better. They can be taken up by the Senate Finance Committee and the House Ways and Means Committee right now, passed by Congress and sent to the President. He supports them too.
Another important priority is tackling skyrocketing lumber costs, which have added more than $18,600 to the price of a new house and $7,300 to the cost of a new apartment – adding $67 to the average monthly rent. The Biden administration must enter into direct talks with Canada to negotiate a comprehensive softwood lumber accord and follow that accord with combined efforts to increase lumber production in both countries.
Fannie Mae and Freddie Mac also have a role in addressing the shortage of affordable housing. FHFA should work with the Enterprises to develop strategies to increase the production of affordable multifamily properties, increase purchases of LIHTC credits in CRA deserts, and significantly reduce sales of foreclosed properties to investors rather than owner-occupants.
The Federal Reserve and other financial regulators can also play a constructive role, using new Community Reinvestment Act regulations to incentivize banks to make loans to builders financing affordable homes.
There are no easy solutions to inflation or the housing supply crisis, but we can make a difference by working together. That’s why NHC will be working with our members to ask the Biden Administration to appoint a Presidential commission on housing affordability and form an interagency task force to address the affordable housing crisis.
At NHC’s first national policy conference at the Willard Hotel in 1934, Eleanor Roosevelt called upon us to build public-private partnerships to clear away dangerous housing units, many of which had no running water or electricity, and build quality, affordable housing in its place. Government could not do everything, she said, and the private sector must help solve the housing crisis.
The following day, a delegation from NHC, including affordable housing advocates, labor leaders and developers, would meet with her and President Franklin D. Roosevelt to discuss housing priorities during the Great Depression. Just two years later Congress passed the National Housing Act of 1937, which remains the foundation of our approach to national housing policy. We should expect no less of ourselves today.