Americans are facing an affordability crisis. Consumers are grappling with higher costs for groceries, energy, healthcare, housing, and more. Homeownership, previously a marker of middle class status, has become less attainable in recent history.
Recent data confirm that trend: the median age for a first-time homebuyer in the U.S. hit a record high of 40 this year, while middle-class income has lagged behind. For example, the share of total U.S. household income held by the middle class has fallen each decade since 1970.
Ryan Allen, associate dean for research and professor of urban and regional planning at the Humphrey School of Public Affairs, is an expert on housing policy and he says a variety of factors have led to the current housing affordability crisis.
We asked Allen to share his insights on the housing market and what public policy changes could help improve affordability.
What's different about the housing market right now, and how did we get here?
Looking back at the 2008 housing crisis, I don’t know if the market ever recovered. We had an enormous amount of foreclosures, housing was overbuilt, and there were dramatic shifts in federal standards around underwriting.
Fast forward to the COVID pandemic, which began in 2020. We had supply chain issues, other factors that constrained supply, and there was very little new housing coming on the market during and post-COVID. Estimates are around five million fewer units were built than what is needed.
Now, a continually growing population and latent demand are causing rapid price appreciation. There has also been a stagnation, in real terms, of household income, particularly among renter households. Income is not keeping up with inflation, let alone price appreciation for housing. If renter households have stagnant income and prices are going up because of constraints in the supply, that’s a bad recipe for affordability.
Have we seen a housing market like this before in the United States?
There are examples, historically, when we’ve had one ingredient of a really tight housing market: a market that has low vacancies, high rates of appreciation, slow additions to supply, and a continually growing population that’s putting stress from the demand side.
I’m sure these ingredients have happened before, but this seems like a pretty special time because we have all of these factors present at the same time. I don’t know that it’s ever come together quite this dramatically in recent memory.
What factors are contributing to a slower rate of home building?
There are a number of issues that are compounding the problem in terms of building. One is a rising cost of inputs into the construction process like lumber, steel, and aluminum, and that can at least be partly attributable to tariffs.
Another issue is an exceptionally tight construction labor market, due in part to the current presidential administration’s immigration enforcement actions.
Immigrants disproportionately work in a variety of facets of construction, and those who don’t have legal status, and even some who do, are being targeted indiscriminately, leading to worker shortages.
Local land use laws and zoning can also make it extremely time intensive to go through reviews, get permits, and start construction for any project. Time is money and it creates more risk. These factors increase the cost of home construction and exacerbate the supply issue.
What role do private equity and institutional investors play in the housing market?
I think in some ways this story is a complicated one, but in other ways it’s pretty simple. Institutional and private equity investors entered the market during the 2008 housing crisis, after banks needed to get rid of a glut of foreclosed properties.
These entities had the resources and saw a real opportunity to buy these homes and flip them, or more commonly, to rent them out. In many cases they can pay in cash and outbid other buyers, making it very hard for first-time buyers to compete. Worst-case scenarios involve firms that rent out a stock of single-family homes, don’t do a great job with maintenance, extract a lot of rents, and flip the property with minimal repairs once they’ve earned enough.
Another issue that is relevant here is short-term rentals, such as Airbnb. These properties are taken out of the market for people who are looking for long-term leases, and that further constrains the supply. Once these investors entered the market, they never looked back.
What steps can local governments take to encourage more home building?
An idea that’s really ascendant right now is loosening up restrictive zoning policies. People are hoping to experiment with increasing the housing density that our land use ordinances allow, and being smarter about where it’s located—for example, developing around transit. Building smaller-footprint housing like townhouses or condos can also make it more affordable for a household to buy.
Another idea is to reduce the number of reviews that need to happen for a builder to get approval for a project. Decreasing the amount of time to get a permit to start building, paired with looser zoning, could allow the private market to build more housing, quickly, and at a reduced cost.
These policy prescriptions don’t involve any kind of budgetary outlay by a city, and they don’t have to increase the subsidy in a scarce budget environment like other solutions might prompt. In the short run it’s not the only thing you can do, but in the long run it’s absolutely necessary.
Ultimately, to serve low-income households, we need to provide deeper subsidies to increase affordability. I don’t believe there is a solely market-based solution for providing affordable housing for this segment of the market.
How is the Humphrey School preparing students to help address the affordable housing issue?
We prepare our students in the urban and regional planning area to understand the affordable housing crisis and other related issues through multiple angles, including policy, development, finance, and applied research.
Our coursework offers in-depth background on housing policy, covering topics such as government intervention in the housing market, the role of the private market, how housing is different from other kinds of commodities, affordability, and the policies that are at play. Other courses cover some of the mechanics of how real estate is produced and the finance aspects of affordable housing.
Beyond their classroom studies, our students also have many avenues to conduct research on this and other topics through capstone projects for external clients, independent studies, and other opportunities here at the Humphrey School and places like the Center for Urban and Regional Affairs (CURA).
Our students also find terrific internships with local organizations, where they get real world experience in land use, real estate, and affordable housing development. All of these experiences translate into important careers that allow our alumni to really make a difference when it comes to addressing the affordable housing challenge in the U.S.
