Lawmakers need to address the housing affordability crisis

The nation needs more homes. Since the financial crisis hit nearly a generation ago, homebuilders haven’t built enough housing. There is now an acute shortage. Rents and house prices have soared as a result. Many Americans are struggling to pay their rents, and most potential first-time homebuyers are locked out of homeownership.

The shortage of homes has no precedent. Builders need to put up an estimated 1.6 million new homes each year on average to meet demand. This is what’s needed to house the new households that form, replace homes that are being lost to natural disasters or torn down, and meet the demand for second and vacation homes.

But that number surely understates the demand for new homes given the surge in legal and undocumented foreign immigrants. Governors and mayors are straining to find places for these families to live, even seconding hotels, schools, and other public buildings.

Because homebuilding collapsed in the housing bust during the financial crisis, builders haven’t come close to keeping up with demand. I calculate a shortfall of 1.7 million homes. Even if demand magically came to a standstill, it would take more than a year at the current pace of homebuilding to fill this gap.

The housing shortage is especially serious for rental units for low-income and working-class Americans. According to Apartment List, the median nationwide rent (half of households pay more in rent, half less) is close to $1,400 per month, up $250 just since the end of the pandemic shutdowns. The typical household must shell out over one-fifth of its income on rent each month.

House prices also have surged, and they are up the most for lower-priced homes. Prices for homes in the bottom third of the market have risen an astounding close to 60% since the pandemic. When combined with the runup in mortgage rates, most households hoping to purchase their first home simply can’t afford it.

Homeownership has been the surest way for most Americans to build wealth to help pay for children’s educations and their own retirements. But today’s twenty- and thirtysomethings, the typical age of a first-time homebuyer, are locked out of owning a home. That puts their long-term financial fortunes in grave doubt.

This exclusionary zone foments the housing crisis. Many local governments restrict multifamily development or dense single-family development, prohibit permitting, and jack up development fees. This limits the availability and raises the cost of land, so that there simply isn’t enough buildable land to meet demand in many places. And the costs associated with securing and developing land that is available too often incentivizes builders to put up big homes at high price points. Not the low- and mid-priced homes that are most needed.

This is tough for federal policymakers to address given the sheer number of local governments involved and not-in-my-backyard politics, or NIMBYism. But they should consider conditioning some of the considerable federal aid they provide to local governments on a commitment to make their communities more hospitable to the construction of affordable housing.

A good candidate is transportation funding. Since one of the costs of local decisions that limit affordable housing is that it forces those of modest means to commute longer distances, putting a strain on roads and highways, it makes sense to reward those communities with policies that make it easier for people to live near their jobs.

Homebuilders have also struggled in recent years to develop and maintain a consistent labor force, reflecting the difficulty that many of the trades have in attracting high school graduates into careers requiring specialized skills.

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This is a challenging problem that implicates issues well outside of housing policy. To address it over the long term, policymakers need to develop a more robust training and apprenticeship infrastructure for high school graduates to move into the trades. These sectors offer well-paying careers, but college graduates often prefer to avoid manual labor, and high school graduates often lack awareness or interest in the additional training needed.

Most immediately, lawmakers should pass the tax legislation now making its way in Congress. This legislation includes expanding the low-income housing tax credit. LIHTC is a tried-and-true way of providing tax incentives to build more rental units for low-income households. It works and already supports over 100,000 units a year in communities across the country. Increasing the credit will mean more much-needed rental units by this time next year.

The housing crisis has been long in the making and will take years to resolve under any scenario. But if policymakers work quickly to address the crisis, they will turn housing from a source of increasing financial and social instability for millions of families to one of stability.