We’re all hearing about the affordable housing crisis constantly these days, but for many homeowners, investors and renters alike, it’s a confusing and overwhelming topic. Understanding more about the causes and trends in the affordable housing crisis might help accelerate solutions to this problem as well as opportunities for real estate investors.
For housing to be affordable you shouldn’t have to spend more than 30% or less of your annual income on rent and utilities, or on a mortgage, property taxes and insurance. Recent data shows that almost half of renters across the country currently spend more than 30% on rent. Even worse, more than 11 million Americans spend more than 50% of their income on rent. Another two-thirds of renters say they can’t afford to buy a home and won’t be able to save for the down payment on one anytime in the near future.
Cities across the country are facing escalating housing insecurity. In the last few years, housing prices have increased at twice the rate of wages. Stagnant wage growth combined with increasing housing costs have led to increased inequality and a housing climate that makes it difficult for millions of Americans to be able to afford a basic need – housing.
How did this happen?
A number of factors have led to the disparity between housing costs and income. In recent years, demographic shifts have been a large part of the problem. Baby boomers living longer and more often living independently have significantly impacted housing inventory. And when baby boomers decide to downsize, which is frequently, this means that there is increased competition for entry-level homes.
In addition, housing policy continues to be a factor in this crisis, as our affordable housing policy increasingly favors homeowners. According to the Harvard University Joint Center for Housing Studies, under current policies, the federal government provides more subsidies and support to middle and upper-middle class homeowners than to low-income renters.
Adding to these foundational issues is a growing NIMBY (not in my backyard) sentiment which stifles many denser projects. Neighbors often oppose new development of affordable housing, making it harder than it should be to build the necessary inventory. In many cities, transportation problems compound this problem, as people have less flexibility to move outside of urban areas. But move outside urban areas they must, as city-living becomes increasingly expensive.
And last but not least are the endless ground up, urban developments targeted at millennials, consisting primarily of studio and one-bedroom units. These too have skewed the marketplace.
A few additional factors are escalating this problem right now. First, since housing supply continues to be limited, demand is driving up sales prices and rent. At the same time, new construction has stalled, in part due to increased cost of materials and labor. Plus, the cost of land in urban areas has increased, further reducing the number of new builds, and forcing smaller more efficient apartments to be built. As a result, the scarcity of new and diverse inventory and the scarcity of resale inventory is working to drive up both home prices and rent, and so the cycle continues.
What does this mean for real estate investors?
The encouraging news for the real estate developer or investor is that while new policies are being created, there is a role that they can play in helping to alleviate this problem.
When considering building a housing project, or investing in one, look to invest in areas that are committed to providing affordable housing and that have plans in place to do so. These markets are probably going to grow.
Finding equity for these projects may not be as hard as it was ten or fifteen years ago. Today there are a growing number of businesses focused on providing affordable housing in a number of ways. Social impact investment firms, opportunity funds and others might provide socially conscious investment for a project that tackles this challenge head on at the same time providing a reasonable rate of return for investors. Crowdfunding equity might also be an opportunity. Recently, Small Change raised $100,000 for a small homeless housing project in Los Angeles from 57 investors who cared enough to invest, some with as little as $500. The offering filled to capacity very quickly.
Finally, keep in mind that new builds alone do not provide the answer to this problem. There are over a million vacant properties across the country. Investing in affordable housing often provides an opportunity to buy inexpensively or through a distressed sale. This can lead to an affordable rental or purchase price while also providing reasonable returns.
The affordable housing crisis is perhaps the most important trend impacting today’s real estate markets. Paying attention to this crisis and deploying a little ingenuity and creativity can lead to both socially conscious and solid investments.