The Housing Crisis
1. Introduction
Housing is a human right (see, https://www.ohchr.org/en/special-procedures/sr-housing/human-right-adequate-housing). In 1948, the United States affirmed the principle that housing is a human right when it signed the United Nation’s Universal Declaration of Human Rights (the “UDHR”). Notwithstanding the 76-year history of recognizing housing as a human right, America today finds itself in the depths of a serious housing crisis. The housing crisis is complex, but not complicated; it can be solved. What follows is a discussion of the housing crisis and proposed solutions.
The discussion that follows warrants some explanation of chosen words, terms, and phrases. The ubiquitous euphemism “affordable housing” comes straight out of discredited, trickledown junk economics and the libertarian taking point of "personal responsibility". It is not George W Bush's compassionate conservatism nor is it Bill Clinton's New Democrats progressivism.
To call the housing crisis in America an "affordable housing" issue to say that housing is unaffordable to the buyer or renter. This presumes the cost of housing is set by a market at equilibrium and perfect knowledge of market conditions exists on both the supply and demand sides, i.e, the problem is the housing consumer simply does not have enough money. This distorted and incorrect market view provides moral license to the government and market players to blame the unhoused or underhoused and relieves them of their responsibility to ensure that America’s commitment to housing as a human right is fulfilled.
Think of it this way: there is more profit in the automobile market that sells trucks and SUVs, so automobile manufactures shift production to trucks and SUVs, which have a higher market selling price that compact sedans. A hardworking individual is in the market for a vehicle and is priced out of the new vehicle market because of the high cost of new trucks and SUVs. Therefore, the buyer must turn to the used car market for a less expensive option, but the prices for used vehicles has skyrocketed because a large segment of vehicle buyers are experiencing the same phenomenon which floods the market for used vehicles and drives up the prices. To say there is an “affordable vehicle” crisis places the burden on the buyer whereas in fact this is a dysfunctional, skewed market and the buyer is a victim.
The euphemism "affordable housing" blames hard working home buyers and renters for a market dysfunction. This is unfair and cruel to the victims of the housing crisis. Victim blaming and shaming is never acceptable. Instead, robust programs that addresses the market dysfunction and confirm America’s commitment to housing as a human right is warranted and desperately needed.
2. Housing Market
Housing is a human right; however, it is also an economic market. Like all markets it has a supply side and a demand side (see, diagram below for simplistic drivers of housing prices from supply and demand sides).
Article 25 of the United Nations UDHR states: “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing [emphasis added] and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.”
The United Nations Committee on Economic, Social and Cultural Rights, in a special report, states that the human right to housing includes the following seven elements:
Security of tenure
Availability of infrastructure, materials, and services
Affordability
Accessibility
Habitability
Location
Cultural
Secure, safe, affordable, accessible, and habitable housing in a location of choice (collectively the minimum “Housing Standard”) is simply out of reach for many families and individuals. This is unacceptable in a country that calls itself the wealthiest, most powerful, most prosperous society ever built. No one in America should accept the status quo. There are solutions to the housing crisis. All it takes is political will and the problem can be solved.
3. Housing Market Supply Side Discussion
The supply of housing on the market is a function primarily of two factors. First, how many built homes are for sale or rent at any given moment in time. Second, how many newly constructed homes are for sale or rent at any given moment in time. Each of these two primary factors has subfactors and influences on it, but for purposes of this paper the focus is on these two primary factors. Together, these two factors comprise the total market of homes available to buyers and renters on the demand side of the equation.
3.1. Number of Sellers | Inventory
We are at a 30-year low in the number of existing homes on the market (the above chart is for single family homes, but the same trend exists for apartments). As stated above, there are many factors driving this 30-year low; however, suffice it to say that buyers and renters have little to choose from and prices have skyrocketed. As in the example about automobiles above, when the supply is limited and demand is high prices will rise due to more competition for limited supply.
Evidence of this market condition is observed in the inverse too. During the financial crisis of 2007-2009 home prices dropped significantly due to a freeze in both supply and demand in the market. There were significant layoffs, which impacted the ability of buyers and renters to move forward with acquisition of new homes, which drove down prices.
The charts above demonstrate that in fact there is a functioning housing market in the United States; however, it is not functioning fairly or evenly for all consumers in the market. Buyers and renters at the low to middle market segments are priced out because the industry is producing mostly trucks and SUVs, not economical sedans and compacts. For example, 89% of apartments built in 2020 – 2022 were luxury units and simply not available in the market segment for low to moderate income buyers. This trend is expected to continue. (see, https://www.axios.com/2023/09/07/apartment-building-construction-record-high, and https://www.rentcafe.com/blog/rental-market/market-snapshots/new-apartment-construction/).
With the supply of existing homes and apartments at a 30 year low and new construction overwhelmingly focused on luxury units the prices for the constrained supply of low to moderate prices homes and apartments has skyrocketed.
4. Housing Market Demand Side Discussion
The demand side of the housing market is more complex than the supply side, but in today’s market the demand side is functioning properly. Housing market dysfunction is mostly on the supply side as evidenced above with 89% of new units being in the luxury segment.
4.1. Interest Rates
Interest rates have an impact on demand side because buyers and renters are sensitive to cost. Interest rates for mortgages and housing construction (a component of rent) are not set by a regulatory agency, but instead fluctuate based upon micro and macro market conditions. Accordingly, it is sufficient to say that as interest rates rise demand softens and as interest rates fall demand strengthens. This is an oversimplification because if falling interest rates coincide with increasing unemployment then there may not be a demand increase because the buyers and renters do not have the economic stability to be in the market.
Similarly, as interest rates rise, housing prices tend to soften or fall. This is a generality with many influential factors.
4.2. Economy; Job Market; Wages
Economic conditions impact demand because buyers and renters need sufficient income and stability to move forward with a home purchase or rental. When the economy is strong and stable, buyers and renters have a confidence level that permits them to move forward with their housing plans. Even if employed, a buyer or renter will hold back on buying or renting if they feel insecure about the direction of the economy. Fear of a layoff or other adverse economic condition chills demand.
Wages are a significant consideration in a housing purchase or rental decision. When looking at the data for low to moderate income households a problem quickly becomes evident. Home prices have risen disproportionate to wages. This widening gap between housing costs and wages exacerbates the dysfunctional housing market that builds mostly luxury units and contributes to artificially low demand.
As one can clearly see, home prices have risen nearly 125% since 1970 whereas wages have risen about 22%.
If wages increased at the same pace as home prices we may not have a housing crisis in America.
4.3. Population Growth; Number of Buyers and Renters
Population growth and the number of buyers and renters are separate factors, but closely related. This is also a fairly simple and straightforward market dynamic. The more people in America the higher housing demand and henceforth the more buyers and renters in the market.
(https://www.census.gov/data/tables/time-series/dec/popchange-data-text.html)
As the US Census Bureau data shows, the US population grew by ~128,000,000 million people over the 50-year period of 1970-2020 (today’s population is ~332,000,000). Assuming an average household of four persons, that equates to organic demand growth of 32,000,000 households. The market is only adding approximately 1.5 million new units per year (half the annual population growth) and of those 1.5 million new units most are in the luxury segment of the market.
(see, https://www.census.gov/construction/nrc/historical_data/index.html)
Increasing demand from an increasing population puts upward pressure on the price of a home and rental unit.
[This is a work in progress and will be updated on an ongoing basis.
Proposed solutions to the housing crisis coming soon.]
