The urban affordability crisis that defined much of the last decade looks like it’s expanding nationwide. A new study from the MBA found that renters and aspiring homeowners in the low- and middle-income brackets are having a harder and harder time finding affordable housing in metro areas nationwide. Rental and purchase price acceleration is either far exceeding the rate of income growth in growing cities, or isn’t falling in areas where incomes are heading down. The report found that in nearly all of America’s 50 largest metro areas, affordability has decreased for renters and prospective homebuyers. Annual median rent has grown by 2.0%, compared to a 0.8% real increase in annual median income. What that means, according to the report, is that the typical household in 2020 must devote an additional 7.6% of its income to rent than it would have in 2001.
The report was authored by Prof. Mike Eriksen (pictured above), associate professor of real estate at the University of Cincinnati, and Dr. Eddie Seiler (pictured below), AVP of housing economics at the MBA. Seiler and Eriksen explained some of the roots of this affordability crisis. They highlighted why the crisis is broadening out beyond the ‘superstar’ cities like San Francisco and New York that have long horrified affordability watchers. They noted, too, some of the solutions available on the rental and purchase sides of the market that could help ameliorate these issues. Crucially, they emphasized that this issue of affordability, while most easily measured in rentals, will not just be limited to the rental market. They believe it’s up to every key stakeholder in housing to work towards addressing affordability.
“One of the reasons things have become so much less affordable is that we have simply not built enough,” Eriksen said. “I think if you look back, whether on the owner side or the renter side, we are at significant deficits from where we were 10 years ago. What already was not a great situation 20 years ago has become much worse since. It’s a trend that has escalated because of a combination of city land use controls and the stagnation of median incomes across America.”
Seiler agreed with Eriksen noting the “Ls” at the core of this affordability crisis. Lumber prices are high, labor prices are high, land use regulations are high and legislative issues get in the way. Dealing with each of these “Ls” he said, can go a long way to alleviating affordability issues across the country.
Read more: This lender just made sweeping enhancements to its non-QM suite
At the moment, however, the affordability crisis is widening. The gap between rent increases and income growth, according to the report, is occurring in around 80% of America’s largest cities. Many lower- and middle-income people, too, aren’t enjoying the new geographic freedom higher earners have gained since the pandemic began. Jobs in these income brackets are often more tied to a physical workspace in the service industry, and access to public transit can be crucial for accessing opportunities and services. Even if suburban house prices are technically lower, Eriksen and Seiler noted that the additional costs of suburban life make it unaffordable for many.
What was most alarming to Seiler and Eriksen about the report was how rapidly the affordability crisis has expanded into previously affordable cities. Eriksen took the example of Seattle, Washington, where Amazon and Microsoft both have an outsized presence. Median income in Seattle has increased by about 1% a year over the last 20 years. Median rents have increased by around 4.8% at the same time. They cited Washington D.C. as another example of a city where rent price acceleration is outpacing home price acceleration. They noted, as well, that this affordability crisis is playing out differently in the ‘rust belt’ where rents are stagnant, but incomes are actually declining, creating a similar gap.
One of the more effective solutions on the rental side has come in the form of Small Area Fair Market Rents (SAFMRs), a program that effectively gives renters a voucher for the market. They can pay 30% of their income in rent, and the government will make up the gap between what they pay and what the market rate is. What’s improving in these SAFMRs is a greater degree of metro-area flexibility, meaning renters in especially expensive cities aren’t being constrained by a national average.
While that solution plays a role on the rental side, the purchase side remains problematic, especially at entry-level prices. Those houses are often subject to far greater price volatility, moving them far out of the reach of contemporary borrowers. Seiler explained that the mortgage industry can play a key role in solving this issue, but it requires aligning the industry’s countless stakeholders around one purpose.
Read more: An old-school approach to connecting with new referral partners
“At the Mortgage Bankers Association, we’ve taken affordability extremely seriously,” Seiler said. “What we’ve found is that there are a lot of groups pushing for affordability, but there isn’t a lot of cohesion across these groups. Now we’ve been working in a couple of medium-sized markets on a project called ‘convergence’ working on how we can build coalitions to increase affordability and increase homeownership.”
Eriksen noted that, even if the key affordability metrics are being measured in rent gaps, this is not something owners are immune from or that any particular state can avoid anymore. It’s an issue we’re all going to have to tackle, now.
“I think we’re going to see an increasing number of households affected,” Eriksen said. “It’s no longer a blue state or a red state issue. I think we might see more action coming up in some of these more traditional affordable areas, which might, frankly, be in red states. They’re suffering from the same issues that we’re seeing elsewhere in the country as well.”