A New Housing Crisis? How US cities are building far too little to meet demand
With towers that reach toward the sky and people brushing quickly past each other on the streets, the life and lights of our cities may be the very heartbeat of America. For many, the excitement is palpable and the opportunities seem endless!
The previous decade has seen a tremendous societal shift as more and more people are choosing to live and work in America’s cities. This trend is especially prevalent among Millennials, who are attracted to the vibrant lifestyle of city living and who often find better job opportunities available to them in these urban markets. This shift is not exclusive to Millennials however, and growing demand for city living has led to what many are calling the “reurbanization of America”.
As people rush to the hustle and bustle of cities across the country, a worrying trend has been emerging. In recent years, the availability of housing has fallen far short of demand in many markets. This has led to unprecedented growth in the cost of housing for numerous urban centers, particularly those with the strongest job markets. Unfortunately, in many of these cities, there is nowhere near enough supply being produced to meet the rising demand.
The lack of sufficient housing has led to an affordability crisis in many metropolitan areas. In Los Angeles for example, the housing stock has increased by 8.6% over the past 20 years. During that same time period, housing prices have exploded by 210.8%, according to a study published by Trulia earlier this year. In New York City, the housing stock grew by 10.9% while experiencing rent growth of 188.3%. The tech hubs of San Francisco and Silicon Valley have seen perhaps the worst of this worrying trend. Over the past twenty years, San Francisco’s housing supply has increased by 12.3% and San Jose’s has increased by 19.5%. In these two markets, housing prices have endured oppressive growth rates of 290.0% and 295.1%, respectively. Many individuals who flock to these cities seeking opportunities and hoping to build a life for themselves have had to come to grip with the reality that home ownership may still be years out of reach. One study published by SmartAsset (a startup offering software tools for homebuyers) claimed that individuals earning the average annual income in San Francisco can only afford a home as large as 135 square feet. That’s about as big as a “full size” parking space. The housing crisis in the Bay Area has become so bad, it has even been turned into a board game.
What does all of this mean for commercial owners and developers of residential real estate? On the surface it seems obvious: there is pent up demand for more housing in many of these major cities. Those real estate professionals who are able to meet this demand with more supply stand to benefit tremendously from the sharp rise in housing prices. It is simple economics, right? But the fact that we as a country have reached this point suggests that there are other factors at work here.
Take Seattle for example. Earlier this year, a study done by Redfin showed that only 33% of Seattle residents (not employed in the tech industry) were confident they would be able to afford to live in the area in the next ten years. At the same time, only 37% of residents support government policies that favor denser housing. How can Seattle make housing more affordable if residents are opposed to development? The clarion call of such residents seems to be, “This is my city, I should be able to afford a home here, and no one else should be allowed in!” This battle cry can be heard by NIMBYs (Not-In-My-Backyarders) in many of the cities across America where affordability is the hardest to come by. Many such activists justifiably want to preserve the character and culture that has made their cities such desirable places to live and they see greater housing density as a threat to that goal.
In order to address these concerns, city governments face a difficult challenge. How do you deliver on two competing requests: provide housing that is affordable and preserve the character of cities by limiting density? While each city will have to find the balance that works best for them, it is apparent that many of these city governments need to simply begin by acknowledging that there is a problem. Once governments, businesses, and residents can agree that housing affordability needs to be addressed, they will better be able to find a consensus regarding how to tackle the issue.
One underlying theme remains apparent however: in one form or another, the housing affordability crisis can only be alleviated by building more housing. Those cities struggling to meet demand will need to identify areas where they can afford to increase density and government officials will need to support policies that favor new development. Commercial real estate owners and developers who work together with these cities will better be able to meet consumers’ pent up demand. Working cooperatively to build more of both affordable and market rate housing, these cities will be laying the groundwork for future growth and will have an advantage in years to come.