Housing shortage risks breaking the American dream

As interest rates rise to combat stubbornly high inflation, increasing mortgage costs are making housing in the US — as across the Atlantic in the UK — even less affordable. In America, today’s 7 per cent rate for a 30-year mortgage, coupled with a median home price of $390,000, yields a monthly mortgage repayment of $2,600; a whopping 53 per cent increase since last December, when both rates and prices were less. The affordability of housing, a function of home prices and personal incomes as well as interest rates, is becoming a political hot-button issue ahead of the midterm elections.

While wages have been increasing as the pandemic has eased, they have failed to offset rising energy, housing and food costs. Although expectations of house price falls are growing, as rates rise, affordability is still expected to be a long-term challenge, especially for first-time buyers and the young.

Some factors behind soaring property values are common across the US and other advanced economies. Declining interest rates helped to fuel demand and prices, but in many places so did constrained land supply, zoning issues, and over-regulated markets. The result is that even before the runaway inflation of the past year, average home prices in 10 countries representing 60 per cent of global gross domestic product had tripled in the past two decades, according to McKinsey Global Institute figures.

In the US, this is fuelling political disenchantment, as younger buyers who cannot find starter homes they can afford are pushed into rental properties, where prices are rising too. To them, a broken market that is stopping them getting on to the housing ladder is a leading indicator for a broken American dream of living a better life than the previous generation.

Republicans are trying to blame President Joe Biden for decreasing affordability. But the president has little to do with the underlying factors, such as monetary policy, supply-chain disruptions, a pandemic-related housing boom (as buyers from rich cities moved into areas with less density, driving up prices in new places), and strict local zoning rules which make it tough to build new housing in the most popular areas.

“Nimby-ism”, or the “not in my backyard” fight by existing homeowners to keep zoning tight so that their own properties do not decrease in value, (or in some cases to try to keep neighbourhoods ethnically homogenous), has become a rallying cry for housing reform. Freddie Mac estimates that the US is short of 3.8mn units of housing, which will require more building. But rising land costs, construction costs and strict local rules make it hard to build new units, particularly cheaper ones. Fewer homes were built in the US in the decade following the 2008 financial crisis than in any decade since the 1960s.

What is to be done? Both the federal and local government should get rid of outdated zoning laws, some more than 100 years old, and use the post-pandemic moment to rethink how urban areas should work — encouraging density, but also diversity. Cities work best when they offer a good mix of office and residential space, smaller units and larger homes, as well as multifamily dwellings. There are lessons here beyond the US.

Government may also need to offer tax credits for low and middle-income families, and incentives for builders to put up high quality, smaller homes. There should be limits, too, on how much of the market can be controlled by big investors: as private equity has entered single family, and now multifamily, housing and rentals, prices have gone up in many markets. Housing is an asset, but also a necessity. Neither families nor politics will be stable until affordability is once again improving.