The rise in Housing Prices Further Inhibits Affordability – But, May Offer Opportunities to Landlords

Affordable housing across America – whether ownership or rental – is growing scarcer than ever, as the wealthy bid up properties that might once have been considered “affordable.” This is especially the case in the big coastal cities.

It now appears that the COVID-19 impact on the housing market may turn out to be permanent – and will widen the gap between rich and poor. Renters and buyers alike face rising prices that outstrip income growth and favor people with cash savings.

The median prices of a single family home in California has now crossed $700,000, setting a new standard for what the American Dream might cost.

Housing experts say this is a trend that has accelerated over the last five months and is tied directly to the pandemic: Low-interest rates – which the Fed will almost certainly keep in place – are pulling people into the market at a time when everyone is craving more space to live and work.

“Starter” homes in cities that attract young people are almost nowhere to be found. They are also growing harder to find in exurbs. People leaving San Francisco, where the median home price is $1.1 million, will have to pay nearly $500,000 if they move to Sacramento. While affordability was a crisis even before the pandemic, it has been accelerated by the crisis.

While California provides the most extreme example of the problem, the story is the same everywhere. The cost of buying a house across the nation was up 7% in September alone, as shown by the Case-Shiller index. Case-Shiller is an index that is used by securities investors, mortgage banks, servicing operations, and government agencies to make property valuations, assess and manage risk, mitigate losses, and control appraisal quality.

Phoenix, Seattle, and San Diego were the cities with the biggest price increases, and the last five months have seen frenzied real estate activity – not just in these areas, but across the Country. Even as many Americans have struggled to pay rent and mortgages, the wealthy have paid above asking prices for homes that used to be worth a lot less – basically hollowing out the low-end of the market. This leads to a chain reaction that keeps low and middle-income people in rentals and leaves fewer financial incentives for single-family developers to build anything but high-end homes.

A recent report by the Harvard Joint Center for Housing Studies found that supply is tightest for low and moderate-cost homes.

The best solution may be to build our way out – in other words, increase the housing supply to the point where the supply begins to match the demand. Mortgage rates are likely to remain low for the foreseeable future, encouraging home sales. The current lack of supply will continue to drive prices up.  Single-family housing starts have remained under 1 million annually for over ten years, but given the current demand, there is hope for a rise in 2021. The only cure for a supply deficit is to build more homes and to make it cheaper to build those new homes.

The cost of buying a house hit a six-year high in September, and prospective buyers are unlikely to find better deals anytime soon. A measure of home prices in 20 large cities rose at a 6.6% yearly pace in October according to the Case-Shiller price index. That’s up from 5.3% in September. It should be noted that Wall Street economists had predicted a 5.4% increase.

A broader measure by Case-Shiller that covers the entire country showed a similarly large 7% increase in home prices over the past year, marking the fastest 12-month gain since 2014. Home prices have actually risen faster during the worst pandemic in a century instead of going down – as would normally be expected. Rock-bottom mortgage rates and a high volume of people leaving cities during the pandemic for more space in the suburbs and beyond has boosted demand at a time when the supply of homes for sale is near historic lows.

Prices rose in 19 of the 20 large cities tracked by Case-Shiller. The lone exception, Detroit, may have had higher prices as well, but Case-Shiller could not collect enough data because of rising COVID-19 cases in the area. The smallest increases were in New York and Dallas. New York has seen a particularly large outflow of residents after suffering a huge number of COVID-19 cases early in the pandemic. Dallas was another hard-hit area.

In the end, home sales may slow a bit in the face of the current surge in coronavirus cases and a softer economy. But demand – and prices – are not likely to taper off significantly, especially if the newly released vaccines – with more to come – turn out to be effective and widely available. Sales are at the highest level in years and are likely to stay that way once the economic rebound picks up the pace.

What impact will this have on affordable rental housing? According to studies done by the Federal Reserve Board, when sales prices are high relative to rents, rent increases during the three years following a price spike have tended to be larger. This indicates that owners of non-subsidized affordable housing (e.g., the LIHTC program), may see opportunities for a rent increase in the next few years – assuming their properties are not already charging maximum LIHTC rent.