Building is not enough: Solving the national housing crisis will take a multi-pronged solution

While new construction is certainly an important component of the solution, Janneke Ratcliffe, VP of the Housing Finance Policy Center at Urban Institute, explained that building is not enough, in a presentation at AHF Live. In her speech, she outlined policy needs and creative industry responses to both build more homes and lower the barrier to access housing. Our team found really strong ideas and insights from her remarks, and we have summarized them for you here.

How did we get here?

Before pursuing a solution to the housing crisis, it is important to understand the nature and severity of the housing problem.

Today, median income doesn’t afford as large of a home as it did before the pandemic. Additionally, rent growth is outpacing wages. Today’s homeownership rate is lower than it was even in the 2000s and is trending downward. The financial strain on households has caused an increase in homelessness, fewer household formations and diminishing health and wellbeing.

Moreover, the nation isn’t building enough new housing. New housing production hit a four-decade low after the 2008 Financial Crisis, and the pace of recovery has been slow, particularly for single family homes and manufactured homes. The biggest shortage is at the affordable end of the sector. While multifamily construction has been strong, new construction starts are down, which portends some problems ahead. Every state has an underbuilding problem to make up for.

Piling on the crisis is the rising cost of land. Land costs now account for 60% of the value of a property, which is astonishing, according to experts. Meanwhile, construction costs account for more than a quarter of the total cost at 28%. Paired together, it is difficult to build new housing units. Exacerbating the problem is an aging housing stock. Public housing, particularly, is in desperate need of an investment in order to stem the obsolescence of our public housing stock.

Addressing the crisis head-on

Building more homes, as most experts explain, is an essential part of the solution, and is the first step. The industry has to start with building more homes and unlocking existing inventory, and increasing supply generally, not just the affordable sector, is important. In markets where rents are easing, there is an above average level of supply, which suggests, not surprisingly, a correlation between building more and declining rental rates.

However, experts also stressed the importance of building targeted affordable housing to meet current demand, with Low-Income Housing Tax Credit (LIHTC) as a big piece of the puzzle. The recommendation to focus more on factory-built homes will help to increase affordable starter home access.

A policy response is important

This is not the first time the nation has faced a severe housing shortage. The nation had even deeper supply shortages before World War II and in the 1960s, and every time, there has been a policy response. The federal government took extraordinary measures in those instances to increase the supply of starter homes and affordable rental housing, so there is a historical roadmap to respond, but each administration has a different set of solutions.

The incoming administration has outlined several ways that it plans to create more housing supply. First, they plan to provide federal land for new housing construction. Although experts say that it is a good idea and makes sense in some markets, it's not really clear how widespread and effective and practical that's going to be. The administration has also promised to lower regulatory costs, most likely through lowering the costs of fees, meeting building codes and Davis Bacon labor standards.²

There is also some concern about the administration’s plans to increase tariffs, which could increase material costs. Additionally, the proposed privatization of Fannie Mae and Freddie Mac may affect the rules for access to affordability, along with financing on both the supply and demand side. There is also concern about the administration’s commitment to cutting taxes. The policy arena is the best chance to influence these outcomes. This new political reality will center around the tax provisions for now, and there could be implications for deficit spending and inflationary risks when these are all implemented.

Legislation can also address the housing crisis directly. The Affordable Housing Credit Improvement Act could lead to the development of 1.94 million units over 10 years through increasing access to tax credits.

Federal policy isn’t alone in reshaping housing policy. A lot of change can also happen at the state and local levels. Cities and states have the power to ease zoning restrictions. Pew Research studies have shown that cities with flexible zoning standards have seen a greater supply increase compared to the national average. Cities and states can also speed the approval process around provisions like lot size and parking to permit more diverse types of housing.

Each solution is a step in the right direction

The housing crisis requires several solutions to address the complexities of the problem, but each solution promises to inch the nation closer to a housing equilibrium. These are important steps that together will help address the national housing crisis. Even without major federal spending programs, thoughtful approaches from the federal, state and local and private sectors can make a big dent in the affordable housing needs facing this country.

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