The National Association of Home Builders (NAHB) has posted some analysis that argues that buyers in the lower fourth of the market have been entirely priced out of new construction, which only adds more upward price pressure on new and existing homes and to the affordability issue.
The trade group combined its own survey data with construction data from the U.S. Census Bureau and the Department of Housing and Urban Development to conclude that there’s now a significant mismatch between actual prices of new homes and prices that buyers expect to pay, and that the gap is growing.
A survey of recent and prospective homebuyers showed that one-fourth were looking to pay less than $150,000, the NAHB said. But only 1% of single-family homes started in 2020 were between $100,000 and $150,000 and none under $100,000.
That’s the mismatch. Essentially no product for the bottom 25% of the homebuying market.
Now looking exclusively to the stock of existing homes
And now, the trade group points out, the median price of a new home in May 2021 was up 18% from a year earlier, at $374,400, adding to the affordability crunch at the lowest end of the market. The tier right above that -- the 22% of the respondents looking to pay from $150,000 to $250,000 for a new build -- also are unlikely to be accommodated in many parts of the country in today’s market, the NAHB added.
"As a result, these buyers have been forced to look exclusively in the stock of existing homes – where the inventory of homes available for sale remains in a historically low range at a 2.5-month supply, with a six-month supply typically acting as a balanced market," the NAHB said in a recent blog on its findings.
Why affordability matters: Its widespread effects
Concerns about affordability extend beyond finding someone to buy the house a real estate investor or occupying homeowner has to sell. Each of those transactions depends ultimately on a society that can accommodate and sustain, in the case of the American Dream, millions and millions of those.
The same goes for rising rents. People who want to but can’t buy houses have to instead rent. The market for single-family rentals (SFRs) is hot. That’s why it’s attracting so much institutional and even crowdfunding investment, as well as individuals looking for attractive rental properties.
There also are ramifications around rental affordability. Here’s how a pair of California professors frame those issues in a paper titled "Why Affordability Matters" they presented at an American Enterprise Institute conference:
"Our findings suggest that elevated rent burdens are associated with a myriad of adverse household outcomes including residential crowding, long commutes, low levels of family expenditure on health care and other vital family needs, and problems of child well-being and development," wrote Stuart Gabriel of UCLA and Gary Painter of USC.
"At the metropolitan level, constraints on housing affordability have been associated with out-migration of households and firms to peripheral areas or beyond, increased levels of urban congestion, and deterioration in quality-of-life so as to ultimately constrain area job growth and local economic viability,” Gabriel and Painter point out.
The Millionacres bottom line
That paper was presented in April 2017, a few short years before the coronavirus pandemic helped ignite a housing market that had already been fueled by low interest rates and falling supply and is now seeing record sales prices and rents on the rise.
Now, more than ever, providing good housing options is profitable both for the investor and owners, and for society. Investors have some very obvious options, including buying shares of stock from the big homebuilders, SFR rental giants, and multifamily real estate investment trusts (REITs), for starters.
But don’t overlook the opportunities to do well by doing good -- the double-bottom line -- and take a moment to consider buying into what’s formally designated as affordable housing.
Check out this piece by our Liz Brumer for more on that: "Affordable Housing: How Investors Can Participate and Profit."