Table of Contents
The United States faces the affordable housing challenge. The country, like many others, has been experiencing a population increase with an upsurge in the demand for housing. There has been a slow growth in the housing units, fueling an increase in the cost of houses in the country. The cost of construction has also been high, with the cost flowing down to the consumers. Previous efforts to deal with the problem have focused on creating affordable housing options for the Americans, which has not been effective. Hence, there is a need for better solutions, one of the proposed ways out, focusing on addressing the prevailing economic inequality. As it is not viable to build more housing based on the limitation in space and resources, the government should focus on providing economic incentives to the people to be able to buy and rent from the private developers.
Housing Challenge in the US
The United States of America is one of the developed nations in the world, the leading power in terms of economic development. The country holds a population of 326,568,391 as of 2017, based on the US estimates. The population of the country is about 4.34% of the overall population of the world. Regarding the population density, the country is 36 per Km2 (92 individuals per mi2) (US 2017). In urban population, the numbers are at 82.9 % of the population. From a comparative analysis, the country is larger in terms of population compared to Russia and the United Kingdom (see figure1 below). Just like many other countries in the world, the country faces serious challenges within its housing sector. Especially looking at the population, it is no surprise that providing affordable housing remains a major challenge for the country. The report focuses on the current state of affairs regarding housing, a critique of the past measures and policies to address the challenge and a proposal for the workable solution.
(Source: US 2017)
Recent research and statistics have indicated that there is a major challenge and a barrier to adequate housing in America. According to Brady (2014), the country is not constructing adequate residential houses to cater for the increasing demand borne out of an increase in the population. See figure 2 for the change in population over a number of decades. The population is increasing, and at the same time depending on the same housing units that have been there for decades. There is a serious shortage of newly constructed housing units which has allowed for an increase in the cost of housing in the country. The shortage which has led to a growth in the cost of housing has left a huge part of the population without affordable housing. The housing reality indicates that at the bottom of the housing sector there are households living on a fraction of what is made by a typical American family. Evidently, there is a need for affordable housing for the low-income families, which is yet to be met. From research, there is a myriad of factors behind the housing problem facing the low-income part of the population.
(Source: US 2017)
The main challenge in terms of affordability of housing is created by the whole concept of the increase in the cost of housing units based on the increase in demand. From a federal government biennial report, The Components of Inventory Change, it was revealed that between 2011 and 2013, an increase in the housing stock of the country by a net 270,000 units was achieved. In fact, this was a very slow growth, slower than an assessment carried out in the preceding decade, which was a part of a period that the nation experienced the Great Recession. The conclusion made in the report was that “despite the gradually improving economy, there were large declines in both new construction and net additions to the housing stock during the 2011–2013 period compared to the 2007–2009 period” (Curry and Abrams 2015, p. 146). From the report, it is indicated that there is a serious challenge in terms of housing as the growth in housing does not match the increasing growth in demand.
A market commentary by Freddie Mac revealed that in 2015, the overall statistics on housing in the United States (multifamily and single family) was 30% below the average between the 1970 and 2007 decade (Buckley, Kallergis, and Wainer 2016). The historical average in this decade has not been experienced ever since. According to the National Association of Realtors the for-sale and rental units’ supply in the country is at three million units short of the present demand. Hence, it does not come as a surprise that millions of the people in the country are not able to afford homes or apartments for renting or buying. It does not come as a surprise that many Americans are still struggling to get housing for their families (Balcilar, Katzke, and Gupta 2015). Evidence from the trend also indicates that the problem is not likely to come to an end in the recent future. Americans might continue to suffer, even as demands for housing continue to rise.
The Rising Cost of Housing
The Research Institute for Housing America has indicated an increase in the development of apartments in the country. The study indicates an experience of a historic boom in this sector of the housing market. The volume of multifamily housing has gone up two times in 2012 in comparison to the level in 2010. Another one-third increase was noted from 2012 to 2014. In 2015, newly constructed multifamily houses peaked at 310,000 units (Balcilar, Katzke, and Gupta 2015). Worth noting is that this was the highest number of constructions within a period of two and a half decades. From market research, it is further estimated that one million additional apartments could be constructed in the coming three years. The statistics appear to be positive in terms of providing solutions to the housing problem in the country (Dickson-Gomez et al. 2011). However, this is far from the reality given that the increase in the housing does not necessarily suggest a positive trend for all the Americans. The newly constructed apartments are at a higher cost than a major part of the Americans can afford.
According to Frankel (2006), it is evident that the new apartments and the single family houses that are coming up in the country are targeted to the consumers at the top of the market. The National Association of Home Builders (NAHB) carried out a study that established that 59% of respondents acknowledged that they are not prepared for or able to get a new home at over $249,000. The findings are unfortunate owing to the fact that a mere 35% of the houses commenced in 2015 were at the level or below the said amount. Figure 3 shows the rise in the cost of housing in the country. The houses are especially more costly in the metropolitan parts of the country. Since 2012, most of the starter and trade-up homes that are constructed in 100 of the metropolitan regions in the country have increased in their market price by over 40% (Doling and Ronald 2014). Currently, for a new apartment, the median asking rent goes beyond $1,300. While there are some Americans who are able to pay, the price leaves out around half of the renters in the country.
(Source: Woo 2016)
In the current cycle, the builders of the single-family and multifamily apartments have indicated a trend in which they are targeting the affluent clients. The probable reason for this trend is that based on the current increasing labor and land costs, targeting this segment is the most profitable move. The developers always look at targeting the clients who are best priced to provide a return on their investment. There is also a pressure from the local regulations to move production to the high-end clientele for better results in terms of productivity and profitability. The move is forced by the regulatory fees which do not give incentives for the construction of low-end housing units. The fees have gone up by almost 30%, over the past half a decade, to over $80,000 per home (Dwyer and Lassus 2015). On average, the fees account for almost 25% of the price of a new house. Evidently, the regulatory environment has to contend with a housing sector that is not generating enough housing to cater for the demands.
In the event that new housing units are built, they come at a greater cost for the renters than the prevailing housing options. Affordable housing has been a policy in use in the country since 1992, which was meant to provide housing at a subsidized cost for the Americans. While the need for such housing has been at work for that long, the demand has been increasing and will continue to grow (Kertesz and Weiner 2009). The housing sector has witnessed a growth in the rent paid for the housing units, with the increase being pushed further by the construction of new housing units. The Urban Institute’s indicate that just 28 affordable units are available for every 100 families living in rented houses. Most of the renters have income at or below 30% of regional median income. It is unfortunate that low-income renters have to pay the huge amounts of rent every month while they are expected to take care of their other expenses.
The High Cost of Construction
The government has struggled with the role of providing affordable housing for the people, but it is evident that there is always too much that the government can achieve. The public housing program has worked in the past, but the increase in the cost of constructing the houses has made it challenging for the government to continue playing an active role in the housing sector. The private sector is the main player in the housing sector, explaining the increase in the cost of housing in the modern days (Bhatti 2001). The government can play a role as a de facto developer, though this is as much as it can go in most cases. Direct intervention of the government is becoming challenging every day. The private sector plays the important role, but in the end, the cost of housing is increased and transferred to the end users.
The public sector is unable to resolve the problem of providing affordable housing. The private sector is worse as to some extent the segment is contributing to the problem. The private sector is not in any position to provide affordable housing to the most in need in the American society. According to the developers, the properties do not pencil out (Golant 2003). In addition, the developers in the private sector assert that the cost of constructing new housing units is greater than the ability of those who would be living in them. Especially within the urban parts of the country, the cost of land and constructing the housing units makes it challenging to construct houses suitable for the low-income earners in the country. The basic math challenge and its associated solution is indicated by the Top of Form
Bottom of Form
Urban Institute and National Housing Conference (Symonds, Schwartz, and Ferguson 2011). Using models of housing from Denver, it becomes possible to understand the complexity.
The case of Denver is an important case study to illustrate the problem and solution. The housing projects in Denver were aimed at creating affordable housing options for the residents. To take care of meeting the demands of the projects, housing fund loans, and tax credits would be advanced. Like Washington, Denver does not have a white-hot housing market. On the contrary, compared to many other parts of the country, in Denver, there is a healthier new housing construction. In terms of the regulatory environment, the market is not highly controlled. Denver is alike Charlotte or Minneapolis. There is a unique question posed by researchers in relation to this case study: “Why is it that the private market just can’t build housing at a cost people can afford?” (Renaud and Kim 2007, p. 3). For a huge part of the renters, about 30% who earn local median income, it is not possible to construct without public support. In building, the construction of new multifamily housing units, the potential builders have to take into account the cost of land acquisition, payment for the constructors, and acquisition of building materials. To build, like it is the case of Denver, the builders have to acquire and service a loan, which is not very affordable.
Critique of Current Responses
For the middle and lower class people in the country, the problem of housing will continue to bite, simply because they are not able to afford the cost of production in the housing market. There have been policy actions that have been taken in the past to help in addressing the challenge of affordable housing to the Americans. The reality is that it is not possible or viable to come up with housing units that are completely free for the low-income earners in the country. The reality is that the cost of production is not possible to subsidize to achieve such an end (Lang, Anacker, and Hornburg, 2008). Besides the cost of constructing the housing units, there is a need to maintain the houses. In the end, it would be necessary to require payment of a rent to be able to maintain the housing units. In fact, there have been efforts to come up with public housing to accommodate the low income and other destitute Americans, but these systems have not worked because of the limitations in terms of maintenance.
The public housing has not been effective in providing a solution to the housing problem in the United States. Evidently, the public housing policy is among the solutions that have been sought in the past to provide a solution to the problem. From this perspective, the government would construct housing units to offer residence for some particular groups of citizens, particularly those who suffer from affordability challenges (Bostic et al. 2012). Some of these housing units would be given at a subsidized rent and other for free to those who are not able to pay at all. While the model was well-meaning, it has not been effective in addressing the housing challenge from the perspective of inadequate means for maintaining the houses, especially those given at no cost (MacGee, 2009). For the houses to have a long life, it would be necessary for maintenance to abound. Other costs like water and power have to be serviced regularly. Hence, lack of the financial resources to maintain the houses has led to the failure of the public housing system.
From the perspective of the model proposed by the Urban Institute, there are three options in giving a solution to the housing problem in the United States. The initial step is to establish the fact that the cost equation is the problem (Colton 2002). Hence, it is obligatory to strike the necessary balance, which would provide housing at an affordable cost, and at the same time, ensure that the cost of maintaining the houses is taken care of. One of the options is to demand the residents to pay for the housing units. In this case, it would be necessary to demand more than the renters would be able to pay for their housing units. For some of the residents in the United States, the payment for the rent can take up as much as 30% of the total income of the renter (Andrews et al. 2012). For the poor, this becomes completely impossible because 30% of the salary will mean that they will not have much to spend on other needs including groceries, bus tickets, school, or clothing.
Another option which would ensure that the public housing policy is operational would be to increase the salary of the renters in order to pay the required rent (Aidala and Sumartojo 2007). The problem in paying for the maintenance cost for the housing units would be addressed if all the renters were able to use less than 30% of their salaries in paying their rents. Building housing units that can be paid for by the renters is critical to addressing the housing problem in the country. Building affordable housing units for low-income earners is the solution that is presented in the second option. However, the viability of this option has also come into question because of the reality that the option also requires the renters to pay (Libman, Fields and Saegert 2012). Building affordable housing units does not address the problem of housing for the poor. The poor might not have the financial capacity to pay even the small amount that is necessary to maintain the housing units.
Bridging the gap in paying for the housing and at the same time providing housing for the needy can be achieved through public subsidies. In fact, the bottom line indicates that “building affordable housing is truly a public-private partnership, and the private only takes you so far” (Katz and Turner 2007, 5). The idea is that the housing facilities will need the support from the government to be able to get the necessary maintenance without placing the burden in the hands of the renters. The affordable housing system is the prime model for the government stepping in to provide housing to its people, especially when the public sector has failed to achieve the same. However, the problem is that there might be a need for more public resources to address the affordable housing than could be spared in the public sector (Hall 2007). There is evidence that the demands for housing are on the increase, which means that the government would have to dig further into the public kitty to cater for this need.
While it is necessary to construct more housing units for the people, it is not workable to build the way out of the challenge. From the graph below, it is evident that building more houses would make the problem worse. After all, there might not be adequate space to keep on building more houses for the people to provide affordable housing. Evidence from other countries, including the UK and Australia, the solution has been achieved through demolishing the existing “poor” houses in order to give way for new affordable houses (Kingsley, 2003). However, this solution might not be the most effective in the case of the current problem. Based on the lack of adequate space to continue building, construction of new houses means more cost in terms of acquiring more land. Where there is no more land, the solution could be achieved only by destroying the current houses in order to build new ones. This creates another problem of housing than it is providing a solution. Sweeping away the houses by the developers is leaving more people without housing.
(Source: Legislative Analyst’s Office 2015).
The developers are highly committed to clear the existing housing units towards the end of creating new and more appealing units, which are, in the end, more expensive than the existing ones. It is estimated that 2.4 million affordable units in the United States, have disappeared between 2001 and 2013. The disappearance of the subsidized as well as market-rate housing units has denied the households that earn 50 of area median income the chance to have houses that they can afford (Fletcher et al. 2015). The housing units that are being demolished are mostly in major housing markets like in New York City. However, the reality is also evident in weaker housing markets as long as the developers find the opportunity to create houses that can be charged more in rent. The damage has been done in terms of there being regions where neglect and deterioration has threatened affordable housing (Feldman and Stall 2004). Unfortunately, the housing units which are being constructed can no longer be categorized as affordable because of the residents being required to pay a very high rent.
Addressing the housing problem in the United States cannot be solved by targeting the housing sector alone. In fact, the solution is not in maintaining houses that are economically challenging to sustain because the people are not paying the rent for those units. The solution is not in constructing housing units that are low in quality in order for the occupants to pay less. The problem of housing has not been solved because of reality that the focus is wrong. Like it is proposed in Hong Kong, the solution to the housing problem lies in dealing with the problem of inequality in society (Mitchell 2004). Addressing the challenge necessitates a confrontation of the consequences of the growing economic inequality in the country. Inequality in the housing market is the problem, creating the increase in the cost of houses which leaves out a considerable proportion of the citizens without adequate means to get affordable housing for their families.
From the perspective of the economics of housing model, increasing the supply of the houses will not be the solution. In fact, increasing the supply will make the economic inequality worse and hurt the financial budget and the general economy of the country. The reality is that the property values are increasing and it is necessary for the changes to be made along the same path. Even as the publicly developed houses are being constructed to address the housing problem, it is necessary to ensure that the majority in society are not being left out (Gerardi, Foote and Willen 2010). The idea is to make sure that low-income earners are empowered to compete in the housing market. The reality is a need to raise the standards of living for all the Americans to ensure that they are well suited to access affordable housing for their families. Indeed, in this approach, it will be possible for Americans to gain affordable housing and at the same time be able to cater for their other needs.
The main focus of the solution to the housing challenge is facilitating financing and the financial capacity to be able to afford the housing units. Rather than providing price discounts, it would be necessary to improve the capacity of the Americans to pay the rent or buy the housing unit to provide quality housing for the family (Forchuk, Nelson, and Hall 2006). Evidently, in the event that the people are financially empowered, it becomes possible to provide the necessary financial resources to maintain the housing units. The cost of constructing the houses will be adequately paid for by the final consumer as long as the consumer has the means to achieve the same. It would be necessary to create policies for the government to focus on enhancing the economic reality of the Americans rather than coming down to provide the affordable housing (Vergragt and Brown, 2012). In this case, the government will provide the means for the people to access the housing units.
It is not economically viable for the government to provide free housing to the people. In fact, this is regardless the reality that the people will still be in need of housing. To address the problem, the government should leave the house construction headache to developers (including private developers) and then focus on providing the means to acquire the houses at the development cost. There are major steps towards ensuring this end (Garrett and Koontz 2008). One of them will be providing employment and welfare programs for the low income and other destitute Americans to give them the means to pay for the housing. The second strategy would be providing the loans and other financial incentives for the Americans to get mortgages for their housing. With government guarantee, it is possible for the Americans to get loans from the banks to access housing for their families. The model as used in the HOS units in Hong Kong will go a long way in dealing with the housing challenge in the country.
The housing challenge in the United States is real. The policy makers should come up with the affordable housing model with the aim of designing housing units that could be provided to the Americans at a subsidized cost. The low-income earners in the United States are the greatly affected by the housing challenge because the housing market is being designed in such a manner that the developers are targeting the high-end consumers. With the increasing cost of housing, it is no surprise that only a small part of the citizenry is able to afford housing, leaving the others without proper homes. Hence, the solution to housing crisis in the United States is a matter of urgency as the population grows and the demand for housing is on the increase. Solutions to the problem require creative remedies to the prevailing affordable housing challenge.
Major solutions are possible based on the models that have worked in other countries in the world. For the United States reality, construction of new affordable housing and preserving the prevailing ones is the solution. However, based on the limitation of space and the cost of acquiring space, construction of new units might not provide a viable solution. Hence, the government should leave the private developers to construct housing units at the market cost as they maintain the ones that are in place. In this approach, there will be no challenges in terms of access. The government should not focus on providing affordable housing, but on empowering the Americans to be able to acquire their houses. The government should increase the minimum wage and improve the welfare programs to provide the financial incentives to the Americans to have their homes. Therefore, addressing the economic inequality issue is the main solution to the housing problem even as the cost of housing increases.