A new housing crisis that may derail the middle class
By Glenn Kelman, CEO of Redfin
The lack of new housing created during this economic recovery threatens to undermine the future of many US cities and the middle class.
America's future is happening first here, in Seattle. Just this year, Seattle technology jobs increased 21 percent. Housing prices rose 12 percent. And all the people who built this city out of coffee, lumber and airplanes have struggled to keep up.
Only a third of Seattle homebuyers outside of technology now report being confident they'll be able to afford to live here in 10 years. The same thing will happen in Austin, Boston, Denver, Portland and, eventually, to a dozen other American cities that will become less affordable over the next decade.
The problem is housing.
When we talk about a city's cost of living, we don't mean food, transportation or clothing, which cost about the same everywhere. We mean housing.
We need a government policy all-out in favor of more, denser housing.
Housing is in short supply. For the 40 years prior to 2008, ground was broken on an average of nearly 1.6 million housing units per year. Starts over the past seven years averaged 788,000; even in 2015, a boom year, starts were only 1.1 million.
With Seattle's racial diversity a centerpiece of the failed plan, the fight to preserve local character has become fraught with uncomfortable implications. In Boulder, Colorado, this fall, the rallying cry of residents who attempted to prevent any zoning changes was, "They're coming for our neighborhoods." The maze of NIMBYs ("Not in my backyard"), pols and community organizations a mayor has to win over to get anything built in San Francisco is so complicated, it's now a board game.
There are small signs of change. Austin has a new zoning initiative explicitly defined to create a more affordable, integrated city. Seattle just announced $45 million in funding for affordable housing, raised in part from local developers. But this is a far cry from the all-out effort to keep housing costs low that we'd pursue if our priority was the people who need affordable housing, not the ones who already have it. As it stands today, housing is the only consumer good where any price drop is universally viewed by the government as a calamity.
On a national scale, the impact of this mentality is breathtaking. The migration from poor areas to rich areas that defined American history for a century is, according to academics, reversing, a phenomenon the mayor of Oklahoma City has described as the "Wrath of Grapes."
These same academics note that janitors now earn less in New York after housing costs than in the Deep South. They argue that limits in housing supply are driven by land-use regulations and increase a city's wealth disparity.
Employers are as sensitive to housing costs as their employees, which is why, when we build more houses, we create more jobs. Google (NASDAQ: GOOGL) and Facebook (NASDAQ: FB) are opening campuses across the U.S. because even software engineers can no longer afford San Francisco, where the median home price just topped $1 million . Businesses move jobs across the country or overseas to find places where the same wages can still offer a comfortable life, which begins with a home you can afford.
This is a problem we can solve. It's hard to improve our schools. It's hard to redistribute wealth created by the concentration of technological and financial power or to increase middle-class wages. But it might be easier to lower middle-class costs by building more housing.
First, federal immigration reform would help. The top new piece of legislation on the lobbying list for the National Association of Homebuilders is immigration reform, to give builders more skilled workers from outside the U.S. How serious is the labor shortage? Builders today are hiring security guards to patrol construction sites, not to safeguard lumber but to prevent recruiters from poaching their people.
We also need federal support for low-income lending; at the moment in 2008 when home prices plummeted, the government essentially outlawed private lending to the working class without adequately funding public programs to fill the gap. The result was nearly a decade of profiteering from cash investors who bought distressed properties for pennies on the dollar, then rented them at above-market rates to folks who couldn't qualify for a mortgage.
The problem is housing.
When we talk about a city's cost of living, we don't mean food, transportation or clothing, which cost about the same everywhere. We mean housing.
We need a government policy all-out in favor of more, denser housing.
Housing is in short supply. For the 40 years prior to 2008, ground was broken on an average of nearly 1.6 million housing units per year. Starts over the past seven years averaged 788,000; even in 2015, a boom year, starts were only 1.1 million.
What happened to the laws of supply and demand? From 2010 to 2013, home prices were 56 percent higher than construction costs, an increase from the 1990s when home prices were 33 percent higher than construction costs; most economists attribute this increase to zoning laws designed to preserve a city's character and to protect home prices.
In Seattle, there are 40 percent fewer homes on the market than just a year ago, yet this summer, the city council flip-flopped on the mayor's plan to support more high-density construction after neighborhood associations revolted; even with people marching in the streets for affordable housing, only 37 percent of Seattle homebuyers support denser development.
With Seattle's racial diversity a centerpiece of the failed plan, the fight to preserve local character has become fraught with uncomfortable implications. In Boulder, Colorado, this fall, the rallying cry of residents who attempted to prevent any zoning changes was, "They're coming for our neighborhoods." The maze of NIMBYs ("Not in my backyard"), pols and community organizations a mayor has to win over to get anything built in San Francisco is so complicated, it's now a board game.
There are small signs of change. Austin has a new zoning initiative explicitly defined to create a more affordable, integrated city. Seattle just announced $45 million in funding for affordable housing, raised in part from local developers. But this is a far cry from the all-out effort to keep housing costs low that we'd pursue if our priority was the people who need affordable housing, not the ones who already have it. As it stands today, housing is the only consumer good where any price drop is universally viewed by the government as a calamity.
On a national scale, the impact of this mentality is breathtaking. The migration from poor areas to rich areas that defined American history for a century is, according to academics, reversing, a phenomenon the mayor of Oklahoma City has described as the "Wrath of Grapes."
These same academics note that janitors now earn less in New York after housing costs than in the Deep South. They argue that limits in housing supply are driven by land-use regulations and increase a city's wealth disparity.
Employers are as sensitive to housing costs as their employees, which is why, when we build more houses, we create more jobs. Google (NASDAQ: GOOGL) and Facebook (NASDAQ: FB) are opening campuses across the U.S. because even software engineers can no longer afford San Francisco, where the median home price just topped $1 million . Businesses move jobs across the country or overseas to find places where the same wages can still offer a comfortable life, which begins with a home you can afford.
This is a problem we can solve. It's hard to improve our schools. It's hard to redistribute wealth created by the concentration of technological and financial power or to increase middle-class wages. But it might be easier to lower middle-class costs by building more housing.
First, federal immigration reform would help. The top new piece of legislation on the lobbying list for the National Association of Homebuilders is immigration reform, to give builders more skilled workers from outside the U.S. How serious is the labor shortage? Builders today are hiring security guards to patrol construction sites, not to safeguard lumber but to prevent recruiters from poaching their people.
We also need federal support for low-income lending; at the moment in 2008 when home prices plummeted, the government essentially outlawed private lending to the working class without adequately funding public programs to fill the gap. The result was nearly a decade of profiteering from cash investors who bought distressed properties for pennies on the dollar, then rented them at above-market rates to folks who couldn't qualify for a mortgage.
But the heroes in this story will be our cities. It should be clear by now to the mayor of every major city that deregulating new construction is key to preventing inequality, sprawl and job losses. And the time is now. When homes are built in an area, anyone can see that change in this boom-and-bust nation happens unevenly, with things staying the same for decades, then changing almost overnight.
A middle-class-friendly housing policy would be aggressively focused on causing a glut of housing, but current policy instead causes a shortage — of fairly historic proportions — causing our cities to become unaffordable, with lower job growth.
It's a little scary to imagine how different our neighborhoods will be if we welcome the growth now coming to many American cities. But what will happen if we don't? Americans will always be protective of where we live, and rightly so. But improving the affordability and diversity of our neighborhoods can enrich their history and character and enrich this nation.
— By Glenn Kelman, CEO of real estate brokerage company Redfin
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