Today’s affordability gap: Part 4, how
[Continued from Part 1, Part 2, and Part 3.]
Michael Grunwald’s Washington Post essay highlighted one reason we have a workforce affordability gap — state and particularly local development restrictions that limit new supply and push up the price of those that are developed.
Now let’s go through door number two
But there’s another reason: this income band is the only income group whose housing receives no Federal assistance whatsoever.
Rising real-term wealth and declining real cost of housing has contributed to not only the expansion of the evolving American home, but also the steady and dramatic drop in average household size. Today’s Americans generally live in more space, of better quality, at lower cost, than any large people in history.
We got there, in large part, through targeted production incentives. And in an environment where almost all forms of housing consumption and tenure are incentivized, those not incentivized are effectively penalized.
As I’ve previously written, housing demand is elastic, so that we consume what we can afford, and as we can afford more or less, so we adjust our housing consumption.
Income from least (left) to most (right)
Housing consumption from least (bottom) to most (top)
In this chart, which I’ve used before, the diagonal line denotes housing expenditure at 30% of income. The horizontal axis marks income limits, and the rising arrows deflect at the affordability line and turn into horizontal arrows of consumption.
Now, since from a financier’s perspective homes are occupied by money, not people, the market likes to build housing for the richest:
Market housing is always introduced from the top down
That works great for adding supply, especially when land for development is readily available. And in fact, in the
Meanwhile, at the spectrum’s other end, there are people whose income is insufficient to afford even the minimal operating costs of a debt-free home. We house some of them in public housing:
Public housing has evolved into the housing for those who cannot afford housing
In between public and market housing lies the realm of affordable housing (called ‘intermediate housing’ in
Capital-cost reducing supply incentives create housing across the blue arrowed band
As more fully discussed in Recap’s Web Update 58, housing consumption divides into four broad bands that we can summarize as follows:
· Poverty. Those who cannot afford any housing. They need an income subsidy. 1 in 4 who do receive it.
· Cheap rents. Those who can afford housing with low costs of capital. They need new affordable production. We produce less than we should.
· Market rental. Those who are renters by social, personal, or economic imperative. In most of the nation, rental housing is plentiful, high quality, and very affordable (by global standards).
· Market homeownership. Those on the ladder of long-term asset-building.
Today the
For the last forty years, these four bands have been in rough equilibrium, with gradual transitions between bands. Today, throughout most of
That opens a gap:
Market forces make it impossible for affordability to reach downward. Statutory caps on the income limits (and thus rents) allowed to LIHTC production prevent it from rising upward.
(By the way, today’s LIHTC, the only source of soft equity, is so dominant it figures in about 90%+ of all new affordable rental production, which in turn is about one-quarter of all national rental production. Absent new resources, as goes the LIHTC, so goes the nation.)
I’m utterly convinced that the gap thus opened will not close of its own volition:
Just getting wider
Which is why, in Web Update 58, we propose a workforce housing tax credit.
I’d really like to see this idea gain traction.
I’m starting it — now who’s with me?
If it doesn’t, then stories like Grunwald’s will become not isolated droplets but a torrent of political pressure.
