How the Affordable Housing Shortage is Hurting Your Bank Account

There aren’t enough affordable home and apartments to go around, which means that rent and mortgage payments are taking a big bite out of people’s paychecks.

For millions of Americans, just trying to live an average life seems out of reach. Even with a roaring economy, they feel like they’re earning less than they should, and the cost of necessities like housing and a car eat up a huge portion of their budget.

And you know what? They’re right. Unless you’re a high earner, America can be a tough place to live right now. Incomes are stagnant and costs are up: the perfect recipe to squeeze the average bank account dry.

One thing that’s more expensive nowadays is housing, with a nationwide shortage of affordable housing making the pinch even more painful. And it’s not just affecting homeowners, either; it’s making life more difficult for renters, too.

Here’s what you need to know.


How bad is the affordable housing shortage?

Every year since 1988, the Joint Center for Housing Studies of Harvard University releases a report called State of the Nation’s Housing. According to their 2018 report, there is a real divide between the demand for affordable housing and the supply of housing that’s available, one that is driving price increases well beyond normal inflation.

From the report:

Homeownership rates among young adults today are even lower than in 1988, and the share of cost-burdened renters is significantly higher. Soaring housing costs are largely to blame, with the national median rent rising 20 percent faster than overall inflation in 1990–2016 and the median home price 41 percent faster.

In short: average housing costs take up a larger portion the average paycheck than they did 30 years ago. Money that once went towards food, household expenses, leisure, transportation, you name it, now goes towards simply keeping a roof over one’s heard.

As anyone who was around for the 2007 mortgage crisis will remember, sometimes the housing market goes a little wacky, with massive price increases being driven by easy credit and wild expectations of profit.

But the issue here appears to be a different one. While there are several factors driving this outsized rise in housing costs, one of the primary factors is simply a lack of lower cost units. The folks who are being squeezed the hardest by these higher prices are the ones who can least afford it.

What’s causing the affordable housing shortage?

The Station of the Nation’s Housing report is a fairly sober document, which means they avoid making sweeping conclusions, and they admit when they’re not sure about something. With the housing crisis, they point to several competing factors that are driving up costs.

  1. Stagnant incomes: The report found that the bottom 25 percent of the U.S. has seen only three percent median income growth since 1988, while adults aged 25-35 (the normal range for first-time home-buyers) saw increases of only 5 percent. For comparison, the country’s per capita GDP grew 52 percent over the same time period. As the authors put it, “If incomes had kept pace more broadly with the economy’s growth over the past 30 years, they would have easily matched the rise in housing costs—underscoring how income inequality has helped to fuel today’s housing affordability challenges.”
  2. Fewer new “entry-level” homes being built: According to the report, there were only 163,000 small single-family homes completed in 2016, representing  22 percent of all single-family construction. From 1999–2007, these types of homes represented 33 percent of new construction. “Entry-level” homes are generally smaller and more affordable, perfect for first-time home buyers. With less of these homes available, its harder for people to become homeowners.
  3. Less single-family construction leads to less supply overall: In fact, the problem isn’t just fewer entry-level homes being built, it’s that there are fewer single-family units on the market in general. The report states that “only 610,000 single-family homes were added to the stock annually in 2008–2017.” In order to keep up with demand, they would have needed to add 1.1 million. Fewer new homes mean fewer options for both new and existing homeowners. With supply unable to keep up with demand, prices have risen.
  4. Impediments to homebuilding:  The report makes clear that homes today are generally better made and with nicer amenities than the homes that were being built 30 years ago. Nicer homes with better materials can lead to higher prices all by itself. Still, the authors also cite four primary reasons why building a home is more expensive now than it used to be. The first is a shortage of skilled workers and a corresponding increase in labor costs. The second is an increase in the prices of both raw and manufactured materials. Third is an increasing scarcity of land, especially in booming metro areas. Last, they cite local regulations and fees that not only increase the cost of construction but often disincentive large-scale housing projects that would increase the population density. Less efficient land use causes price hikes.
  5. Fewer public subsidies: The authors of the report specifically mention that expanding the supply of affordable housing will not entirely solve this crisis. Without increased subsidies for very low-income households, issues will remain. “Between 1987 and 2015,” they write, “the number of very low-income renters grew by 6 million while the number assisted rose only 950,000, reducing the share with assistance from 29 percent to 25 percent.” They point to the housing choice vouchers administered by the Department of Housing and Urban Development and the Low-Income Housing Tax Credits (LIHTC) administered by the Treasury Department as two key programs that have not kept up and should be bolstered to provide additional support.

Less affordable housing means higher rents, too.

Earlier in this post, we cited a passage that mentioned “cost-burdened” renters. Being cost-burdened refers to people and families who pay more than 30 percent of their income towards housing. From the report:

The cost-burdened share of renters doubled from 23.8 percent in the 1960s to 47.5 percent in 2016 as housing costs and household incomes steadily diverged, with the largest increases occurring in the 2000s. Adjusting for inflation, the median rent payment rose 61 percent between 1960 and 2016 while the median renter income grew only 5 percent (Figure 6). The pattern for homeowners is similar, with the median home value increasing 112 percent and the median owner income rising only 50 percent.

You read that right, almost 40 percent of renters are overly burdened by the cost of their housing. Discussions around housing often circle around homeownership, but these issues don’t just affect those who own. A lack of affordable housing supply means all types of people are affected.

Think about it: stagnant incomes don’t differentiate between renters and homeowners, while higher building costs and labor, plus more expensive land, affects the cost of constructing apartment buildings, not just single homes. The same goes for insufficient public subsidies.

Unless you have owned your home for a really long time, this affordable housing shortage is almost certainly draining funds from your bank account. That’s money that you could be putting towards an emergency fund or to pay for your children’s education. This a crisis that pretty much affects us all, whether we like it or not.

So what can you do?

At a different type of personal finance blog, they might tell you to wait until the inevitable housing crash that’s coming courtesy of our overheated economy, swooping in when prices are at their absolute rock bottom.

Yeah, we’re definitely not that kind of finance blog. Instead, the advice we can offer you is pretty simple. If you’re looking to buy a home, become an ace at saving money and build up a large down payment.

First-time homebuyers can often get their mortgages approved with much lower down payments, but that will mean larger monthly payments, which could be a worse situation overall. Still, if you find something in your price range, certainly take advantage of the opportunity.

Aside from that, the best thing you can do is to consider moving to an area where the cost of living is more affordable. The State of the Nation’s Housing report makes clear that affordability varies wildly depending on location. Buying a home in Fargo, ND is much easier than buying one in San Francisco, CA. Just make sure there are plenty of jobs where you’re moving, as well.

This isn’t an issue that can be solved on a personal level. It’s a grand public policy debate that will need years to sort out—and even then, there aren’t any guarantees that the problem will be solved. In the meantime, the best you can do is take care of yourself by building up your savings and maximizing your income, either through a new career, a big promotion, or a successful side hustle.

One last thing: If you’re looking to get ahead financially, stay away from predatory no credit check loans like payday loans, title loans, and cash advances. Even if high rents are draining your bank account, these types of short-term bad credit loans won’t make things any better. In fact, they could trap you in a dangerous cycle of debt that could take you from paying too much to getting evicted altogether.

To learn more about saving money, check out these related posts from OppLoans:

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