America's housing industry faces the greatest threat to its sustainability in decades from a crisis of affordability that is shutting out increasingly larger numbers of prospective buyers from purchasing homes, whose prices—despite recent reductions—remain simply out of reach.
Once downplayed by builders and developers as a problem confined to overheated markets such as Las Vegas and San Diego, this affordability crisis is impacting buyers from shore to shore and border to border. Eighty percent of first-time home buyers couldn't afford a $501,390 median-priced home in Los Angeles County in the first quarter of 2007, and three-quarters of all households in all of California couldn't afford an entry-level home priced at $480,670, according to the California Association of Realtors. In Humboldt County, Ariz., north of Phoenix, affordability fell to 12 percent after median home prices rose to $325,000 in March from $309,000 in February. That same month, Vermont issued a report called “Between a Rock and a Hard Place,” which estimates that 67 percent of the state's households don't earn enough to afford the $197,000 median price for a house, and nearly three-fifths of those households can't even afford the state's median monthly rent. Only about one-third of Florida households have annual incomes that would allow them to purchase a median-priced home, compared to 69 percent in 1999, according to Affordable Housing Finance magazine, Builder's sister publication.
“There's a big bubble in the middle,” observes Richard Haughey, the Urban Land Institute's director of multifamily development. James Carr, senior vice president of financial innovation, planning, and research for the Fannie Mae Foundation, gave his audience a jolt when he suggested, during a recent Congress for New Urbanism meeting, that the nation's economic survival could hinge on its creating more affordable housing. If Hispanics and Asians, many with moderate incomes, now account for nearly half of America's population growth, “Who are we building houses for if the fastest-growing segments of our society are least able to afford ownership?” asks Carr.
And what are builders doing to manage this crisis and make their products more affordable? Up until last year, the answer would have been “not much,” as builders milked the surge in home buying during the first half of this decade for every dollar they could wring out of customers. (An index that Yale University economist Robert Shiller uses to track home prices shot up 83 percent between 1997 and 2006; during that same period, weekly earnings for non-farm production and non-supervisory workers increased 31 percent, according to U.S. Bureau of Labor Statistics data.) But by mid-2006, when home sales started dropping precipitously, most builders were concluding that their aggressive pricing had pushed too many buyers out of the market, as the evidence was overwhelming.
Last year, Pulte Homes' Arizona division did research that found its prices and policies excluded 42 percent of Phoenix's buyers. The Boston Globe reports that Northwestern University economist Barry Bluestone calculated that median-income families could afford a median-priced home in only 12 of greater Boston's 161 communities in 2006, compared to those living in 148 of those communities in 1998. While a family of four in Seattle could afford a $280,000 home in 2006, median prices there that year were $450,000 for a house and $290,000 for a condo, reports the Seattle Post-Intelligencer.
The affordability crisis is also manifesting itself uncomfortably in the recent alarming rise of foreclosures that is partly the result of buyers purchasing homes beyond their means. With one in three households spending at least 30 percent of its monthly income on housing, and 15.6 million households—about one in seven—spending at least 50 percent, according to Harvard Joint Center for Housing Studies' estimates, the industry has rarely looked more fragile.
Suddenly, builders are embracing the same affordable customer that many of them had walked away from when their businesses were more flush. And the customers these builders are targeting most aggressively are those “workforce” buyers cherished by employers and municipalities alike. In March, for example, the town of Cromwell, Conn., south of Hartford, held a forum on affordable housing that had an unlikely sponsor: the Middlesex County Chamber of Commerce. The NAHB's CEO Jerry Howard, who attended the meeting, notes that cities and towns understandably panic when escalating home prices force workers—significantly, first responders such as police officers and nurses—and businesses to relocate to less-expensive areas.
“ ‘Affordable' has gone mainstream,” says Doug Guthrie, president of Kimball Hill Urban Centers, which Kimball Hill Homes launched four years ago to get involved in mixed-income projects within urban settings. A poll of 1,205 people that the NAHB and other housing advocates conducted in March found 90 percent citing affordable housing as a “high priority” for the country, and more than half saying America's housing policies are on the wrong track if providing decent housing for all is the goal. Builder conducted its own exclusive survey of its readers, and more than three-quarters of the 731 who replied think the U.S. faces an affordable housing crisis.
Two-fifths of those respondents see affordable housing as a potential market opportunity. In the Dallas/Fort Worth area, 30 percent of the permits that builders pulled last year were for homes that would sell for under $160,000, says Eddie Servigon, vice president of operations for Meritage Homes' Legacy division in Dallas. In that market, Meritage sells 2,000- to 2,200-square-foot homes on 6,000-square-foot lots for between $140,000 and $170,000. But affordable home building “isn't for the faint hearted,” cautions Nelson Mitchell, president of History Maker Homes in North Richmond Hills, Texas. Rising land costs, zoning restrictions, and onerous impact fees can strip margins down to nothing. History Maker's evenflow construction and negotiating skills with trade partners allow it to make money selling a 3,000-square-foot, four-bedroom brick house on a 5,000-square-foot lot for $119,000. “It boils down to discipline,” says Mitchell.
BUYERS ADRIFT Escalating prices are one of several factors that drove America's housing market to this critical juncture. Four consecutive presidents have made homeownership the centerpiece of their administrations' housing agendas, but gains have been modest, especially for Hispanics and blacks whose ownership rates are still under 50 percent. The number of homeless in America—which HUD estimates at 754,000—hasn't changed in 15 years. And the affordable rental market, once a stepping-stone towards ownership, is in disarray, with millions of low-income units having been razed, taken off the market, or converted to market-rate apartments. The National Low Income Housing Coalition estimates another 103,000 rental units are at risk over the next decade because their contracts under Section 8 (the federal government's voucher program that subsidizes affordable rental properties) will expire.