Housing is one industry that probably generates more statistics than Major League Baseball. The whole business of tracking and forecasting housing figures has become a cottage industry unto itself. Yet with all that analysis available, it's curious how the ups and downs of interest rates, home prices, and housing starts continue to dominate mainstream media while the real, untold story unfolding in America is the gap between housing demand and the increasing shortfall of supply.
A new housing forecast prepared for the California Building Industry Association by NAHB vice president Michael Carliner puts the situation into clear perspective.
On the surface, the forecast bears good economic news for Governor Schwarzenegger and the state of California. Continued demand for new housing, together with low-interest rates, are expected to induce builders to start building 193,000 new homes and apartments this year—the most California has seen since 1989. And despite expectations that interest rates will rise, the forecast for 2005 looks almost as promising as 2004, with builders expected to start an additional 182,000 new homes and apartments.
The problem is that California's population is growing by an average 600,000 people a year. That translates into a need for 230,000 new homes, or about 20 percent more than builders are in a position to provide, say state officials. And that's just this year. Developer fees and restrictive land controls have choked the supply of new homes for years. As a result, Californians need 1 million more new homes and apartments than are available, according to CBIA and state estimates. The imbalance between supply and demand has caused land and housing costs to skyrocket, which only compounds the problem.
Governor Schwarzenegger and state legislators in Sacramento don't have to look far to see what's happening. The average cost of a lot in the Sacramento area “has shot up in recent years from $20,000 to $150,000,” says CBIA president Sherm Harmer. “And when you add $30,000 to $50,000 in so-called ‘developer fees'—hidden taxes levied by cities and counties that are ultimately paid by home buyers—the cost of a new home can be $200,000 before the slab is even poured.”
Of course, the law of supply and demand doesn't end at the state line. People can—and increasingly will have to—look elsewhere. The trouble is that a growing population of prospective, and even middle-class, homeowners are running into the same situation across the country.
And that's the sobering point of the CBIA's report. “If we do not provide enough housing to house the main stream of our workforce,” says Harmer, “we will soon start to lose jobs and undermine the stability of our economy.” How long will it be before high-income producing states such as New Jersey and Massachusetts—where new home building remains severely constrained—must reckon with a similar fate?
Indeed, analysts who keep pointing to the rise in home prices, worrying about risks of a housing bubble, are missing the fundamental problem. The real concern should be the massive number of kinks in the housing supply pipeline inflicted by municipal, county, and state officials. Those kinks are effectively rupturing the nation's ability of affordable homes.
The solution isn't to subsidize affordable housing by charging builders onerous fees. That just drives up home prices. Nor does the solution lie in ever-more creative mortgage finance packages. Those programs help, but they are more a bandage in dealing with demand than a remedy for supply.
One place to start would be for more communities to band together to study the true underpinnings of their regional economies and how housing fits in the equation. A great example is the recent work published by The Rauch Foundation of Garden City, N.Y., called “Long Island Index 2004” (www.longislandindex.org).
Another approach would be for municipal groups to engage builders more effectively at the planning table. Sure, builders need to make a profit. But they can also bring a wealth of creative ideas and approaches to the challenge of supplying more affordable housing.
So long as builders are constrained from keeping up with the demand for housing, millions of hard working Americans—and very likely our children—will continue to find the first rung on the ladder of homeownership rising increasingly beyond their reach.