Large cities such as Seattle are not affordable to middle-class home buyers, says a new report.
Large cities such as Seattle are not affordable to middle-class home buyers, says a new report.

The growing lack of affordable housing for America’s middle class could harm the economic health of the country, according to the author of a new report.

America's Housing Crisis, by the Houston-based Center For Opportunity Urbanism (COU), says that a growing crisis in housing supply is driving middle-class families out of many high-priced areas of the country, notes COU Executive Director Joel Kotkin.

Here, BUILDER talks with Kotkin about the ramifications of the high price of housing and what can be done about it.

Q: In the study, you talk about a housing shortage. Is that for all buyers or just first-time and low-income?
A: The housing shortage is affecting a wide range of buyers – from first-time to low-income to middle-income ones, especially in expensive metro areas.

In most major metropolitan areas of the nation, housing has been affordable for middle-income households since World War II. The median house price tended to be approximately three times the median household income. But in the past several years housing prices in some metropolitan areas have far outpaced incomes. In San Francisco and San Jose, for example, they're as much as nine to 10 times incomes. In Los Angeles and San Diego, they're more than eight times incomes. And in Portland, Seattle and Denver, they are about five times incomes.

All these cities have seen home prices double to triple their previous levels, and all have strong land use regulation, principally urban growth boundaries, which severely limit or even prohibit building on the urban fringe. The resulting shortage of land drives up prices and has been associated with lost housing affordability.

Joel Kotkin
Joel Kotkin

Q: What does this mean for buyers?
A: This means that younger people, and middle-income households that are not homeowners already have little or no opportunity to purchase housing that they desire. Many are forced to rent rather than buy, and others see no alternative than moving to metropolitan areas where housing is affordable.

Housing is the largest expenditure item in the household budget. Excessively high housing prices, which exist in places like San Francisco, San Diego and Seattle, leave less money available to households for other goods and services. This results in a lower standard of living than would otherwise be the case. Higher house prices help shut lower middle-income households out of homeownership altogether, possibly increasing demand for subsidized housing where there is also a shortage as is evident by the waiting lists in many cities.

Q: Is this housing crisis reflective of the country’s income inequality as a whole?
A: Housing, notes scholars in both Europe and the United States, has become the biggest driver of inequality in recent decades. As housing prices go out of reach, it becomes increasingly difficult for middle and working class families to purchase a home, or even find a place with affordable rents. The result has been to drive many working families into poverty; in California, where high prices are largely the result of regulations, upwards of one in four people lives in poverty, the highest rate in the country.

Without home ownership, most Americans lack any decent asset that they can rely upon as they approach retirement. This will create a new class of middle and working class people who will be utterly dependent on income transfers to make ends meet.

Q: Is urban living out of reach for middle-income Americans?
A: Today’s housing crisis is about middle-income households who have been driven from the market by high prices. This was not always the case.

From World War II until the 1970s, median house prices were approximately three times (or less) median household incomes in every major metropolitan area. Similar housing affordability remains today in many metropolitan areas, such as Atlanta, Charlotte, Dallas-Fort Worth, Houston, Kansas City, Columbus, Indianapolis, Nashville and others. However prices have doubled or tripled relative to incomes, with house prices now are severely unaffordable, at 5 to 10 times incomes, in places like San Francisco, San Jose, San Diego, Portland, Seattle, Miami and others (each of these metropolitan areas had house prices of approximately three times or less household incomes in the early 1970s and later).

The difference between the affordable and unaffordable metropolitan areas is that the high cost markets have adopted overly restrictive land use regulations, especially those that ban or severely restrict development on the urban fringe (such as urban growth boundaries). When cities severely cut back land supply, land prices are driven up and house prices rise. In an environment of constricted land supply, there is little that can be done to make cities more affordable. Indeed, it can be expected that housing affordability will continue to get worse in the cities listed above and others with overly restrictive land use regulation. New Zealand is considering a proposal to reverse the problem. It would involve an automatic suspension of urban growth boundaries if housing affordability targets are not met.

Reform of restrictive land use policies is a prerequisite for improving housing affordability. At the same time, it will be very important for cities that have not implemented such strong regulations to avoid doing so. There is justifiable concern about the economic decline of the middle class. Much of this decline results from the reduction in discretionary incomes resulting that occur due to severely unaffordable housing.

Q: How should public officials “make it easier for U.S. housing developers to produce more starter and other homes to accommodate the demand,” as you say in the report?
A: Very simply, by reducing greenfield land regulation, so that houses can be built on land that represents a more reasonable share of the land and house price. That share has normally been around 20 percent, but has been driven much higher in recent years in markets with urban containment policy and related restrictive land use policy, such as California, Portland, Seattle, Denver and Washington DC. There is no higher domestic priority than a better standard of living and lower poverty rates. Housing is the largest expenditure item in household budgets. By unnecessarily driving up land prices through unreasonable regulation, public policy wrongly favors planning goals over human and social goals.