The housing affordability crisis has no easy solutions, but research has shown a strong correlation between stricter land use regulations and higher costs, Atlanta Fed President Raphael Bostic said Friday.
Speaking at Tulane University in New Orleans, he began by saying that “housing is so fundamental to family well-being and security that one could argue that it transcends the economy,” noting that good housing contributes to better outcomes in other areas, such as for example education and employment.
He added that racial disparities in the ability to leverage housing equity are also critical to any policies intended to promote economic mobility and resilience.
“Unfortunately, today, housing – whether as shelter or as an investment – is not working as well as it could for too many of our neighbors,” Bostic said, according to his prepared speech. “In the generally thriving metropolitan centers of the Sunbelt, in major cities on the coasts and in the Midwest, and even in smaller cities and rural communities, housing is unaffordable for too many.”
He pointed out that the national median household income is about $75,000 a year and that Americans need to spend 41% of that amount to own a median-priced home, which costs about $359,000. This is well above the standard 30% threshold for affordability.
And in some communities the percentage is even higher. In the Miami-Fort Lauderdale-West Palm Beach region, for example, Bostic said median-priced homes take up 54% of household income. Renters also face similar burdens, she added.
“I talked mostly about metropolitan areas,” he said. “But rest assured that affordability is an issue in rural areas too. The issue takes on a different significance in rural areas. Average incomes are lower and in many cases the quality of housing, even access to infrastructure such as sewerage, are urgent concerns.”
Despite the grim statistics, Bostic expressed some optimism in discussing housing policy experiments, highlighting efforts to loosen zoning rules in Florida and Minnesota. Other hopeful signs include the promotion of prefabricated and prefabricated homes to increase supply, while market forces are also spurring production, he said.
However, Bostic highlighted data showing that land use regulation overall has become more stringent. And that could offer a clue to the housing crisis.
“A rapid exercise conducted by researchers at the Atlanta Fed revealed a strong correlation between restrictive land use regulations at the county and metro area levels and housing unaffordability, based on tracking housing affordability our Bank,” he observed. “It is perhaps unsurprising that the tighter the regulatory environment, the more expensive the real estate market, in general.”
To be sure, the affordability crisis is a “nagging and incredibly complex puzzle” that defies easy solutions, Bostic said, acknowledging that it has raised more questions than answers.
His remarks come as earlier hopes that lower mortgage rates would improve affordability have been tempered. Signs of sticky inflation have pushed back the timeline for when the Federal Reserve might lower benchmark interest rates. That has pushed Treasury yields and mortgage rates up in recent months after last fall’s collapse.
Now, homeowners who took advantage of low rates in the midst of the pandemic are reluctant to purchase a new home and finance at higher rates, resulting in a “lock-in effect” that has limited the supply of homes on the market.
Meanwhile, the salary Americans need to buy a first home has nearly doubled since the start of the pandemic, according to Redfin data, and the down payment on the average home has increased 25% in the last year alone, according to a separate Redfin report.
To keep up with rising real estate costs, homeowners are making more and more sacrifices, such as skipping meals and selling their belongings.
“Housing has become so financially burdensome in America that some families can no longer afford other essentials, including food and medical care, and have been forced to make great sacrifices, work overtime, and ask others for money in order to cover their monthly expenses,” said Chen Zhao, head of economic research at Redfin.