Housing affordability 'will never' return, dv01 warns

Long-term conditions in the U.S. housing market have made one thing clear to dv01 researchers: housing will never be affordable again.

This is the title of a report authored by Vadim Verkhoglyad, vice president and head of market intelligence and research at dv01, which is part of Fitch.

The gap is substantial. The ratio of household formations to housing starts, the shortage since 2010 is 3 million homes; using permit data, it shows a 2.1 million gap, but not all of those morph into a housing start.

A brief respite then a return to the new norm

Verkhoglyad pointed out that conditions had changed for a brief period between 2018 and 2022, supported by low interest rates, income growth and fiscal stimulus.

Those have now reversed, driven by declining affordability and leading to decreased household formation and an increase of people living with their parents.

Furthermore, the affordability problem is not just a U.S. issue but runs across every developed society, Verkhoglyad said in an interview.

He compared this to the situation after the Great Financial Crisis, when everyone was looking to identify one single cause of the problem. Much in the same way, the markets and government are looking for the one single cause for housing unaffordability and in reality the situation is structural.

The report said those structural elements will make it nearly impossible to return to the historical levels of affordability in the foreseeable future.

A deep and persistent problem with no easy fix

The point of the paper is not to suggest the outcome is guaranteed, but that the problem is deep and persistent and cannot be easily fixed through incremental policy changes.

Affordability can improve for the short-term, but longer-term, returning to the norms of the 1990s or 2010s would be difficult.

"Building does help solve the problem," Verkhoglyad said, pointing to three global cities which are taking different approaches to combating affordability. Singapore is taking a supply approach, Tokyo is looking at it from both supply and demand and Auckland is working on it from a demand approach.

The first two of those cities have transportation, while Auckland is working on it; but the U.S. "sorely lacks" this, he continued.

The need for a transportation infrastructure

In many U.S. cities, "housing construction exceeds the development of transportation infrastructure," Verkhoglyad said.

But the more you build, the further out the community goes and it becomes less viable because of the lack of transportation.

"If you don't address transportation, it actually doesn't solve affordability," he argues.

This being said, what the U.S. does better than other countries is its decentralized economic growth. In the United Kingdom, for example, the economy is centered primarily around London; the country's very different if London, Birmingham and Manchester are taken out of the equation.

It would be difficult to create such a transit infrastructure in the U.S., but when motivated, like with Operation Warp Speed, which accelerated the development of the Covid vaccine, a lot can be accomplished, Verkhoglyad said.

The report pointed out housing must be built where demand exists, but this action is subject to regulation like local zoning and land constraints.

Is upzoning an answer?

The dv01 paper argues upzoning, where policies are revised to increase the number of permissible units constructed, faces political limits, unless it is paired with meaningful transportation and parking reform.

Upzoning is also the topic of a new Urban Institute paper from Yipeng Su, Will Curran-Groome and Yonah Freemark. It looks at housing investment in New York City and Philadelphia over the last 15 years after the introduction of major zoning changes.

"In New York, we estimate that seven neighborhood-scale upzonings collectively resulted in more than 4,000 additional housing units within four years compared with the number of added units on similar parcels that were not upzoned," the authors said. More supply creation is likely in these areas in the future, they continued.

Verkhoglyad in his paper when discussing the need for transportation infrastructure to deal with the shortage, pointed to the New York area as one of few in the U.S where a majority of residents commute via mass transit.

How upzoning worked in Philadelphia and New York

For Philadelphia, Su, Curran-Groome and Freemark said the upzoning effort resulted in a meaningful increase in permitting across the city, especially between 2019 and 2021. It helped generate a maximum of 4,000 additional permits per year in the upzoned areas versus other neighborhoods; many of those permits will not translate into construction, this report noted as well.

"In both Philadelphia and New York, some areas did not see an increase in permitting or housing supply after upzoning, likely because of preexisting, weaker housing markets," Su, Curran-Groome and Freemark said.

The findings mean while upzoning can provide the way for denser development, its effectiveness in addressing a shortage depends on local market conditions and complementary policies.

What you do for work and where you do it matters

What someone does for work, and where they do it, matters for homeownership affordability, a Truework study claims. Depending on the state where they live, people working in certain professions have a path to homeownership, while others are locked out. The report gave the example of food service workers in Hawaii, where only 4% can afford to buy a home. But nearly 100% of software engineers in Maine can achieve homeownership.

In fact, only 16% of verified borrowers from Hawaii meet standard mortgage eligibility criteria, Truework said. California follows with 32%, then Washington, at 40%. At the same time, in West Virginia, Louisiana, Illinois, North Dakota and Ohio, between 76% and 81% meet standard affordability thresholds.

It's the system that's the problem

"It is no longer enough to earn a good income; you need to earn it predictably, in the right occupation, and in the right state," Ethan Winchell, Truework president said in a press release.

"For millions of Americans in service, care, and hourly roles, homeownership is increasingly out of reach, not because they aren't working hard enough, but because the system was not built to accommodate how they earn."

Mortgage qualifying systems need to be adjusted to accommodate things like gig work and other forms of variable income, rather than prioritizing steady and predictable paychecks.

"Unless underwriting models evolve to better account for modern income patterns, we may end up with a housing market that systematically favors predictability over earning potential, leaving a growing share of the workforce on the outside looking in," said Winchell.

The home price/household income ratio is too high

Meanwhile, the median U.S. home price of $414,900 is 5.08 times the median household income of $81,9604, a report from Clever Real Estate and Best Interest Financial pointed out.

It said the ratio should be at or below 2.6 times.

Since 1980, median home prices have increased 551% while income has risen just 373%.

The two tracked closely through 2000, when the gap was just 25 percentage points. But five years later, it grew to 111 percentage points.

Because of the GFC, in 2010, the gap narrowed, but by 2015 it was back out to 136 percentage points. In 2022 it was up to 252 percentage points but two years later came back to 178 percentage points.

In the Clever report the most affordable of the nation's 50 largest metros is Pittsburgh, where the home price is 3.07 times median income. Philadelphia ranked 20th, below the national average at 4.32 times, while New York is 45th at 7.55 times.

At the bottom of the list are four California cities: San Jose, 11.65 times; Los Angeles 9.75 times; San Francisco, 9.62 times; and San Diego, 9.11 times.