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Public Opinion on Housing Affordability: What Are the Long-Term Implications for Investors?
According to a recent Pew Research Center report, there is growing concern among Americans about housing costs, with 69% of respondents indicating that they are “very concerned.” Nearly one-third of the population was categorized as cost-burdened in 2023, spending over 30% of their income on housing, with renters facing the greatest strain. Factors such as elevated mortgage rates, a shortage of new housing, demographic shifts, and urbanization contribute significantly to this issue.
Housing affordability is a topic of increasing concern among both political parties, and it has become a key issue in presidential campaigns. While there is widespread agreement that addressing the housing affordability crisis is critical, solutions vary, and voters often disagree on which policies should take precedence.
Although there is evidence suggesting that zoning reforms can have a positive impact, outdated building codes remain a barrier. Approximately 60% of voters believe rental property investors play a significant role in rising home prices, but research indicates that their influence is relatively minimal. While most voters support government funding for affordable housing, opinions diverge on how funds should be allocated. A Redfin survey revealed that 82% of Americans back rent control, despite substantial evidence that it reduces the supply and quality of rental housing and faces opposition from economists and housing experts.
Recent state and local ballot measures reflect public concern, illustrating the division in opinions on how to address the issue. These measures could have notable implications for real estate investors in major markets.
Securing Funds for Affordable Housing
Several initiatives in the November 2024 elections aimed to secure dedicated funds for affordable housing and homelessness programs. Notably, Los Angeles voters approved Measure A, which replaces a prior sales tax increase with a permanent 0.5% sales tax designed to raise over $1 billion annually for affordable housing and services for the homeless. This measure received strong support from housing advocates and passed with 57% of votes. Despite concerns about the regressive nature of sales taxes, the increased funds are expected to aid in both new housing construction and providing services for the homeless population.
Voters in North Carolina’s Charlotte, Asheville, and Chapel Hill approved bonds totaling $125 million for affordable housing initiatives, with bond repayment coming through property taxes. Similarly, Rhode Island voters approved a $120 million bond aimed at enhancing housing affordability. In contrast, voters in Cary, North Carolina, and Denver rejected bond measures, highlighting some resistance to new funding mechanisms.
Housing Trust Funds
In New Orleans, voters established a housing trust fund, dedicating 2% of the city’s budget to building and rehabilitating affordable housing. Orlando also approved a measure to make its housing trust fund permanent, ensuring a stable source of funding for affordable housing initiatives.
Divergent Views on Rent Control
Rent control remains a contentious issue. Economic theory suggests that rent control is an unsustainable solution, often leading to reduced quality and quantity of housing. However, some studies indicate that rent control can reduce displacement and improve affordability in the short term, which makes it appealing during a housing crisis. Proponents argue that rent control’s negative impacts can be mitigated with stricter enforcement of housing codes, but opponents caution that it often discourages new construction and deteriorates the quality of controlled housing.
In cities like St. Paul, Minnesota, rent control measures limiting rent increases without exemptions for new buildings led to a sharp decline in new housing permits. Similarly, while Los Angeles has seen some new construction despite rent control, it has still struggled to meet housing demand, particularly as the city faces a significant shortage of affordable units.
California’s Rejection of Rent Control Measures
In California, voters rejected Proposition 33, which would have repealed a law limiting local government control over rent increases. This marks the third failed attempt to grant municipalities more power to enforce stricter rent control ordinances. Local measures to implement rent control also faced opposition in several California cities, such as Larkspur, San Anselmo, and Fairfax.
Hoboken’s Rent Control Decision
In Hoboken, New Jersey, voters chose to retain the city’s rent control measures, which limit rent hikes to 25% when a tenant vacates. The referendum would have allowed landlords to bypass this limit by contributing to the Hoboken Affordable Housing Trust Fund. However, the measure was not passed, reflecting the city’s resistance to deregulating rent prices.
Implications for Real Estate Investors
The growing recognition of the negative effects of rent control and the increasing awareness that supply deficits drive high housing prices is generally favorable for real estate investors. While building sufficient housing to meet demand remains a long-term challenge, the recent voter trends indicate a desire to find creative solutions to housing affordability without overly restrictive policies.
This signals a positive outlook for real estate investors, particularly those focused on affordable housing development. The willingness to fund new projects through taxes or bonds, combined with a more balanced approach to rent control, may provide valuable opportunities in the market.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Public Opinion on Housing Affordability: What Are the Long-Term Implications for Investors?
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“