America's Housing Shortage

If you’re paying attention to reports emanating from every quarter, you’re aware America is experiencing a critical housing shortage. The cause: Our nation is not building nearly enough new residential units to meet demand.

A most recent biennial report from the federal government finds, despite the gradually improving economy, declines in both new construction and net additions to the housing stock during the preceding year. In addition, a Freddie Mac market commentary notes the total number of housing starts in the prior year (single plus multifamily) was substantially below the historical average between 1970 and 2007.

Additionally, the National Association of Realtors estimates the country’s supply of for-sale and rental units combined is 3 million units short of current demand.

What appears to be happening nationally may not be evident in certain select areas. One such exception is the downtown section of Los Angeles, where dozens of mixed-use condo and apartment towers are replacing parking lots, strip malls and warehouses, as builders erect new homes in a city grappling with a persistent housing shortage.

Other prominent neighborhoods, including Koreatown and Hollywood, are equally awash in residential construction. Unfortunately, what’s happening in these economically booming sections of the community is not visible in less prosperous areas. The development wave in the city’s core is but a ripple in the outlying sections, where the added number of homes cannot keep pace with the growth in population.

Between 1975 and 2015, only one new housing unit was constructed for every 3.7 new residents. And what’s going on in Los Angeles is merely a reflection of what’s transpiring elsewhere.

With 2017 upon us and inflation in check, Americans should be able to breathe easier. However, housing costs continue to climb, all while rents rise at their highest clip in the past seven years. Add to this the fact that home prices nationally increased in the past year by six percent.

And what is this doing throughout the country? Consider Seattle as one example. As technology jobs increased 21 percent in just one year, housing prices rose 12 percent. Only a third of Seattle home buyers outside the technology industry are confident they can afford to live there in the near future. And what’s happening there is evident in Austin, Boston, Denver, Portland, and eventually, in dozens of other American cities, as they become less affordable over the next decade.

The logical question now to be asked is: What are our nation’s leaders doing to resolve the problem? Though it’s too early to know what the new Trump administration’s approach will be, how we’ve functioned during the past half-century is less than encouraging.

Under the direction of the Department of Housing and Urban Development (HUD), efforts have been toward subsidies for the disadvantaged and enforcement of a variety of devices designed mostly to increase the cost of developing and holding real estate.

The rent supplement device where the government pays all or a portion of a tenant’s rent to a private landlord, in effect since the mid-1960s, offers a benefit to both tenant and landlord, but does little to augment the housing supply. Similarly, the federally assisted financing of non-profit housing geared toward low-income tenants possibly encourages some developers to build units which might be otherwise infeasible. Whether this significantly increases the overall housing supply is doubtful.

Unhappily, it’s HUD’s preoccupation with such programs as affirmative action and fair housing, as well as the nation’s more recent embrace of global warming – sorry, it’s now climate change – that’s contributing to the drastic escalation in housing costs.

Since the Fair Housing Act of 1968, federal agencies and the courts have engaged in all sorts of projects designed to eliminate “historic patterns of segregation, achieve truly balanced and integrated living patterns, promote fair housing, and foster inclusive communities that are free from discrimination.”

These obligations understandably ensure the imposition of expenses of all sorts. The result: housing prices increase, and will continue to do so as each new regulatory contrivance becomes established policy.

The following portion of one unnamed Pennsylvania municipality’s interpretation of the Fair Housing Act will give you an idea of how housing prices increase.

 Contracts that will be paid using HUD funds include commitments to provide low-income individuals with a springboard for economic empowerment through direct participation in construction and most other activities funded by HUD.

Hiring Requirements

• 30 percent of the aggregate number of any new hires for purposes of fulfilling any covered contract with [unnamed city] shall be Section 3 qualified individuals.

Subcontracting Requirements

• Construction-type contracts: 10 percent of the total dollar amount of all covered construction contracts shall be awarded to Section 3 business concerns.
• Non-construction contracts: 3 percent of the total dollar amount of all covered non-construction contracts shall be awarded to Section 3 business concerns.”

I’ll now provide you with my analysis of why new housing is often not created. Please stick with me as we take an excursion through some numbers.

In relatively affluent Costa Mesa a 650 sq. ft. newly-built apartment rents for $2,000 monthly. Its total cost, land and construction, is $227,500. The gross rent multiplier (GRM) is cost divided by annual rent, 227,500 ÷ 24,000 = 9.5. My personal belief is if GRM is no greater than 10, the project is inherently sound. As you might guess, apartment units are being constructed in Costa Mesa.

In un-affluent Hemet a 750 sq. ft. apartment rents for $800 monthly. Its cost of construction, considering zero cost for the land, is $131,250. Its GRM is 131,250 ÷ 9,600 = 13.7. Not only is there no land value for residential development, but the parcel’s owner cannot justify building upon it. Again, as you might guess, apartment units are not being built in Hemet.

What’s occurring in Costa Mesa is being repeated in selective areas throughout the country, which is why downtown Los Angeles is experiencing brisk development. Similarly, what’s going on (or perhaps more accurately, not going on) in Hemet is in evidence in numerous cities everywhere.

A concluding thought: Our government officials may bemoan the unpleasantness of the housing shortage as they extol the virtues of grandiose housing for all. And as they strive to benefit the disadvantaged by countless wealth redistribution schemes, they run the risks that come with ignoring economic reality.

Irrespective of the 4.7 percent national unemployment rate the U.S. Labor Department manufactured out of whole cloth, a massive number of Americans have no income – President Trump recently reported 94 million persons 16 and older out of the workforce. The simple fact is, the housing shortage cannot be remedied; its presence is a built-in feature we must live with.

Al Jacobs, a professional investor for nearly a half-century, distributes a monthly newsletter in which he shares his financial knowledge and experience. You may view it on www.roadwaytoprosperity.com/.

al@beachcomber.news