Where Have All the Affordable Homes Gone?

Frank Nothaft Addresses Housing Affordability at EPIQ 2019

By Wade Sands Housing Affordability, Real Estate

Housing affordability has been a growing concern in the housing ecosystem, but why is it such a problem? In his session "Economic Outlook & State of the Housing Industry" at the EPIQ 2019 conference, CoreLogic Chief Economist Frank Nothaft broke down the primary reasons why entry-level homebuyers are having so much difficulty finding affordable housing.

It's Expensive to Be Cheap

While home prices have been steadily rising for many years, Nothaft observed, "We find that lower-priced homes have appreciated much, much more than higher-priced homes." Since May 2018, prices of homes more than 25% above the median have risen 3%, while homes in the lowest tier, those more than 25% below the median, have risen almost 5.5%.

Price Growth Strongest For Lowest-Priced Houses

With prices rising, many would-be homebuyers are scrambling to find homes within their price range. This puts higher demand on affordable homes and raises their prices. The increased activity of Investors, who typically prefer to buy lower-priced homes as investments, has exacerbated the issue. The investor share of entry-level home purchases has sharply risen over the past two decades, going from 10.7% between 1999 and 2003 to almost double at 19.2% in 2015-2019. With more competition for entry-level homes, prices skyrocket even further.

Tight Supply

As demand rises on affordable homes, the supply has become increasingly constrained. Nothaft noted, "New construction, while picking up gradually over the last few years, is still well below what it was prior to the housing boom." The current inventory for homes is tightest in the lowest price tiers, particularly in those between 50 and 100 percent of the median home price.

Modern home builders are showing a preference to build expensive homes over affordable homes. In fact, only about 2% of entry-level homes are new sales, compared to 12% of premium homes. That's less than half of what it was two decades ago.

New Construction Added to Supply of Premium Homes

On the affordable housing shortage, Nothaft concluded, "I don't see that changing any time soon unless we find ways to reduce the cost of producing or delivering lower-priced homes into the marketplace and reducing some of the regulatory costs." In the meantime, with demand rising on an increasingly scarce product, we can expect prices to continue rising on affordable homes for the foreseeable future.

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