Many Ferndale, Royal Oak, & Berkley residents are complaining about the increased volumes of development (as well as the types of developments aka 'bigfoot houses') and high housing prices. It begs the question: if supply & demand drives pricing, can't we just build more housing to increase supply and decrease the price demanded? Can we saturate the market with housing stock, meet the demand, and naturally experience a decline in purchase price?
In short, the answer is no.
Supply & demand is a great basic economic concept, but it doesn't tend to pan out in areas like Ferndale, or in real estate in general. You'll notice a lot of talk about 'increasing density' and 'building more to create more housing opportunities"; the argument continues that homebuilders haven’t built enough new homes because local governments and residents won’t let the builders build more new homes due to zoning that is too restrictive and NIMBYism. This argument conveniently deflects attention away from the entire demand side of the equation.
But let’s go with it. Let’s assume here that the cause of high home prices is that new home builders are not building enough single-family detached homes.
It doesn’t fit the narrative but it’s hard not to notice on the graph above from the website of the St. Louis Fed that home prices were highest when new home construction was also highest. Building twice as many homes as today didn’t slow down the enormous home price increase in 2005.
Yes, more new home construction tends to put downward pressure on home prices but the Great Real Estate Bubble shows graphically that the downward pressure on prices coming from increases in supply can easily be overwhelmed by the upward pressure put on prices coming from increases in the amount of money chasing homes.
In housing, increases in demand often completely offset increases in supply. Bankers can always increase the supply of mortgage credit faster than builders can build homes. The usual cause of high home prices is demand, not supply.
Demand Side Of The Equation
The demand for homes comes from potential homeowners but also from landlords. (When I say “homeowners” here, I mean owners who live in the homes they own as opposed to landlords.) Both homeowners and landlords are influenced by a lot of factors, especially lending standards but also tax policies. For instance 2017 tax law removed some tax breaks for homeowners (mortgage interest, and state and local tax deductions) but kept all those same deductions for landlords. It also created a new 20% tax deduction for landlords who are set up as “pass-through” businesses. reference
From 2008 to 2012, nearly 750,000 new single-family detached homes were sold (increased supply), but landlords bought over 1,000,000 additional single-family detached homes (increased demand). The increase in demand from landlords was greater than the entire increase in supply from sales of new single-family detached homes over those five years.
In the early 2000s, landlords owned about 13% of the single-family detached homes. By 2013 it was 17%. That may not sound like a lot but in a market where only around 6% of homes are sold in a year, it’s huge, it’s like adding over a half year’s extra demand over those years.
Landlord Demand Equals Two-Thirds Of New Homes Built 2008-2017
If we look over the last 10 years, we see the number of single-family detached homes that shifted from family-owned to landlord-owned was equivalent to two-thirds of all new single-family detached homes sold from 2008 to 2017. In a way, that increase in demand from landlords offset two-thirds of the increase in the supply from builders over the last 10 years.
Despite large home price increases since 2012, the percentage of single-family detached homes owned by landlords hasn’t fallen much. Landlords owned 17% of all single-family detached homes from 2013 through 2016 and it only fell to 16% in 2017 as landlords finally started to sell more homes than they bought. reference
Even Fannie Mae is showing concern, with an article citing More Than 1 Million Owner-Occupied Starter Homes Have Been Lost Since the Onset of the Housing Bust
How Did We Get Here?
During the crisis, America’s homeowners lost $17 trillion of home equity, and millions—perhaps as many as 10 million—lost their homes entirely. But homeowners didn’t get back all that equity when the market recovered. Instead, a significant portion of the gains went straight to the private-equity funds and other corporate investors who bought low and sold high or are still holding properties as single-family rentals.
While numbers are difficult to come by due to the lack of a federal data collection structure, by any calculation a huge number of formerly owner-occupied homes have landed in the hands of an investor. For example, Zillow estimates that 5.4 million single-family homes transitioned from owner-occupied to rental between 2006 and 2017. During approximately that same period of time, the national homeownership rate declined from 69 percent to around 64 percent.
Unlike in previous cycles, however, these investors didn’t resell once prices had recovered. Instead, investors in the market have stayed, creating a new asset class of large, scattered-site, single-family rental portfolios. It turns out that with rents in most parts of the country at all-time highs, the economics of single-family rentals are extremely favorable to investors, more so than buying, rehabbing, and flipping.
By competing with potential homeowners and reducing the available supply of affordable homes, this ramped-up investor activity in the single-family market has helped lock in the crisis-driven reduction in homeownership even as family incomes and employment have recovered. While single-family rentals have always been a large part of the rental market (albeit often overlooked by policymakers compared to apartment rentals), data shows an unmistakable uptick since the crisis. Today, more than half of all renters now live in single-family properties, and almost one-fifth of all single-family properties are occupied by tenants rather than homeowners. reference
What About Building DEDICATED Affordable Housing?
This isn't necessarily a bad idea. I'm still not pleased with the fact that we're paying another 60k-ish to a consultant in 2019 to give us recommendations after passing an Affordable Housing policy back in 2017.
Current policy:
Requires developers building with 25 or more units to reserve 25% of the units for affordable housing. The requirement applies to future projects, not ones currently under construction. It also applies only to those that involve city-owned land or tax incentives.
For any City -owned or City -acquired land proposed for multiple family housing that would be 25 units or larger, 25 % of the units be set aside for inclusive housing.
The 25% would be made up of the current area median income (AMI $56,142 gross ) at the percentages listed below.
-10% of units equal to or less than 80% AMI ($44,914)
-10% of units equal to or less than 60% AMI ($33,685)
-5% of units equal to or less than 50% AMI ($28,071)
Also included are stipulations to maintain the inclusive housing for 30 years.
The problem? Where are we planning on placing this housing? With the loss of several schools and the subsequent sale of the land to developers, we're down quite a bit of develop-able land. Yes, we have the Pinecrest forest- but that's an incredibly toxic site which would hold large amounts of liability to the owner and potential health ramifications to residents during the construction. And- that's ONE site.
I don't believe we can build our way out of this, and the current trend of development surrounding renovating/rebuilding single family homes into 'bigfoot homes' doesn't exactly keep prices low or stable.
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