Why attainably priced for-sale housing has disappeared and opportunities to fill the gap
By Todd Larue
One of the largest — though underpublicized — reasons for America’s housing affordability challenge is the rapid decline of attainably priced, new for-sale homes in most areas. For decades, the homebuilding sector in the U.S. built a preponderance of homes for the middle class, but this practice contracted significantly after the Great Financial Crisis (GFC). Today very little market-rate homebuilding activity targets price points attainable to the middle class. This article outlines why this has occurred as well as the market opportunities and potential barriers to filling the growing gap of attainably priced, for-sale housing.
There is no universal definition of “attainable housing.” For the purpose of this article, attainable housing is defined as nonsubsidized, for-sale housing that is affordable to households with incomes between 80% and 120% of the area median income (AMI). Over the past 30 years, the top 20% of household income earners have seen much more significant income increases when compared with the middle tier, and much of the homebuilding industry has focused on those consumers with means to purchase homes in the move-up and luxury segments. But the story is not just about household incomes. In general, there is a growing mismatch between the demographics of new households, the stated housing preferences of households active in the for-sale housing market and the new home products and price points offered to the market. The mix of sizes of the new home inventory is driving up home prices.
Housing is significantly undersupplied in this country and the industry needs to commit to entitling and designing attainable housing.
Compared to the years leading up the GFC, the share of newly constructed homes larger than 3,000 square feet increased from 19% to 30% by 2019, even though the growth of smaller households have been outpacing traditional family households since the mid-1960s. This shift in home sizes has resulted in fewer than 13% of new homes offered at prices under $200,000 versus nearly 55% fifteen years ago. Lastly, there is generally a shortage of housing supply in many of America’s fastest growing regions, and the industry has not delivered housing at levels in line with household growth in the past 10 years, creating pricing pressure on all for-sale housing, including lower priced resale homes.
Increasingly, community developers and builders are beginning to respond to the growing mismatch between the demographics of new households, the stated housing preferences of active homebuyers, and decreasing affordability through a variety of means, through:
Small Homes: Defined as those with less than 1,400 square feet, small homes offer first-time homebuyers, downsizers, and small households of any age and income level an alternative housing option, even in areas in high demand. Homebuilders, initially looking to target the emerging millennial demographic transitioning out of smaller apartments, have discovered that other generations are also interested in smaller homes.
Value Housing: Homebuilders have been adding brand segments that address attainable housing. Typically, these value products introduce simplicity to their core brand, in terms of both option packages and structural choices.
Missing-Middle Housing: Missing-middle housing, a term coined by Opticos Design, is defined as housing typologies at densities between those of single-family homes and mid-rise communities. This includes duplexes, triplexes, fourplexes, courtyard buildings, bungalow courts, townhouses, multiplexes, and live/work buildings. Local regulatory environments often preclude these housing options from being delivered, but consumer research indicates buyers are willing to accept higher density homes to be in their preferred neighborhood at an attainable price point.
High-Density Detached (Cluster) Housing: In many areas of the country, detached living is the preferred housing type for potential homebuyers. According to RCLCO’s consumer research, over 55% of households, regardless of age, would prefer a single-family detached home to other housing types. Detached cluster homes (8-15 units per acre) allow higher density than traditional single-family homes but create the traditional feel that many homebuyers are looking for.
Housing is significantly undersupplied in this country and the industry needs to commit to entitling and designing attainable housing. Many factors have played a role in limiting the options for middle- and lower-income households to secure housing that is affordable at their income levels, but successful builders of attainable, for-sale housing are looking for entitlement deals in older, desirable walkable neighborhoods as well as revisiting current assets and retrofitting the product offering to meet demand from this market segment.
In addition, they are looking at how future land deals can provide multiple segments of attainable housing within neighborhoods to maximize absorption, create move-up demand in early phases, and offer move-down opportunities in later phases. Ultimately, attainable housing will relieve the current downward pressure on the market that has kept renters from becoming homeowners and made housing increasingly unaffordable for Americans at lower income levels.
Todd LaRue is a managing director with RCLCO, a national real estate advisory firm, and is based in Austin, Texas.