In the most simple economic terms, property owners benefit from scarcity. The omnipotent supply/demand function of more people and fewer places for them to live means the price of housing goes up. By this reasoning, property owners, particularly rental property owners, shouldn’t want more housing. More housing means more competition, lower prices, and less money.
This overly simplistic understanding of the relationship between property value and housing accessibility is what the general public has come to understand. Property owners are seen as not only benefiting from the affordability crisis but also to blame for it. Landlord has become a derogatory term online; “the landlord special” the captions says every time someone posts a picture of shoddy workmanship done in their rental. Property owners are decried for their compassionless greed and anti-affordability protectionism.
But the real relationship between housing affordability and property value is much more complicated. If housing becomes prohibitively unaffordable to the population it serves, it creates a number of unwanted consequences like mass relocation, social unrest, and economic stagnation. So what is the actual relationship between property prices and housing scarcity? Does the property industry benefit from the unaffordable conditions of our cities? And if so, how do we realign the idea of property ownership with sustainable, equitable development?
The idea of ensuring housing affordability in America started in the aftermath of the Great Depression. An act of Congress in 1934 created the Federal Housing Administration with the mandate to make homeownership more affordable and address the housing needs of low-income Americans. This led to a number of public housing initiatives and the creation of the Federal Housing Administration. In 1965 the Federal Housing Administration was elevated to a cabinet-level agency, and the U.S. Department of Housing and Urban Development, or HUD, was born. Rather than own and manage buildings outright, as the Federal Housing Administration had done, HUD began providing subsidies to housing agencies and property owners to help them make up the difference between revenue from rents and costs of adequately maintaining housing.
Eventually, private owners of affordable housing started opting out as their mandates expired, and so a program was developed to preserve the disappearing stock of subsidized affordable housing. In 1986 the Internal Revenue Service created a Low Income Housing Tax Credit that has been the backbone of the country’s affordable housing ever since. These tax credits create an incentive for the real estate industry to develop and own affordable housing units. Local banks were also pushed to fund affordable housing in order to satisfy the Community Reinvestment Act, which requires financial institutions to help meet the credit needs of their communities.
But even the tax credits and subsidies have not been enough to spur the growth of affordable housing as fast as many hoped. The reason is that building and owning affordable housing is not always as easy as it sounds. The extra layer of bureaucracy, additional financing partners, and ongoing reporting make affordable housing a niche property type that many real estate companies choose not to specialize in. Douglas Durst, the president of one of New York City’s real estate dynasties, The Durst Organization, explained the difficulties of maintaining subsidized housing in a recent interview, “What people don’t realize as far as affordable housing is concerned, is not only is it expensive and takes large subsidies to get it built, but because the rents are so low, they don’t support the operations and the capital improvements,” he said. “So many of these affordable housing buildings end up needing tremendous repairs after 20 years.”
Now more than ever, though, affordable housing is having its moment. Cities and states are mandating that affordable housing units be built using carrots and sticks, which has created an opportunity for the real estate industry. “Conventional and affordable housing industries don’t always agree,” said Allen Feliz, Vice President of Affordable Housing at MRI Software. “Some conventional housing advocates believe certain affordable housing policies, like rent control, are not great for the real estate industry, but that is changing.”
More and more traditional real estate companies are looking for ways to add an affordable housing component to their portfolio. States like California offer density bonuses for developments that have a certain percentage of subsidized housing units. This puts affordable housing at the forefront of many real estate companies’ growth strategies and provides a clear example of how the incentives of the real estate industry align with solving the affordable housing crisis rather than protecting the status quo. “Affordable housing developers and owners get compensated every time they bring another affordable complex online so the more they build, the more money they make,” Feliz said.
The need for development puts much of the real estate industry firmly in the YIMBY camp, a fact that flies in the face of the popular belief that the real estate industry is in opposition with more affordable cities. “We are at a place in the country where affordable housing has become a dinner table conversation, and people are actually ready to fight for affordable housing,” Feliz said. “Plus, the affordable housing industry has some really great trade groups that have become a powerful lobbying force.”
We all have different definitions for the term affordable housing. If you ask politicians and advocates, they will tell you that affordable housing means subsidies and tax credits for the country’s lowest wage earners. But if you ask the average person, they would likely tell you that it means the price of living in their home. There are obvious reasons to protect the country’s most vulnerable citizens. But the housing affordability crisis is about much more than that now. Over the past two decades, the number of people who are “housing burdened,’ (meaning that they spend more than 30 percent of their income on housing) has risen, particularly in the higher income brackets. The 2020 census reported that 46 percent of Americans spend enough on housing to be considered tax burdened, a number that has likely gone up since then.
When it comes to the general price of housing, subsidized affordable housing is enough to really move the needle. There are around 2 million subsidized housing units in the U.S., which grows by a few hundred thousand every year. Even if you add the roughly 1.2 million public housing units, it is still far from the 7 million homes that many estimate need to be built to reduce the price of housing in the country to a healthy level.
What we need in order to make housing more affordable to the majority of Americans is more moderately priced units. These are being called by housing affordability advocates “the missing middle.” Unfortunately, the missing middle is not always easy to construct. New construction is usually on the higher end of the affordability spectrum. New buildings are clean, well-adorned, and have modern amenities. While this might not be the affordable stock that many want, the theory is that they make the rest of the housing stock more affordable by comparison.
“We are clearly not building enough housing,” said Beth Mullen, National Director of Affordable Housing Industry at CohnReznick. “In order to inspire more developers to build more we have to encourage them to do so.” It’s that encouragement that will ultimately help the real estate industry. “There are ways of making it more profitable indirectly. For example, any policies that will speed up the development timeline will encourage more growth,” Mullen said. Time is money when it comes to the real estate industry, so speeding up the permitting and approvals process would certainly help bring about more development.
Cities are rethinking their relationship with real estate to bring the price of housing down. One of the ways is to change what can often be a very inflexible zoning code. For housing to be more affordable, at least in places where people want and need to live, we need to increase density. Doing that often means changing zoning laws. Research shows that relaxing zoning laws has been very effective in slowing rental growth in places that have done so.
Parking minimums are another obstacle that cities are removing for new developments. Buildings with more unit density and smaller per unit square footages are more valuable to both build and own. But they are often not feasible due to parking minimums, especially if they require underground parking garages to be built. Now cities are getting rid of parking minimums for new developments, especially when they are close to transit options. “A lot of ordinances need to be reimagined, including parking,” Mullen said. “Car ownership is down, particularly among young people, so it makes sense to ease those requirements in order to make housing more affordable.”
We know we need more housing, but standing in the way of more development is a number of economic, political, and cultural factors. First, there is a pervasive theory that development, particularly affordable development, lowers property values. This idea has been studied at length and proven to be inaccurate. The most recent of these studies used data from Alexandria, Virginia, from 2000 to 2022. The author found that “affordable units in the city of Alexandria are associated with a small but statistically significant increase in property values of 0.09 percent within 1/16 of a mile of a development, on average—a distance comparable to a typical urban block.”
Still, the real estate industry faces a lot of opposition from locals when it comes to building more housing. Karin Brandt is the founder of coUrbanize, a community engagement tool for real estate owners and developers, “Our clients battle misinformation all the time about affordable housing and property value impacts,” she said. “What happens is that proposals for the missing middle housing get hit by both sides, NIMBYs that don’t want poor people in their neighborhood and affordable housing activists that want there to be more subsidized housing.”
She suggests actively engaging locals and working with city officials to get buy-in. This isn’t always easy because most people worry about any neighborhood change. But developers are finding innovative ways to get around the complaints of the anti-gentrification crowd. Sometimes current residents of buildings getting demolished or renovated can stay at their current rental rates. Other times much-needed community service centers or retailers are added to the development plans.
No matter the tactic, the real estate industry must work hard to change its image. No longer can it be seen as an industry filled with the uncaring profiteers often shown in movies. Only when people understand that the real estate industry stands more to gain from making our cities more affordable will we see less opposition and more collaboration.
The property industry has benefited from unaffordable housing, but those benefits are short-lived. For the industry to grow without holding back locals and local economies, real estate companies must address what is becoming a hot-button issue. Never before has the sentiment of the general public been on the side of opening up more development opportunities.
Housing affordability is getting to a point where something has to be done. If the situation worsens, politicians will be pressured to act in ways that will be much worse for the industry that slows rental growth, such as enacting rent control measures. Most people still think that affordable housing is at odds with the real estate market. It is up to everyone in the property industry to change that belief, as hard as it may be. The future of our industry and our cities depends on it.