In the comments section of a recent Code Switch post, a reader named Aboubacar Ndiaye gave a long but thoughtful explanation for the many reasons why housing costs are rising, and why there's no easy solution to the problem. He was gracious enough to expand on his thoughts in this commentary.
A report released last month by the Joint Center for Housing Studies at Harvard found that in an environment of increasing rent and home prices, low- and middle-income Americans were seeing a larger portion of their take-home pay going to cover the cost of rent, making their dreams of homeownership seem like a mirage.
Many commentators used the findings to highlight the need for relief and to offer explanations for the increasing cost of housing in American metro areas.
But while the problem of both rental and buying prices squeezing middle- to low- income earners is complicated, there's one issue in particular that is the main driver of unaffordable housing.
But first, here's a list of some of the other factors that contribute to this problem.
Many well-intentioned policies like housing-choice vouchers, affordable housing mandates, rent control, height regulations, historic designations, and protective zoning laws contribute to the creation of a bifurcated, distorted market — one in which a $500 apartment can exist next door to a $3,000 one. Though housing choice vouchers — also known as Section 8 vouchers — allow millions of low-income people to stay out of poverty and stave off homelessness, they also gobble up a huge portion of a city's affordable housing stock. Most perniciously, Section 8 users are likely to be concentrated in a city's most marginalized neighborhoods, contributing to economic and racial disparities between white and minority residents of a city.
Affordable housing mandates, which usually require a developer to set aside a small percentage of new units for affordable housing, sound good in theory. But developers simply pass on the cost of the affordable units to other residents, driving up the cost of market-rate rents. And in cities like San Francisco and Washington, D.C., height regulations — which forbid buildings from surpassing certain thresholds in height — make it tougher to create more housing through denser development.
All of these raise the costs for renters in the open market, but rent control, at least as it is practiced in New York, Washington, and San Francisco, is the most inefficient. In San Francisco, it's leading to a wave of evictions as landlords convert their rental units into condominiums to get around rent-control legislation. In Washington, the system is so dysfunctional that an Urban Institute study could not find the total number of units subject to rent control. In New York, a lottery-based system, as well as a large contingent of legacy residents, leads to "housing misallocation" — that is, where one person lives in a three-bedroom apartment and pays little for it. Instead of instituting city-wide rent stabilization, cities now have a patchwork rental market: The very poor live in public housing, the rich pay exorbitant rents and middle-income earners vie for the few affordable apartments left over.
New Mortgage Rules
After the last financial crash, new tighter lending standards made it next-to-impossible for people with middle incomes to afford to buy homes. Even for government-backed loans from the Federal Housing Administration that sometimes only require small down payments, the new rules make it harder for people with recession-battered credit scores to obtain mortgages. Even if their post-crisis incomes could support a mortgage.
In a report released last year, Shaun Donovan, the secretary for HUD, emphasized that "only those with stronger credit scores are eligible for FHA-insured mortgages with the minimum 3.5 percent down payment." Ironically, because of historically low interest rates and lower home prices, buying is much more attractive than renting in many places. But because of the newly raised barrier of entry for homeownership, cities are full of relatively high-income renters who might have otherwise owned a home. That's another reason there's so much demand for rental units.
As crime rates have plummeted, more people are willing to live within cities. Even in cities and neighborhoods where the poverty rate stayed the same, where every other factor stayed constant, the crime rate dropped. Crime rates have been dropping internationally at rates consistent with the decreases in the United States.
That decrease in crime, coupled with a cultural move away from suburbanization, reversed the wealth/population flight that marked the second half of the 20th century. (Many cities are now close to, or exceeding, their 1950 population highs.) You can see a positive correlation between rising rents and house prices and falling crime rates in places like Atlanta, Washington, New York, Los Angeles, and Chicago. (Some researchers have suggested that the influx of higher income individuals helped push crime down in cities, but as is shown here, here, and here, there is no consensus on just why crime rates have dropped so much.) It's likelier that the end of the burning cities of the 1960s and '70s and the violent crime epidemics of the '80s and early '90s provoked younger generations to move to newly safe central areas. A Brookings Institution study from 2005 showed that the revitalization of downtown areas coincided almost exactly with the end of the crime spikes of the Reagan-Bush era.
Along with high unemployment, and stagnant and falling wages for bottom- and middle-income earners, the hollowing out of the middle class brought with it a geographic realignment. As the economy required higher levels of education, a lot of cities, especially on the coasts, became hubs for a lot of well-paid people who could afford higher rents and higher house prices. As was reported in The New York Times, hyper-gentrification in New York and San Francisco driven by the financial and tech industries have pushed average rents to astronomical levels. Cities like Washington, Chicago, Los Angeles and Boston are now magnets for young, childless, often-cohabitating college-educated professionals whose economic clout has pushed rents higher. The reason why someone in those places can afford a $750,000 house or $3,000 a month in rent is because they get paid enough to afford it. That's more of an issue of structural income inequality than simply a housing policy problem.
Many studies show that one of the crucial steps to gentrification — Disneyfication, some might say — is the presence or creation of artist/creative communities. In Phillip Clay's four-step model of gentrification, a form of economic succession occurs as first starving artists, "marginals," and "urban pioneers" move into low-cost communities. The first generation of artists help make the neighborhood attractive for more well-off "parent scholarship" students and creative types. Those people then attract more established professionals whose quality-of-life demands, like renovated buildings and higher-end retail and dining, drive up housing prices. That was the trajectory for places such as New York City's SoHo, Atlanta's Midtown section, Montrose, Houston; Silver Lake, Los Angeles; the Mission District in San Francisco, Chicago's Wicker Park and Columbia Heights, Adams Morgan, and Logan Circle, in Washington, D.C.
According to a piece in The New York Times back in November, an Australian real estate investment firm basically now owns the Bushwick neighborhood of Brooklyn. This is one of the most hidden factors to high housing costs: mega-landlords and investors who can afford to buy up huge swaths of the available housing stock, reducing the natural elasticity of the market. Investor-driven developments are catalysts, speeding up the pace at which neighborhoods change. Ingrid Gould Ellen, a professor of urban policy at New York University, said in The Wall Street Journal that while "it can take generations for neighborhoods to change," big investors have the means "to purchase lots of homes at once, even in tight credit markets."
On a recent episode of This American Life and in an investigative series for ProPublica, Nikole Hannah-Jones outlined in meticulous detail the way the federal government essentially created and codified racial segregation in the aftermath of the Great Depression. The result of that hyper-segregation is still with us today. As Hannah-Jones said, while all-white communities are now largely non-existent, all-black neighborhoods still exist. As more well-to-do African-Americans have moved out of these all-black neighborhoods because of crime, worsening schools, or simply for the warmth of suburban suns, the populations left behind became poorer and poorer. Neighborhoods like East New York in Brooklyn, College Park in Atlanta, and Houston's Fifth Ward are full of housing projects, large percentages of people on public assistance, and higher crime rates than the rest of their cities.
So what does this have to do with rent prices? The result of all this concentrated poverty is that housing in mostly-white neighborhoods now comes at a premium. Decades of benefiting from better city services, infrastructure, better transportation, better access to financial services, better policing, better school-funding, better health services and better retail options have created a situation in which "good neighborhoods" cost much more to live in than if services had been more equally distributed.
Some might read this and think that this is the result of economic and not racial segregation. But a Brown University study from 2011 and a 2012 report from the Pew Research Center, showed that even if you control for income, communities will remain racially homogeneous. The Brown study showed that in all but two communities in the United States, black households with incomes of $75,000 lived in poorer neighborhoods than white families who earned $40,000 a year.
Another popular argument is that African-Americans might prefer to live in black communities and that this is just a case of self-segregation, but investigation after investigation has proved that Realtors show fewer homes and apartments to black prospective renters/buyers than to white people with the same income and credit scores, steering them into poorer neighborhoods. Banks and other lenders routinely charged African-Americans and Latino households higher interest rates and fees than white borrowers with the same credit profiles, making buying in more expensive, white areas harder. I can't overstate the extent to which this contributes to high rents and home prices.
But the Number One reason why the rent is too damn high and why more folks can't afford to buy a house:
People with money want to live there.
It really doesn't matter what the other factors are. We can talk all day about how San Francisco is only 50 square miles and yet every residential building is only 3 stories high. We can say that if more people were willing to move to Southeast D.C., maybe Dupont Circle wouldn't be as expensive. I can talk about the dirt cheap rent in Brownsville, Brooklyn and Englewood, Chicago or the mansions available in South Atlanta. But if you did away with every housing regulation and every rent-controlled apartment from San Diego to Sag Harbor, people with money will segregate themselves and drive up housing prices in the best parts of their cities. And as a result, they'll drive up everyone else's rents, too.
There's a reason people don't complain about the rising rents in Omaha or Pittsburgh or Buffalo. People with money don't live there. Rents will match people's ability to pay them, no matter where you are. We saw this happen in the oil and natural gas communities in North Dakota. One-bedroom apartments went for $2,100 a month in Williston, N.D. This is not an American thing. The residents of London, Paris, Moscow and Sydney can tell you about their rising rents too.
There's very little you can do about that. To paraphrase the researcher Robert Beauregard, the chaos and complexity of cities do not lend themselves to easy answers.