In a recent chat with two PropTech executives concerned about rising house prices, an interesting linguistic distinction was the focus of our discussion. The two words were affordable and affordability.
In the housing market, the first has a particular resonance, and the second has come to have a specific meaning, defined by the strange times in which we live.
For most people in the industry, the term affordable connotes a particular class of housing that is specifically intended for people of low or moderate income. The connotation can even carry pejorative valences — subsidies, populist political trickery, and so on.
Affordable housing discussions almost always are connected to the notion of “political compromise,” which is to say the compromise between the commonweal-focused public sector and the profit-driven private sector.
The term affordability comes at us from a different angle. It connotes relativity. Whatever one’s income, affordability is a relative term. Of course, the word affordable is too, but it has come to mean a very specific thing in the U.S. and, as such, creates a particular metaphor that is not necessarily synonymous with affordability.
Let’s go from the abstract and philosophical to the real and practical. I live in Bellevue, Washington. The median house price in this city is $1.2 million. Because of this stratospheric number, it doesn’t take a mathematician to know that a family of four making, say, $150,000-per-annum is priced out of the market.
As a point of note, this family is in the 85th percentile nationwide with regard to income but will still feel inadequate when it comes to housing in Bellevue. So affordability in Bellevue has really little to do with the notion of affordable, as we use the word in this industry.
Let’s talk affordability
The data is clear — there is an affordability problem in the U.S. Since 2012, US house prices have risen every year. From 2021 to 2022, prices rose a staggering 19%. One might ask, what about wage growth? Has it kept up with house price growth? The answering is, unsurprisingly, no. A resounding “NO,” that is.
In the 46-year span from 1973 to 2019, real wages remained flat. While home prices have gone up by multiple factors. There are many more factors, but suffice it to say, there is a crisis in house prices.
To understand this not as anything but a crisis, it is important to remember what homeownership means to families. It is the gravitational center of a family’s existence. The factors that radiate from this include: school, neighbors, safety, commute time, livability, air quality, and others.
On the financial side, home equity is the largest source of wealth for American families and as such constitutes a large percentage of generational wealth transfer for most families. Homeownership is therefore not “just another factor,” but is in fact fundamental to a balanced and sustainable economy and even democracy itself.
So when homeownership is effectively closed off to large swaths of the population, the entire fabric of society starts to fray.
So what is to be done?
Outside of a complete re-ordering of the economic system, which some people continue to call for, there are six important pillars of the solution:
1. Immediately de-bias real estate. This includes a deep reconsideration of the meaning of “data” and of the notion of “truth in data” that even well-meaning executives often cling to.
2. Increase supply while simultaneously reducing the single-family home resource footprint.
3. Emphasize and de-stigmatize collective living — whether multi-family homes or other innovative configurations.
4. Develop and nurture a shared-equity business model that allows for partnerships in risk and reward.
5. Regulate big financial institutions with an eye towards equity, community, and profit-moderation.
6. Keynesian government policies with a public dividend.
Some of these will appear obvious, others odious — depends on the reader. Whatever the case, none of these is easy.
There are over 100 companies in PropTech that claim their dedication to home affordability, but even a cursory look at their business models suggest mere financial engineering without the concomitant acquisition of risk and customer benefit.
As such, they appear to be more wealth-extractive than wealthy-creative for families who seek to be homeowners. About 10% of them are the real thing, in this author’s opinion. Each of those in the latter category found a way to offer the customer both a primary and a secondary benefit that actually accrues to community-building and generational wealth creation.
But we need more.
Two particular scenarios are perhaps the most significant to mention: Institutional acquisition of homes — turning people into permanent renters; and the absolute travesty of African-American and Native-American lack of homeownership as the result of deliberate policy.
No company that seeks to do something about home affordability can be seen as whole unless they address these two scenarios.
We know from mathematics, that if we get the angle even a bit incorrect at the beginning, the progression strays increasingly farther from the target.
We have a chance now to get home affordability right. Time to get the protractor out.
This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.
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