Perhaps the problem of housing affordability is not yet a crisis, but it is on its way toward crisis unless a change in trend occurs.  Solutions to this problem are pretty obvious, and also quite difficult to achieve.

It’s America. It’s 2023. Everything is a crisis, or so it seems. Our media, social and otherwise, have conditioned us Americans to click and react to news by exaggerating the significance of many insignificant stories. The downside of that media environment is that we can overlook a real crisis when it occurs. Perhaps the problem of housing affordability is not yet a crisis, but it is on its way toward crisis unless a change in trend occurs.

Most homeowners do not view above-average price appreciation as a problem. Their investment – often the single biggest investment they will make – pays off when prices go up. If prices go up faster than normal, the investment is doing better than normal. That thinking fades when the homeowner starts to think about moving to a bigger home. Selling your home for 20 percent or 50 percent more than you paid for it feels like a good thing, until you find that the home you want to buy went up just as much, or more.

For people who want to buy a home for the first time, unusually high appreciation is a barrier to purchasing that keeps getting higher. Over the past few years, as inflation ratcheted up and the inventory of homes for sale plummeted to record low levels, the price of homes surged at double-digit rates. That prevented many renters who had saved to buy a home from doing so.

When the Federal Reserve Bank began aggressively raising interest rates to combat higher inflation in March 2022, it was a double whammy for many would-be buyers and sellers. The additional borrowing costs of mortgages that were two or three percentage points higher than a year earlier became another barrier to purchasing. For existing homeowners interested in selling, the thought of trading a three percent mortgage for one that was double that rate was chilling.

As jarring as the home price inflation and rising mortgage rates were, the problem of affordability in the U.S. housing market began well before the COVID-19 pandemic that drove inflation and interest rates up. The demand for home ownership has outstripped the supply of existing homes for sale for nearly a decade. New construction slumped following the Great Recession, which led to a decade of underbuilding. If the pandemic had not happened, prices would likely be lower than they are today, but it is unlikely that many more buyers would be able to afford a home.

The solutions to the problem are pretty obvious, and also quite difficult to achieve. As is often the case, the government can be part of the solution, but mainly if it pulls back and allows the marketplace to work. Homebuilders are champing at the bit to build more houses, which would relieve the supply problem. However, there are not enough lots, nor enough workers, to make that happen. People are working hard to make home ownership more affordable, but it is going to take time for the solutions to be effective. That is not necessarily a bad thing in the long run. A deep recession or black swan event could send home prices plummeting, as they did in 2008-2009. That would be disastrous for the economy, which would mean fewer people could afford to buy a home. The current market difficulties will pass in time, but that is little consolation for today’s buyer.

The Origins of the Problem

There is no single cause for the affordability problem in the U.S. housing market, but many of the conditions that have pushed home prices out of reach are legacies of the housing bubble of the mid-2000s and the financial crisis that followed.

In the immediate aftermath of the financial crisis, lending froze, and banks failed. The appetite for residential mortgage lending declined and millions of borrowers found themselves underwater. Nearly four million homes were foreclosed upon between 2007 and 2010. The market needed time to recalibrate, and buyers needed to deleverage. The shock to the financial system resulted in regulations under the Dodd-Frank Act that made it harder to offer and accept a mortgage for a while. That chilled the housing market until 2014.

The lingering legacy of those regulations has been on residential development. Financing conditions for residential development, which is a commercial loan, tightened dramatically. Banks were reluctant to finance new developments in the wake of the housing bubble, and the tighter regulations – most of which diminished the return on investment of new developments – cooled demand from developers. The result was a dramatic decrease in the development of new lots for construction. When demand for homes returned in the late 2010s, there were not enough lots to meet it.

It took less than a decade to go from a housing bubble to housing shortage. Since 2018, the tight market conditions, coupled with an extended economic boom, have driven double-digit home price appreciation each year. While there is widespread recognition of the shortage, there are few incentives for developers or builders to risk overextending themselves again. Even after 15 years, the pain of 2007 and 2008 is remembered well.

There are also more recent events that have raised anxieties and produced tighter credit conditions. Beginning with the Silicon Valley Bank collapse in March 2023, several large banks failed in the past few months as a result of mismanaging the risk of rising interest rates. These banks found themselves in a self-fulfilling liquidity crisis, one where depositors fled after fearing that the bank did not have enough liquid assets to cover deposits. While these failures have not led to a systemic collapse like occurred in 2008, two responses to the crisis have further damaged residential lending.

First, systemic fears have inspired a flight from depositors. More than $1 trillion has moved from regional bank balance sheets to one of the national banks or major money market funds. That weakens the level of asset that banks hold in reserve against loan defaults, which, in turn, reduces the number of loans regional banks can make. Second, in response to the potential crisis the federal banking oversight system required banks to increase their reserve levels and decrease their exposure to real estate. The result is that far fewer dollars are available for residential development.

“Banks are tight right now. I spoke to my banker yesterday and he told me that all banks are tightening up for commercial loans and residential development,” reports Jeff Costa, founder of Costa Homebuilders. “My bank is not taking on new customers right now. For commercial projects they are only going to serve
existing customers.”

A demographic sea change is the icing on the cake for the current housing market conundrum. A combination of good health, more wealth, and caution has extended the time the average homeowner spends in their family home. The average time that an American owns a home has gone from seven years to almost 11 years during the past decade. Older Americans are staying in the homes in which they raised their families, reducing the options for move-up buyers, which reduces the number of starter homes on the market.

“I wish I were more optimistic. I think the challenge with the existing home market is that there is not one lever to pull that could take care of everything. It’s a combination of several factors,” says Howard “Hoby” Hanna IV, CEO of Howard Hanna Real Estate. “When you look at our population base, the Baby Boomer cohort is still such a big group and are behaving differently from previous generations. Today’s 75-year-old isn’t the 75-year-old of 40 years ago. They are more active and are willing to maintain their family house. Even those that are interested in downsizing are finding that there is little product to move into.”

Hanna points to the impact of the pandemic and its aftermath as additional factors, noting that demand for more space during the pandemic pushed homeowners and renters who may have been planning to move up in 2022 or 2023 to accelerate those plans, especially in light of the low interest rate environment at the time. He also notes that the low rates are a disincentive for many existing homeowners who do not want to give up record-low mortgage payments.

Low mortgage rates are acting as “golden handcuffs” for a majority of U.S. homeowners. According to the Mortgage Bankers Association (MBA), 82.4 percent of current mortgages are below five percent, and 62 percent are below four percent. Mike Henry, senior vice president of residential lending for Dollar Bank, observed that the closer mortgage rates got to six percent in 2022, there were fewer sellers. As you might imagine, refinancing has nearly vanished, and mortgage activity is slow.

“We have the highest number of pre-approvals of people looking for houses that we have ever had, but it’s more than double what we have in the pipeline of loans for people who have purchased a home,” says Henry.


“According to figures from the MBA, mortgage originations in the first half of 2023 were down 42 percent from the first half of 2022 and 63 percent compared to the same period in 2021. By comparison, FNB is a bit of an outlier, with relatively flat origination volume to date,” says Joseph Cartellone, First National Bank’s (FNB) director of mortgage services. “FNB is less reliant on refinance activity. One reason our demand isn’t experiencing such a sharp decline is because our focus is largely on purchase, new construction mortgages and home equity production.”

The impact of the financing turmoil has been devastating on new construction. According to the National Association of Homebuilders (NAHB), the effect of the multi-year, double-digit price appreciation priced 69 percent of Americans out of purchasing a home at the median price point in 2022. According to the National Association of Realtors (NAR), new homes sold at a rate that was 16.4 percent lower in 2022 than in 2021. New single-family construction were off more than 10 percent. In metropolitan Pittsburgh, new single-family permits were off 18.6 percent to 3,471 in 2022 and have fallen by 14.7 percent year-over-year in the first six months of 2023.

More challenging financing conditions have put a dent in the housing market but have been less of a drag on new construction than other factors. Home builders have been dealing with a double whammy of their own since the pandemic. A combination of fewer workers and an unreliable supply chain added about 25 percent to the cost of construction from 2020 to 2021, and from 2021 to 2022.

“In our market – the size home we build and the quality of materials we use – we couldn’t build a house that sold for under $500,000, even if the land was free. And the land isn’t free,” says Costa.

Costa notes that the big swings in material costs have increased the risk of doing business. Spikes in lumber, plywood, paint, and fuel prices happened throughout the past three years, sometimes leaving homebuilders with contracts made when costs were 10 percent or 15 percent lower than when the builders later purchased them. New construction prices lagged some of those early spikes but have since gone higher.

Mark Heinauer, the founder of Barrington homes, says he has been forced to look at his business in a different way than he would have expected just two years ago. Barrington Homes primarily builds custom homes that are priced above $1 million dollars. Its buyers frequently have the wherewithal to pay cash or otherwise mitigate the impact of higher mortgage rates. But the volatile and uncertain environment is challenging for the high-end buyer as well. Faced with market conditions that make it more difficult for Barrington Homes to keep its schedules and its customers happy, Heinauer has opted to build fewer homes.

“My sons and I talked it over. With all the headaches involved in trying to keep up with our usual pace of 20 or 25 homes, we decided we would be better off if we just built less. That is a hard call to make,” he admits.

For builders in the mainstream of the housing market, building fewer homes has not been a choice but a reality forced upon them by the marketplace. Production-style builders operate best in an environment that has a predictable supply chain and in which subcontractors have a reliable labor force. Those conditions have not existed since mid-2020. Moreover, volatile material costs and escalating costs of development weigh just as heavily on that business model.

In recent months, new construction has rallied nationwide. Single-family housing starts jumped 18.5 percent from April to May, to the highest level in 11 months. Starts were still down year-over-year but permits for new homes were higher for the fourth consecutive month. Should this become a long-term trend, the increased construction will be relief for the inventory of available homes next spring. In Pittsburgh, unfortunately, the slowing trend has not reversed, with the second quarter essentially as far behind the same period in 2022 as was the first quarter. The culprit remains an insufficient supply of lots, not buyers.

The Solutions Will Come
From the Market

Few problems exist in America that do not become political fodder. Office holders and office seekers have long capitalized on the problems that Americans face by promising solutions that they and their party deliver (and their opponents cannot). Setting aside whatever politics exist about affordable housing, the effective solution to increasing home ownership is not likely to come from government at any level, unless the solution is simply giving away money.

Demand for housing is so strong that it is easy to overlook the impact of income inequality on the affordability problem. Wage earners in the bottom 25th quartile have seen their incomes rise more slowly since the 1980s, effectively falling when inflation is considered. Those workers are the grass roots of the housing market, the renters who become first-time buyers. Post-pandemic inflation and demographics have altered that equation. A recent study by the Federal Reserve Bank found that workers earning the lowest incomes have seen the highest wage growth over the past few years, while middle-income and high-income workers have seen flat or declining real wages. The median wage growth for the bottom 25 percent of earners was seven percent from 2021 to 2022, and that growth rate is not expected to decline in 2023.

The reason for the increase is the shortage of workers at the low-skilled end of the spectrum. Although the federal minimum wage of $7.25 per hour has not been increased, the lack of available workers in most industries has pushed wages well above that. Through June, 30 states have minimum wage levels above $7.25 (Many are double that.) Moreover, countless low-earning jobs have seen wages skyrocket to attract workers. Fast food restaurants are paying two and three times the minimum wage. Construction workers are earning more than double the minimum wage at the entry level. And lacking an immigration policy that is attractive, the U.S. workforce will remain tight into the foreseeable future.

While faster wage growth among the lowest earners alone will not shift the market, if the trend continues there will be more people earning wages closer to the median income.

There is evidence that the rising tide in wages is pushing home ownership. In all, 45.6 percent of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $96,300. This is up from 38.1 percent posted in the fourth quarter of last year, which was the lowest level since NAHB began tracking affordability on a consistent basis in 2012.

Another potential solution combines the convenience of renting with many of the advantages of home ownership.

There is a growing share of homes built for rent since the late 2010s. From 2021 to 2022, the number of units built for rent jumped by 35 percent to 81,000 units. That represented eight percent of the total new single-family homes built, the highest share recorded. Building for rent as a business model grew during the housing bubble and in the years following the mortgage crisis, but the number of homes built was generally below 40,000 units.

Homes built for rent offer apartment dwellers more room and the advantages of living in a single-family property. While much has been offered in opinion about the reluctance of Millennials (and now Gen Z-ers) to form traditional families and buy a home, the data tells a different story. The younger generations are forming households and buying at the same rates as their Baby Boomer parents and make up the lion’s share of the pent-up demand for home ownership. Renting a single-family home limits expenses while offering a yard, room for a pet and children, and even a home office that proved so useful since the pandemic.

First-time buyers comprised 27 percent of the market in 2022, a steep decline from the 40 percent historical share. For some looking to move from renting to buying, built-for-rent will be a temporary solution.

Housing market advocates have begun lobbying the government to look at another aspect of rental housing that could unlock existing home inventory. Investing in single-family homes spiked even more than built-for-rent following the financial crisis of 2008. By spring 2023, more than 44 million Americans live in almost 15 million single-family homes for rent. Advocates say this glut in rentals is a function of the tax regulations that are negative for the property owner.

“Most people think it’s big private equity groups and institutional investors that own them but about three quarters of the rentals are owned by a mom-and-pop investor. Often those are in low-income neighborhoods where we need more inventory,” says Hanna. “There’s a think tank that has been surveying a lot of these individual owners to find out why they won’t sell, and the answer is that the tax ramifications for capital gains are restrictive. There are groups in D.C. now petitioning lawmakers to consider doing something for capital gains tax on these rentals to bring them to market rather than giving subsidies for home ownership. That would free up inventory that would not need to be built.”

For new construction, there are some efforts to introduce products that are more affordable, even if the price range is not quite in the technical definition of “affordable housing.”

The region’s top builder, Ryan Homes, is making an attempt to fill the hole in the new construction market at lower price points by introducing a limited line of home plans under the Simply Ryan brand. Priced from the low $200,000s to the upper $300,000, Simply Ryan plans offer some of the same amenities that new construction buyers seek in a smaller, more efficient floor plan. In Pittsburgh, the Simply Ryan home is being built at its Imperial Ridge neighborhood in Findlay Township, West Allegheny School District, and at Arden Wood in Lancaster Township in Seneca Valley School District.

One potential opportunity for builders to increase volume and affordability would be the development of land in less desirable areas. There are significant parcels of land that could be developed in Butler, Beaver, Washington, Westmoreland and even parts of Allegheny County, which are in school districts that are not highly regarded. There is growing interest from national builders in the Pittsburgh market, and it is more likely that their growth initiatives would trump concerns about school district. If that were to happen, it would test the assumptions about buyer demand for school districts. Those assumptions have rarely been tested in recent decades.

Without relief from the higher costs of development and construction, however, new construction is not going to be the relief valve for home ownership. Most lenders are hopeful that relief will come from an easing of interest rates that will bring mortgages into more affordable territory. Until that happens, there are programs being offered to help with borrowing costs for buyers with lower incomes.

“We’ve participated in some programs like the $27 million ‘Pittsburgh Owns’ program, where they are giving first-time buyers who are low- or moderate-income individuals up to $90,000 towards the purchase of a home,” says Henry.

“In 2022, we introduced a Special Purpose Credit Program (SPCP) specifically designed to expand access to home financing in majority-minority and other historically underserved communities,” says Cartellone. “For homebuyers in these areas, the program offers closing-cost assistance, up to 100 percent financing, no mortgage insurance requirement, and considerations for buyers with low credit scores or no credit history. The SPCP builds on other proprietary programs we offer, including mortgages that require little to no down payment and our Closing Cost Assistance Grant, which provides up to $5,000 toward closing costs for low- to moderate-income (LMI) borrowers or borrowers in LMI or majority-minority communities.”

Programs that help lower barriers of entry for lower-income buyers deepen the housing market, but the current conditions require government intervention in the short term and structural changes in the longer term to bring about major changes.  With inflation trending much lower, one of the structural changes – a reduction in mortgage rates – seems imminent.

“The general consensus is that rates will come down. We’re thinking that within the year, rates will start to come down,” says Henry. “Mortgage rates are not likely to go to three, but people are now used to 6.5 percent. If it becomes 4.5 percent or even 5.5 percent, you’ll see some movement. I think that’s the only thing that will unlock the housing market.”  NH