Pick up a newspaper from any major U.S. city, and you’re likely to read about how expensive housing has become. California, of course, is ground zero: high housing costs are almost as much of the state’s identity as abundant sunshine and tech start-ups in garages. But the problem isn’t limited to large coastal cities anymore. Minneapolis has adopted zoning reform aimed at reducing housing costs. Neighborhoods in Raleigh, North Carolina, are showing the kind of infill development and racial change previously associated with hot market cities like Brooklyn and Washington D.C. So, does the U.S. have a housing affordability crisis? For whom?
Over the past five years, median housing prices have risen faster than median incomes (Figure 1). While that’s generally good news for homeowners, it puts additional pressure on renters. Because renters generally earn lower incomes than homeowners, rising housing costs have regressive wealth implications. Renters also tend to be younger, less white, and more urban than homeowners – making them a potentially important constituency for progressive politicians.
Are higher prices a crisis? It’s complicated.
Economists study how people react in response to changes in the price of specific goods or services. In general, we observe two types of behavioral responses: income and substitution effects. For instance, when the price of beer increases, that makes beer drinkers somewhat poorer (the income effect), so they may reduce their total consumption of all goods, not just beer. Because beer has gotten more expensive than wine, people may choose to drink relatively more wine than before (the substitution effect). And there can be knock-on effects on goods that are complements to beer and wine: perhaps people buy fewer pretzels and more cheese.
How does this translate to changes in housing costs? Having a place to live is a basic human need. For poor renters who are already housing insecure, rising housing costs may push them into homelessness. But middle-income renters are likely to respond in several different ways. If they want to stay in their existing apartment (keep consuming the same quantity and quality of housing), they will have to devote a larger share of income towards rent. That means cutting back on consumption of other goods and services. For middle-income renters who choose not to increase spending on housing, they might move into smaller or lower-quality apartments, even “doubling-up” with family or roommates. Moving to lower-rent neighborhoods that require longer commutes, or relocating from high-cost cities to less expensive ones, is also an option.
Bottom line: because there are so many ways that households can respond to higher housing costs, it’s difficult to identify a housing “crisis” just by looking at standard affordability measures, like the share of income spent on housing. On May 8th, we will release a new report that examines housing stresses on middle-income households from a variety of angles, along with a keynote speech from Scott Wiener and expert panels on how housing policies could help middle-class families. Stay tuned!
Tiffany Ford provided outstanding research assistance.