The Biden Administration is taking steps to increase the available housing stock in an effort to overcome today’s massive inventory shortage. For real estate investors the plan has its pros and cons.
The background, of course, is that few homes are coming to market. This is not something new, and it is not something specific to one administration or another. A bad situation before the pandemic, there’s little to suggest that things are about to get better or get better quickly.
The Real Estate Inventory Shortage
One solution might be to build our way out of the inventory shortage. There’s surely no shortage of demand, and yet new construction is slowing. The National Association of Home Builders (NAHB) said that in July, “single-family starts decreased 4.5 percent to a 1.11 million seasonally adjusted annual rate. The multifamily sector, which includes apartment buildings and condos, decreased 13.1 percent to a 423,000 pace.”
One reason for reduced new home development is that the workforce is inadequate. The Bureau of Labor Statistics estimates that in June there were 365,000 job openings in the construction trades, up from 238,000 a year earlier.
It’s not just new homes. Existing sales are hardly encouraging, July inventory was down 12% from a year ago, according to the National Association of Realtors (NAR).
What’s behind the inventory shortage? And can the new White House plan significantly increase the available housing stock?
Have prices risen “too much”?
The inventory shortage cuts both ways. Home costs have been forced up as a result of less supply relative to demand. The average price for new homes was $446,000 in July, according to the government. Alternatively, the typical existing home sold for $359,900 in July, according to NAR, up 17.8% from a year ago and the 113th straight month of year-over-year gains.
Make no mistake, soaring property values are great news for real estate investors and current real estate owners. They certainly delight state and local governments, entities that see rising property tax revenues when home values grow.
But increasing property values also have downsides.
Ownership is less affordable — not a lot of people got an 18% pay hike during the past year. No doubt many potential sellers are staying out of the market, fearing that a great sale today does not resolve the problem of finding a replacement property tomorrow. And, fast-rising values themselves are problematic because they cause buyers to ask if swift increases continue. After all, who wants to buy at the top of the market?
The White House Plan
Economic advisors to President Biden have produced a blog looking at the inventory shortage and suggesting a number of steps to take in response. While no one believes that the lack of available inventory can be quickly resolved, several ideas put forth by the White House economists are likely to be helpful, bipartisan, and actionable.
The biggest proposal components involve a vast program to rehab existing housing units and a national effort to change traditional zoning patterns.
2 million rehabs
The economists want to “create or rehabilitate over 2 million housing units.”
“Low-cost units fall out of the inventory through demolition or are converted to higher-cost housing,” explains the proposal. “It is difficult for the private market to replace low-cost units through new construction without subsidies or incentives, because the cost of constructing new units exceeds the ability of lower-income families to pay the unit cost.”
Under the American Rescue Plan passed earlier this year — also known as the $1.9 trillion COVID-19 Stimulus Package – the Biden Administration will seek targeted tax credits, formula funding, grants, and project-based rental assistance to expand and improve the housing stock. The money has already been set aside, so look for announcements from DC as the programs start.
The second big idea is to undue traditional zoning rules, to allow the construction of two-to-four units on lots now restricted to one home.
The blog explains that “rigid single-family zoning, a practice linked with racial segregation, has prevented the construction of multifamily units, which would allow for higher density and an increased supply of housing.”
According to Rick Sharga, Executive Vice President with RealtyTrac “traditional zoning codes already face challenges. New Hampshire, Oregon, and California as well as many localities allow the construction of accessory dwelling units (ADUs). Freddie Mac says there are already 1.4 million ADUs. Also known as granny flats or casitas, ADUs are typically detached small houses constructed on a property with an existing single-family home.”
The attraction of ADUs is that they can be used for offices, mother-in-law suites, and other purposes. Also, in many cases, they can be rented out, a benefit that can help both owner-occupants and investors.
The economists point out that Fannie Mae and Freddie Mac can be authorized to buy more mortgages for the purchase of 2-4 unit properties. “In so doing,” says the proposal, “it will be easier for prospective buyers to purchase and build wealth with these properties, and the supply of rental housing can expand as well.”
Another idea is to expand mortgage options for single-wide manufactured homes. These are generally borrower-owned homes classified as “real estate;” permanently attached to a foundation; without wheels, axles, or a hitch; on the property tax rolls; built after June 15, 1976; and with a HUD Data Plate and Certification Label or a Label Verification Letter.
“Such properties,” say the economists, “have been significantly improved in terms of quality and amenities and, because they are pre-manufactured, they can quickly enter the supply chain.” Additional finance options also increase demand and make such properties easier to sell.
Lastly, not every proposal will be favored by real estate investors. For instance, owner-occupants can now bid on HUD homes without investor competition for as long as 20 days. The economists’ plan extends the no-compete period to 30 days.