Home Blog Uncategorized Addressing the Housing Crisis: The Necessity of Increased Housing Supply
Addressing the Housing Crisis: The Necessity of Increased Housing Supply

Addressing the Housing Crisis: The Necessity of Increased Housing Supply

In May 2023, rent prices witnessed a significant drop, marking the first decline since the onset of the Covid pandemic, as stated in the June 2023 Rent report released by Rent.com. However, despite this recent development, the U.S. housing market continues to face a shortage of 6.5 million homes, as reported by CNN. The data from Freddie Mac emphasizes the urgent need for more construction to meet the demand generated by the growing number of households.

The prevailing question is why developers are not actively constructing more houses, given the rising rents and the evident housing shortfall. The answer to this question lies in various factors, which require attention to both affordability and development issues.

According to A Dime Saved, a shocking 61% of Americans reveal their inability to afford a home, while one in five believe that owning a house is an unattainable dream. On the other hand, developers tend to embark on housing projects when they perceive clear opportunities. Places with favorable conditions and high demand for housing often encourage contractors to construct and sell properties. Therefore, increasing the number of homes built could help alleviate the shortage and potentially drive down rental prices.

After extensive years of development endeavors, contractors often encounter challenges when seeking suitable locations for construction in certain regions. Limited availability of land for development can be a prevalent issue in some municipalities. Additionally, opposition from residents who embrace a “Not in My Backyard” (NIMBY) sentiment further compounds the situation in certain communities. Moreover, various cities impose density restrictions, exemplified by New York’s floor-area ratio (FAR) cap, which limits the size of residential buildings to 12 times the area of their lot.

Developers commonly raise inquiries about regulatory frameworks prior to embarking on a new project. While zoning ordinances serve a necessary purpose in certain areas, less stringent regulations can serve as an incentive for new development initiatives. Cities such as Houston, Texas, with comparatively fewer restrictions on height and density, may attract investors seeking more favorable conditions.

Notably, development has historically been regarded as a particularly speculative form of financing. In light of recent bank failures and heightened pressures on lenders, financial institutions may exercise increased caution when extending construction loans. Consequently, lenders may demonstrate a preference for financing existing apartment buildings, particularly those that exhibit stable cash flow.

Escalating interest rates further impact the real estate landscape. Developers embarking on rental housing projects or intending to sell the completed units will meticulously calculate the achievable sale price in a market influenced by rising interest rates and cap rates. Given investors’ pursuit of higher returns, these factors contribute to a push-down effect on the value of completed projects. Unless there is a noticeable reduction in land prices, the viability of new construction projects may be questionable, especially if developers perceive insufficient profit margins for completing and reselling the developments.

In certain states, such as New York, California, Oregon, and Minnesota, there are regulations in place that limit the amount by which rent can be increased on a property. Imposing rent caps can exert downward pressure on the pricing of the final product, potentially deterring developers from constructing market rate units.

However, eliminating rent regulation can help level the playing field and lead to a reduction in rents across the board. For instance, in Boston, the lifting of rent control triggered the most significant housing and development boom in the city’s history. Contrary to initial concerns of skyrocketing rents, new construction actually contributed to a decline in housing prices.

The Regional Plan Association in New York is actively advocating for the construction of new homes near transit stations to promote affordable and stable housing. This approach involves repurposing under-utilized parking lots and constructing properties in close proximity to major infrastructure and transportation hubs.

In areas where ride-share services, walking, biking, and remote work are more prevalent, the need for large parking spaces may diminish. These spaces have the potential to be transformed into residential housing, catering to residents who value convenient access to amenities and public transportation. Developers can leverage these building projects to provide healthier and more sustainable options for communities.

Undoubtedly, certain regions are grappling with a housing crisis. In New York City, for instance, Mayor Eric Adams acknowledges the urgent need for 500,000 new units, while the Real Estate Board of New York aims for 530,000 units by 2030.

There is a clear demand for affordable housing solutions, but there is also a notable interest in market rate housing. In light of this, addressing the housing crisis could involve the provision of housing across various affordability levels. Increasing the availability of housing has the potential to foster a more equitable market and ultimately lead to lower rents overall.

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