Supply is the heart of the housing problem—we’re missing millions of homes. Mortgage rates are also important, but not nearly enough. Nick Villa, an economist at Moody’s, has said that lowering interest rates won’t solve the housing crisis.
Now that the Fed has cut its key interest rates by a half-point, it’s saying it again, with a plan.
“So while interest rate easing is one part of the equation, the other, more important part, in my view, is supply,” Villa wrote in analysis “It is natural to think of increased housing construction, but the type of properties being built should reflect varying price points and not just focus on the upper end of the market.”
Over the past 25 years, the share of Class A multifamily housing units—upscale luxury apartments targeting wealthy tenants—has risen 18 percent, to make up just over 50 percent of the multifamily housing sector.
In other words, the share of Class B and C multifamily housing units fell by about 18 percentage points, as developers prioritized buildings that fetch higher rents, he explained.
Class B apartments are older but considered well-maintained; Class C apartments are decades old and sometimes rent below market rates. Both are in demand because not all Americans can afford luxury apartments, let alone buy their own homes.
However, inventory growth for Class A multifamily units has increased by about 19 percentage points since the end of 2019, but for Class B and C units the growth was only 2.6%, Villa said.
The difference in rents is large and growing. Asking rents for Class A were 45.4% higher than those for Class B and C. In the first quarter of 2000, they were 41% higher. Basically, developers and builders see more revenue associated with luxury buildings, so they are building more.
But there are demographic changes to consider, too, Villa noted. The share of households in the country with incomes of more than $100,000 increased from 31.9% in 2000 to 37.5% in 2022, he said, citing data from the Census Bureau.
However, the end result for him is more exposure across the board.
“Instead of ‘Dig, little one, dig!’ perhaps it would be better to say ‘Build, little one, build!’ Either way, with America’s housing crisis recently entering the political arena, it remains unclear whether any bipartisan support will move the needle in the future,” Villa wrote.
In fact, both presidential candidates have had a say on housing. Kamala Harris’s plan would spur more construction and provide some help for first-time homebuyers. Donald Trump has pledged to lower prices, cut red tape and impose strict immigration controls.
In recent years, I’ve interviewed high-income people who rent rather than buy; while each had their own circumstances, affordability was the main reason. One couple I spoke to last year was living in a one-bedroom apartment in Los Angeles; they’d since moved out. But at the time, he and his partner were earning more than $200,000 a year, and the idea of owning a home in the city still seemed ludicrous to them.
On the other hand, Wall Street Journal Recently Published story Under the headline “These Millionaires Can Buy Their Dream Homes. But They Rent Instead.” In both cases, people who make good money are renting and choosing apartments that meet their highest standards—and that’s what builders can see.
But for someone who makes $79,701 a year or less in Los Angeles, they need Class B and Class C buildings. So it’s not just about building housing, it’s about building all kinds of housing for everyone. And that’s not something the Fed can do, and even Chairman Jerome Powell said that after cutting interest rates.
“I mean, the real problem with housing is that we were and are on our way to not having enough housing, and so it’s going to be tough,” Powell said. “It’s tough to … subdivide existing land where people want to live … every aspect of housing is getting tougher, and where are we going to get the supply from? And that’s not something the Fed can really fix.”
Powell later added that it was up to the market and the government to deal with it. But it is clear that building housing is not easy, otherwise it would have happened, whether because of land use regulations or local controls.