The Rent Is Too Damn Low
America's housing crisis is about more than high prices.
Everybody knows about America’s housing affordability crisis, right? Thanks to rampant gentrification and a scarce housing supply, low-income families are being forced out of their neighborhoods in search of a place they can actually afford.
But that’s only half of the story. In many places, the problem isn’t that housing costs are too high. It’s that they’re too low. As a report from the Brookings Institution last spring rightly concluded, our country’s housing needs are a complex mix of regional issues, not an overarching national affordability crisis. Yes, skyrocketing prices are a problem in certain places, including California and much of the Acela corridor in the Northeast. But elsewhere, notably in the Rust Belt and the Midwest, it’s low prices -- and the spiral of disinvestment they create -- that are displacing residents.
Every city has its own specific story, but there are five general conditions keeping housing prices from appreciating -- and keeping people and jobs away -- in cities across a wide swath of the middle of the country.
The first is an oversupply of housing. The same mid-century suburban housing boom that fueled the growth of metro areas across the nation impacted the Midwest, too. The problem, however, is that the boom took place at the same time that Rust Belt metro growth began to grind to a halt in the 1960s and ’70s. These areas rarely gained the population to substantiate the development.
That led to the second cause: weakened demand. Metros such as Cleveland and Detroit continued to push outward even as their metro populations stagnated.
Very quickly a preference emerged among homebuyers for new housing over old housing, dropping home values in older, established neighborhoods. These neighborhoods, in turn, often lacked the contemporary amenities that astute homebuyers demanded and therefore became obsolete. That obsolescence led to vacancy. Property owners who believed that they’d never get a return on their investment walked away. It’s no coincidence that cities with the highest levels of vacancies read like a list of the lowest-value cities as well.
And finally, the fifth condition is segregation. Most Northern cities pioneered a new segregation tactic as the Great Migration brought hundreds of thousands of African-Americans from the rural South to the urban North: neighborhood avoidance. Residents engaging in white flight ceded ground to incoming minorities within urban neighborhoods and never looked back. This further weakened demand, substantially decreasing the number of potential homebuyers viewing homes within some neighborhoods.
Low property values create real challenges for municipalities and their residents. For municipalities, huge drops in value ultimately lead to dramatic losses in property tax revenue. Take Detroit, home of the nation’s largest municipal bankruptcy. Detroit’s overall property value peaked in the late 1950s at $45.2 billion, in 2013 dollars. By 1980, its property value stood at $15 billion, in 2013 dollars, an astonishing 67 percent drop within 25 years.
Buyers and banks enable this downward spiral. Cash purchases often become the predominant means of buying homes in low-value areas, leading to the ironic outcome that low values incentivize investors flush with cash to buy homes and rent them while making potential low- and middle-income buyers less likely or flat-out unable to buy.
So what can be done? Of course, the most obvious answer is the most elusive: Revitalize the local economy so that people and jobs return and stimulate demand. Rust Belt cities are still waiting for that to work out for them. But three rather counterintuitive ideas could work, even as they challenge the municipal budgets of struggling cities.
One such idea is to invest in infrastructure, facilities and amenities. Improved roads and transit, remodeled schools and parks, and an emphasis on bringing commercial and institutional amenities back to communities can set the table for shifting the low-value paradigm.
Another is to build new housing. Cities should proactively look to contemporize their housing stock, broadening their offerings in housing types, including more rental properties and larger and smaller housing styles.
And finally, roll the dice to incentivize investment. Akron, Ohio, recently announced a citywide program that would offer a 100 percent abatement on added property value for 15 years for applicants seeking to construct new homes or renovate existing ones ($5,000 or more). It may take bold moves such as this to bring up values.
The Brookings report stated that local governments contributed to the broken nature of their housing markets, and it will be up to them to fix them. That’s just as true for low-value metros as for the stratospheric ones.