You Decide: Can Homeownership Be Made More Affordable?

By Mike Walden

Traditionally, one of the ways to accumulate wealth was to buy a home. Indeed, owning a home was part of the “American Dream” of getting ahead economically. Sure, it might take a young household a few years to accumulate enough for a down payment, but once that was accomplished and the home bought, the wealth-building started.

In fact, it was common for a household to purchase many homes over their lifetime. The wealth accumulated from the first home would be used to purchase a more expensive home. A few years later, that home would be sold and an even more expensive home bought. The advantage of this process was each more expensive home would generate greater wealth. Then, at retirement, the most expensive home could be sold to generate wealth and income for retirement.

But using a home to accumulate lifetime wealth has become harder. A big reason is that buying a home has become more expensive. The homeownership affordability index dropped 15% in just the last year. The home price to income ratio has risen almost 50% in the last decade. The percentage of households who are homeowners is well below the level prior to the pandemic.

One of the reasons the process of accumulating housing wealth worked was that housing is unique among things we buy. Other products we own, like clothing, vehicles and furniture, can be moved to different locations. But not a house, except in rare situations or with mobile homes, which only comprise 6% of the housing stock. A dwelling is tied to the land underneath it.

Furthermore, unlike clothing, vehicles and furniture, where manufacturers can make more when people want more, more dwellings usually can’t be made at a particular site. The only recourse is to build multiple stories, which significantly increases the cost.

The major reason most homes increase in value over time is that the land underneath the structure has become more valuable. As Mark Twain once said, “buy land; they’re not making any more of it.” Twain was exactly correct. While more clothing, vehicles, and furniture can be manufactured as the population grows, more land can’t be made.

Furthermore, it’s not just land anywhere that becomes more valuable. It’s particularly land in areas where people want to live. In the 21st century, this has meant mainly land in urban areas. The restructuring of the U.S. economy in the 21st century to focus on technology, medicine, finance and the professions has increased the benefit of living in big cities, where a continual flow of workers in these fields graduate from local universities and colleges. Also, young workers, especially, like the dining, entertainment and shopping amenities in cities.

So what can be done to make home ownership more affordable? Some say it will happen when the Federal Reserve lowers its interest rate, which should prompt the interest rate on home loans — termed the mortgage rate — to also fall. But the problem is, when mortgage rates drop, the increase in buyers prompts home prices to rise more. Housing affordability could still improve, but it may not be by as much as buyers would expect.

A long-time recommendation for improving home affordability is to update the regulations regarding housing construction with a goal of making changes to reduce construction costs. However, one problem with this approach is that many of the regulations address reasonable goals, like safety, durability, compatibility with the neighborhood and — more recently — protection of the environment. The competing goals of lower construction costs and broader benefits has often impeded progress on this approach.

Governments, especially local governments, have been called on to help improve housing affordability. Many have responded, including some in North Carolina. One approach is to require builders of housing developments to price a certain percentage of their units at a level affordable to lower income buyers. However, since developers must recover all their costs, this likely means builders finance those subsidies by charging higher prices for other units.

Another governmental approach is using public money to subsidize some housing units to make them more affordable. While certainly a direct approach, the public budget required for this kind of program to have a significant impact is likely not affordable.

There are two other approaches that are somewhat outside the box for dealing with homeownership affordability. One is simple. For those who work remotely — almost one-third of the workforce — purchase a home outside the big cities and metro areas. Take advantage of the much lower home prices in rural areas and small towns. While this may mean a different lifestyle, if it becomes popular we could see new developments focusing on attracting remote workers and providing amenities they desire.

A second idea is encouraging home developers to build communities on the edge of metropolitan areas where land costs are cheaper, with the developers then working with local governments to provide rapid public transportation from the communities to major destination points in the area. Charlotte and Raleigh are in the early stages of planning a version of this idea using dedicated bus lanes on designated major thoroughfares running from the outskirts of the cities to the city centers.

Homeownership has traditionally served two purposes for households. The first is to provide shelter, and the second is to create wealth. In recent years both purposes have been impeded by the high cost of purchasing homes. How can we get back to the “good old days” of the American dream of owning a home? I’ve presented some ideas, but you decide.

Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.