Housing affordability crisis caused by mismatch between housing supply and demand.

The U.S. housing affordability crisis is not just about high home prices and mortgage interest rates. Nor is it merely an issue of a low supply of new construction housing. The real problem is a housing supply and demand mismatch. Put simply, the U.S. housing industry isn’t building the type of housing people want and need. And, sadly, our government policymakers share the blame for creating the imbalance between supply and demand.

By Deborah Goonan, Independent American Communities deborahgoonan@gmail.com

Let’s start with the basic question: Why is there a housing supply and demand mismatch that is causing an affordability crisis?

In this post I list several reasons, including a few that are rarely acknowledged by industry leaders and policymakers.

These are the significant constraints that create a pervasive imbalance between housing demand (what consumers want to buy or rent) and what the housing market supplies.

Due to overregulation, the U.S. housing market is not a free market.

In an ideal world, consumer demand would drive housing supply. Home buyers and renters would be able to easily find the type and size of housing they need, when they need it, and at a price they could afford. But, in fact, land development and new housing construction is highly regulated by state and local laws, zoning and planning and development codes. Don’t misunderstand. I advocate for reasonable regulations are necessary to prevent shoddy construction and ensure public safety. But many housing and land development regulations simply make it more expensive to increase housing supply. That includes preservation and improvement of existing housing, as well as new construction.

A private sector real estate industry supplies nearly all housing in the U.S. With the rare exception of non-profit housing organizations, the housing industry’s primary goal is to generate maximum profit from land development, home sales, and future rental income.

Most developers and home builders prefer assets that generate higher revenue per acre and per square foot. That naturally tends toward a shortage of homes for sale at lower price points. For the same reasons, we have a shortage of rental apartments and homes that offer consumers a comfortably affordable monthly rent. So, it’s no wonder the U.S. has a housing affordability crisis.

Deep-pocketed developers and investors own nearly all of the best real estate and land sites well-suited for housing development.

Most buyers of new construction wind up buying from one of the larger homebuilding corporations in their market. The big corporate builders limit consumer choice of floor plans. Sometimes none of standard floorplans are a good fit for a home buyer.

But unfortunately, homebuyers find it exceedingly difficult to locate a site that will accommodate a custom-built home. Big developer and home building corporations own most vacant lots. And those buildable lots include restrictions on the size and type of home that can be built.

Before a buyer can work with a custom home builder, or use newer technology such as modular construction, that buyer must purchase a lot that will accommodate their new home. This is a critical barrier to building a small home, with the option of expanding the home in the future as needs change and budget allows.

Cost-shifting from public to private service providers such as HOAs.

Local governments strive to generate higher gross property tax revenue and impact fees from new construction. At the same time, cities and counties want to reduce their operating expenses. One way to do that is to shift their traditional duties of infrastructure maintenance, code enforcement, and neighborhood services to home and condo communities governed and managed by HOAs. (Homeowners and condo associations)

Local planning ordinances almost always require a CIOC (Common Interest Ownership Community) to establish a homeowners or condominium association to fund its own community-centric services and, to varying degrees, future maintenance of infrastructure.

The objective is to eliminate or at least minimize taxpayer-funded municipal support and services. State laws require owners to pay HOA and condo fees, on top of property taxes and homeowners’ insurance coverage. These significant added costs ultimately increase the cost of homeownership. When CIOC units are rented, those added carrying costs are often passed onto tenants. Higer rent makes housing less affordable, and eventual homeownership less attainable.

CIOCs are established on a foundation of property covenants, restrictions, and conditions that often severely limit the use of one’s property in the present and in the foreseeable future.

Declarations of CC&Rs or Declaration of Condominium governing documents for CIOCs tend to be far more restrictive than local zoning and code requirements. Because HOAs are responsible for enforcing these covenants and restrictions, most HOAs prevent owners from physically improving or modifying their homes. In many cases, HOAs can legally prevent owners from making the most beneficial use of their property as the owners’ needs change. For example, an HOA can prevent an owner from expanding their home’s footprint, converting the home into a duplex, adding an accessory dwelling unit (ADU). HOAs, including condo associations, often restrict the rights of owners to rent out their units, share living expenses with a roommate, allow for a live-in caregiver, or prohibit many types of home-based businesses.

HOA, condo and co-op fees ultimately increase the cost of homeownership. Even if the purchase price starts out lower, condo and HOA fees make housing less affordable to own.

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When CIOC units are rented, those added carrying costs of HOA and condo fees are often passed onto tenants, making housing less affordable, and eventual homeownership less attainable.

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Supply and demand imbalance creates limited choices for home buyers in PA

Given the rising cost of buildable land, as well as the historical and current zoning and regulatory environment of the past 3 to 4 decades, home buyers have had limited options for new or nearly new construction.

Since I happen to be a homeowner that resides in Pennsylvania, I’ll use the Keystone State as an example.

New (or newer) construction housing supply and demand mismatch

In Eastern Pennsylvania, new or recently built detached housing options are much too expensive for most buyers. Most of these brand-new homes are quite large in size, and not designed for smaller households or modest budgets. Not surprisingly, buyers relocating to PA from more expensive markets such as New York, New Jersey and states on the West Coast purchase a significant share of new construction housing.

For most PA residents seeking newer construction, townhouses and condominiums are, by default, the only “affordable” options for buyers. This is especially true for anyone living in a major metropolitan area.

As is the case across the U.S., most of the newer homes and virtually all townhouses built in PA since 1990 are Common Interest Ownership Communities (CIOCs) with HOAs. Some of the newest townhouses are legally organized as condominiums, where the condo owners share an undivided interest in the community. In other words, a townhouse owner doesn’t individually own the front, side, or back yard or the driveway.

Older and vintage housing supply

Fortunately, for buyers who want to avoid HOAs, PA has an ample supply of existing homes built prior to 1990. Options include small mid-century ranches, turn of the century row homes and “twin” homes (a side-by-side duplex attached by one common wall). Buyers can also find a plethora of two-story, split-level, bi-level homes, and cape cod homes, but most of these homes are 40-50 years old. In the urban center of bigger cities (Philadelphia, Allentown, Scranton, Wilkes-Barre), a buyer can find older multifamily properties with 2 to 4 units. Some are sold as condos, but most are used as multigenerational housing or as rental properties.

Unfortunately, the vast majority of these older homes require significant investment in renovations and improvements. There are some partially or fully renovated homes, but these command higher sale prices.

Buyer demand for older homes is relatively strong. However, many first-time home buyers, single working adults, and retirees don’t have the financial resources, handy man skills or time to invest in an older home. So, they either buy what they can afford and live with it as is, deferring maintenance as long as possible, or they rent.

Modern apartments with air conditioning, all appliances supplied in the kitchen, and in-unit laundry hookups command high rent. In fact, the rent for a more modern apartment is equivalent to or exceeds the mortgage payment on many existing homes for sale.

It’s the zoning, stupid!

According to most pros in the real estate industry, the housing affordability crisis is a result of restrictive land use zoning at the local government level.

Indeed, in most regions of the U.S., the majority of developable land is zoned for single family construction. Multi-family zoning is limited to urban settings or located on the fringe of town near major artery roads and highways.

At the same time, one cannot overlook the obvious fact. The housing market is heavily influenced by real estate industry developers, home builders, and investors. From their point of view, new construction of housing must generate a healthy profit, or it isn’t worth building. That’s understandable, but it’s also a leading cause of the housing market imbalance between supply and demand.

Pennsylvania is no exception to zoning restrictions. As in other states, most of the land outside of urban centers is zoned for single family homes. Townhouses and apartment communities are allowed only in multifamily zones. These are close to major highways or adjacent to commercial centers. Standalone apartment hi-rises and condominiums are rare outside of larger cities such as Philadelphia, Pittsburgh, and Allentown.

Zoning codes explain why, if you’ve been in the market to buy a home during the past decade or two, you can’t find a modestly sized new construction detached home. And it’s even more challenging to find a new home that isn’t part of a homeowner’s association, requiring HOA fees and compliance with covenants and restrictions on the property you own.

Land costs keep rising

I must also acknowledge that land costs are exceedingly high in many areas of the U.S., especially in California, Hawaii, the New England states and Northern Virginia. In fact, land costs are rising substantially in states that were once considered more affordable. Just check out this Land Search database to view the price per acre in Florida, Delaware, Illinois, and Maryland.

High demand for smaller homes

At the heart of the problem, in my view, both government and the real estate industry have largely ignored the untapped consumer demand for smaller, more affordable homes — without an HOA.

According to data compiled by the National Association of Realtors in 2022, 26% of homebuyers in 2022 were single adults. Surprisingly, twice as many single adult homebuyers were women — 17% vs. 9% single men. Another 66% of homebuyers were married couples. NAR also reports that 14% of homebuyers purchased a multigenerational home in 2022. (Source)

Data from the U.S. Census Bureau estimates that, in 2022, 36% of U.S. households identified as “non-family.” This includes single adult women (16%) and men (13%) living alone. (Source)

At the same time, recent surveys indicate that the majority of people prefer to live in a single family detached housing, and no shared walls.

Americans prefer to avoid HOAs and condos

Also, a majority of homebuyers and current homeowners say they do not want to live under the governance of HOAs.

Now I know the HOA industry trade group (Community Associations Institute-CAI) will claim HOAs are “popular,” and cite their self-created surveys. But there’s growing discontent with HOAs, as shown with other recent research from notable sources connected to the residential real estate industry:

Residential rules: How Americans view HOAs and their influence | YouGov

Study: Homeowners Say HOAs Aren’t Worth the Stress (homeadvisor.com)

Assessing the Association – Homeowners Weigh in on the HOA | Rocket Mortgage

Taking all of this data into account, it appears there is a large segment of the housing market that needs and wants smaller homes, preferably without attached walls and without HOAs.

Zoning codes explain why, if you’ve been in the market to buy a home during the past decade or two, you can’t find a modestly sized new construction detached home.

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And it’s even more challenging to find a new home that isn’t part of a homeowner’s association, requiring HOA fees.

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What to consider before you purchase (or rent) in an HOA community

Here at Independent American Communities website, you’ll find hundreds of examples and dozens of reasons why you might NOT want to buy into a condominium or homeowners association. These three articles expose the hidden risks and pitfalls of HOAs.

HOA Risks: The Triple Threat of Homeowners Associations

7 things to consider before buying a townhouse

9 good reasons to avoid HOAs

Correction: in a previous version of this article, I referred to condo association owning the land in common.

However, I received the following legal clarification from Attorney Bill Davis of Texas:

“However (I) want to clarify a couple of things. RE: “where the condo association owns all the land in common.” For a condominium, it is not the condominium association that owns the “common areas”. Instead it is the unit owners who own 100% of the “common areas” in undivided interest. That’s how the term “common area” came about. It’s not really appropriate to apply the term “common area” to HOAs (non-condo). In those cases the HOA corporation owns the inaptly named “common area”.

The industry loves to confuse owners, prospective purchasers, juries, and judges through the use of the word “association”. It is important to distinguish between the corporate entity vs. the individual owners.”

The article has been edited accordingly. (Thanks, Bill!)