There are multiple, connected issues that have to be addressed in order to answer this question. Before delving deeply into them, it is important to get grounded in the numbers:
- The housing market is the country’s largest asset class, worth approximately $44 trillion.
- The market rose almost 20% in 2021, adding $7 trillion in value.
While these staggering numbers certainly show the “rising tide,” the story is more complex than the aggregate numbers might suggest:
- While house prices have risen across the board, about one-third of houses equal about two-thirds of the aggregate value.
- While the amount of equity Americans own in their homes has risen dramatically in aggregate, Americans still have between $15 trillion and $18 trillion in mortgage debt.
The numbers, when examined at a family-to-family level indicate a more dire story:
- Despite measures to facilitate home buying, only 65% of Americans “own” their homes, with the numbers being far lower for many disadvantaged groups.
- Despite rising home equity, the total net worth of the average American household is $122,000 with 70% of that being equity in their homes. Again, the numbers for many minority groups are much lower.
- In a 2015 poll conducted by The Atlantic Magazine, two-thirds of Americans making under $40,000 a year said that they’d have a hard time coming up with $400 for an emergency.
- Gig work is increasingly common in the United States, with 34% of working Americans involved in the gig economy and 40% of those who rely on gig work as their primary source of income. The average gig worker makes $29,000 per year.
There are many more statistics that can be quoted, but the net result is a massive imbalance in the housing sector. In many parts of the country, the rising house prices have made it literally impossible for most families to partake in homeownership, which sets off a cascade of other issues, such as those related to transience, lack of good educational opportunities, and spiraling debt.
The rising tide has created a flood indeed. So, what can be done? Solutions can be found in three categories that might appear distinct but are in fact fundamentally connected:
- Category 1: Supply innovation
- Category 2: Government policy innovation
- Category 3: Paradigm-change innovation
Supply innovation is a complex issue.
From supply chain issues to zoning rules, from dirigisme to a purely free market mentality, the issues of supply are not given to pat answers. Yes, the U.S. is “behind” by tens of millions of housing units, but there is a perverse pressure on existing homeowners to be unsupportive of new developments, even if those new developments offer homeownership possibilities to a group of people locked out of the current system.
Recent trends toward smaller and more affordable housing units are a bright light in this arena but experts are united in the notion that the need far outstrips the current capacity for development.
Government policy innovation is similarly fraught though offers a great deal of potential.
Governments, whether federal, state or local could require private builders to build more units or control prices, but the laissez-faire ethos of American government militates against a strongly interventionist policy framework. Fiscal stimulus or benefits typically accrue to precisely the populations that require help the least.
Paradigm-change innovation is not a cake-walk either.
This calls for real change in the way we make finance options available to people who do not traditionally have the means to buy homes at sky-high prices or who opt out of the traditional system due to differing economic philosophies.
Polls indicate that people below 40 in the United States are less likely to want to opt for the typical 30-year mortgage and traditional financing means. What is needed is offerings that reflect a new paradigm in home-buying, learning from innovations in other sectors.
Just as each of these areas has difficulties and inertia associated with it, each has enormous potential to help Americans avoid the flood. To get there, we require the will to do so but also alignment across different parts of the ecosystem.
Some fertile areas for change are as follows:
On the supply-side, we need more companies willing to create affordable housing; they need to focus on median economics and not “one-percenter” economics. We also need to culturally socialize smaller houses with better ecological footprints. This requires concerted effort and cooperation between urban planners, builders, local governments, and financial institutions.
With regard to government policy, we need the GSEs with the backing of the federal government to work affirmatively to undo the deleterious effects of red-lining and artificial zoning to create a fair playing field and to regulate financial service companies so that it is less onerous and less credit-score dependent for working families to purchase and finance homes. This requires political will and clear follow-through.
In terms of paradigm change, we need better financial on- and off-ramps for homeowners, more abundant facilities to allow Americans to access and use equity in their homes, and creative ways to help house-poor Americans enjoy shared risk/reward models with investors.
Clearly, there is a lot more that needs to be done, but the conversations must happen and happen soon. With 2022 slated to be another year of high-growth in house prices, we need to intervene powerfully — and soon — before the rising waters prove too much for us to handle.
Romi Mahajan is an expert in the fintech marketing space. His previous roles include serving as CMO at Quantarium.