A Surprising Solution to the Housing Affordability Crisis? Build More Housing (a Lot More) 

December 22, 2020

The housing industry has experienced a record number of new home sales in 2020, defying expectations in a normal year–let alone during a pandemic. However, housing affordability remains a nationwide issue with significant, far-reaching impacts.

During a recent webinar, real estate entrepreneur and Harvard Extension School instructor Teo Nicolais shared several factors driving the housing affordability crisis and what we, as an industry, can do about it (spoiler alert: it involves reducing builders’ upfront costs, so it’s a win-win for everyone involved).

Reducing builders’ upfront costs requires Builders FirstSource to address all the relevant costs involved, like estimating, design, delivery, inventory and other operational expenses. To do this, we need to work together, aiming further upstream in the building process to set us all up for success. By staying ahead of the curve, we can lessen costly expenses, such as additional purchase orders, invoices and deliveries. When we work in tandem with our builders, we can help impact affordability.

Housing Affordability is a Nationwide Issue

Roughly half of urban households (20-25 million) are considered housing cost-burdened. According to the Joint Center for Housing Studies of Harvard University’s The State of the Nation’s Housing 2020 report, about a quarter of the population spends more than half their income on rent in the United States.

Despite what some people believe, we know that the market drives pricing and rent increases — not the housing industry. Teo Nicolais, who previously served as vice president of the Apartment Association of Metro Denver and a board member of the Colorado Apartment Association, pointed to the Mile High City as a perfect example. Denver experienced several years of steep rent hikes, reaching record-high levels in 2014 and 2015. After a concerted effort to build more housing, rents dropped significantly.

Household Growth Keeps Outpacing New Construction

For most of the past 50 years, new homes have almost always exceeded the number of new households. Since the global financial crisis, however, home construction just hasn’t been able to keep up with demand.

Residential housing construction has increased since 2011, but not enough to keep up with the rising demand. Excess supply from the early 2000s, combined with an industry-wide labor shortage and increasing regulation, contributes to the lack of construction – not to mention halts in production and increasing supply chain costs this year due to the novel coronavirus.

With approximately 5 million people turning 18 every year, it’s critical that we get a handle on the housing affordability crisis. Teo Nicolais explains that we need to build an additional 2.5 million homes each year just to catch up. That includes replacing older housing that’s been torn down or taken off the market.

Besides getting the supply and demand equilibrium in place, we again need to work together to build more houses, attract more people to the industry and become more efficient with automation to address affordability.

So, How Can We Create More Housing?

The good news is that builders can be a big part of the solution by doing what they do best: building more homes. The better news is that this is exactly what is happening right now. According to the most recent release of housing starts data, we are finally back to building the 1.55 million starts annually, which meet pre-great recession levels. As we all know, however, building housing is costly and time-consuming. On top of that, if the market rate for rent or pricing falls below builders’ required upfront costs, the demand for housing may wane if renting is more affordable.

A regional planning agency recently called for the city of Palo Alto, California to build 10,000 more homes by 2030 to keep up with demand — comparable to building activity during the decade after World War II. Despite being home to Stanford University and situated squarely in Silicon Valley, a global center of technology and innovation, the city pushed back, claiming the task is impossible.

Teo Nicolais encouraged everyone in the housing industry – builders and developers in particular – to join the policy conversations at the local level in order to help effect change. While this may not fall in everyone’s comfort zone, the discussions we foster as an industry over the next few years can lay the figurative foundation that leads to more literal foundations in the future — while also addressing our country’s looming housing affordability crisis at the same time.

As Teo Nicolais said during the webinar, “There is no silver bullet.” He did, however, offer several of what he called “5-10% solutions” that can add up to help reduce upfront costs for builders:

  • Option 1: Reduce Financing Costs Indirectly by Reducing Development Costs
  • Option 2: Reduce Financing Costs Directly
  • Option 3: Reduce Operating Costs
  • Option 4: Subsidized Rent
  • Option 5: Filtering

(Click here for additional detail on these five solutions.)

Builders FirstSource’s READY-FRAME® can also impact housing affordability by providing a sustainable solution that requires less labor, uses less lumber, reduces the number of jobsite deliveries and can also reduce energy costs for the long term. To learn more about Builders FirstSource’s READY-FRAME, click here.

The Housing Industry Can Help Ease the Burden of An Ever-Growing Population

If 2020 has shown us anything, it’s that the housing industry and economy are inextricably linked. It’s critical that we encourage our local lawmakers to enact policies that treat the cause of the housing affordability crisis instead of symptoms.

Increased housing density will play a huge role in making this work, but as Teo Nicolais said, “Building a lot isn’t enough.” As you plan for future growth, carefully consider how you can:

  • Build the right type (a wide range of housing types)
  • Build in the right places (near transit corridors and job centers)
  • Build for all income levels (including luxury units!)

The residential housing industry is well-positioned to help influence policy and keep our nation building, but both require informed public engagement and advocating for change in your communities.

The National Multifamily Housing Council provides additional insights in The Housing Affordability Toolkit, a wonderful primer on how to frame discussions with policy makers and help guide them toward effective and realistic solutions.

It will require time, money and effort, but as we all know, housing is worth it — and, as we’ve seen this year, it can even help support a struggling economy. Builders FirstSource is committed to partnering with our customers to address this great challenge builders are facing; it’s the reason our 10,000 associates work so hard every day.

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