Sooner or later every real estate boom comes to an end. Real estate has been the poster child for a “V” shaped recovery during the COVID-19 economic recovery. But now, that real estate exuberance is facing an affordability plateau. There are two strong economic forces at work here. Both involve the lack of affordable housing. There can be no denying that the U.S. is experiencing the highest level of demand for affordable housing since millions of servicemen returned from WWII.
The G.I. Bill almost single-handedly built the American middle class by addressing the core social needs of unemployment, education, and health care. And importantly, it did so through government-backed, low-interest, fixed-rate mortgages with zero or low-down payments with up to 30-year terms. In effect, the G.I. Bill put homes within reach of all but the poorest American vets. The American suburb was born.
It was several years earlier when President Roosevelt laid the groundwork when he said, “A nation of homeowners, of people who won a real share in their own land, is unconquerable.”
This was an affordable-home revolution from our past. But what does that have to do with today’s need for affordable housing? More than a little. Although the 20-year war in the middle east is ending, there will not be 15 million vets coming home in search of a family home. But there are still millions of Americans in search of an affordable family home.
Today’s affordable housing shortage didn’t happen overnight. The end of WWII brought us the baby boomers; the largest population increase in America’s history that also needed to be housed. And this was met with another surge in affordable housing as the economy went through another great expansion.
Now, baby boomers have downsized and moved to condominiums in the sunbelt. Before retiring, the prosperity of many baby boomers created two legacies that remain with us today. One is the next population surge that includes millennials that is roughly the same number of people as the baby boomers were at their high point. Today, the oldest of the millennials are reaching age 40 with many still looking to buy their first affordable home. The second baby boomer legacy is the multitude of McMansions built in the early 2000s at the height of baby boomers' buying power. These overly large and opulent mass-produced homes are not the affordable homes that today’s young people need.
McMansions are also where many millennials ended their childhood years and what they now expect for their adulthood. This is a big part of the irrational exuberance that can’t last forever. Moving forward, came the pandemic that brought new construction almost to a standstill. Along the way we see large swaths of neighborhoods wiped each year by hurricanes, floods, forest fires, and other disasters.
The result is what we have today, which is a full-blown shortage of single-family homes relative to demand on a national scale in all 50 states. Before the pandemic, there was a housing shortage to the tune of 3.8 million homes. As the economy recovers, builders are returning to McMansions because of the higher profit margins with plenty of demand to fill the still limited construction capacity. If nothing changes significantly, inventory will remain constrained for the foreseeable future. But change will happen.
Home quarantines from the pandemic, growing up in McMansions, and their early adulthood urban experiences have created a millennial expectation that can’t be satisfied with yesterday’s 1,100 square foot affordable home.
As soon as builders and the finance industry figure it out, the new suburbs will be very different compared to the normal that existed from the 1950s into the 1990s. With continuing high buyer demand and soon-to-come interest rate increases, McMansions will become even more unaffordable. The new, scaled down-down home will be much closer to 1,100 square feet with small yards in suburbia. But the neighborhoods will change to include open multi-purpose playgrounds for raising families. For millennial adults, neighborhoods will include familiar features from the high-density cities they flocked to in their 20s. Instead of separately developed commercial zones, housing neighborhoods will be mixed-use with high-tech office buildings that combine work-near-home with the need for team collaboration. Shopping malls will give way to shopping centers featuring warehouse-size grocery stores surrounded by boutique retail with restaurants, bars, gyms, and small event venues for entertainment. Millennials will find a way to make affordable life worth living in the new normal.
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