The Economics of Housing Affordability

Housing is a crucial aspect of society. Unfortunately, the costs of housing can be so disproportionately high relative to income levels that people simply can’t comfortably afford it. Not only is housing affordability a concern in many US metropolitan areas, it is a concern across the globe. With the large number of individuals and families struggling, and with an increasing number of people without housing, this issue deserves serious attention.

Affordable housing is essentially “housing that a household can pay for, while still having money left over for necessities like food, transportation, and health care.”  According to one measure of housing affordability, the Median Multiple which provides a good assessment of middle market housing affordability, the numbers are quite literally off the charts.

housing affordability categories

Any Median Multiple score that is 5.1 or over is deemed severely unaffordable. Unfortunately, a number of cities worldwide greatly exceed this upper limit, moving into ranges upwards of in the 20s.

cities median multiple ratings

As is evident in the figure above, many individuals and families across the world cannot afford housing. But acknowledging the issue is one thing—understanding it and ways that can potentially address it is another.

Demand, Supply, and Market Equilibrium

Like any other good the price of housing depends on the demand and supply. In terms of understanding the demand for housing is the attractiveness of a location. Amenities like public transit, education, parks, safety, and access to economic opportunities all lead to increased demand in housing. Until recently, very low interest rates have further contributed to increased demand for housing. Unfortunately, the supply of housing has not kept pace with demand in part because affordable housing production is only profitable but only at higher densities than established communities have been willing to accept, or in locations that are far from economic opportunity.

Market equilibrium occurs at the intersection of supply and demand. House prices effectively allocate people across locations. When demand increases, so do average house prices and rents, unless supply responds sufficiently. Locations where it is easy to build new housing will see supply increases when demand increases, and hence average house prices and rents will be lower.

Even increasing supply, however, will not necessarily create sufficient affordable housing. When rents reach the level of exceeding the cost to build, that is when developers begin to build. However, developers opt to build the most profitable option possible, which will usually not be any type of affordable housing.

Where Does Affordable Housing Come From?

Affordable housing is primarily generated in three ways—filtering, inclusionary zoning, and public investment.

Filtering is essentially “the process by which properties age and depreciate in quality and price, becoming more affordable to lower-income households.” Increasing the supply of market rate of housing results in more affordable housing as some households “move up” to new housing, making more affordable older housing available. The greater the availability of filtered housing, the more affordable housing for lower-income households becomes. However, although filtering is a primary way of generating affordable housing, it is only a partial solution at best. Filtered housing may be obsolete, in poor condition, and in an unsafe neighborhood with poor schools. Further, locations where there is lots of filtering will most likely be in places far removed from any significant economic opportunity. 

Inclusionary Zoning refers to the requirement of new market developments to include affordable housing. This tactic ultimately reduces the overall supply of housing, which as discussed will lower the average rent price of a property. It can potentially lead to the generation of affordable housing in desirable neighborhoods, yet challenges lie in allocating a limited number of affordable housing units. 

Public investments can create affordable housing. Most cities have Public Housing Authorities which produce, own, and manage affordable housing. In the US, however the largest public investment in affordable housing is through the Low-Income Housing Tax Credit (LIHTC) program. This program involves public subsidy of private affordable housing production through the selling of tax credits to investors of affordable housing. This is the largest source of public housing subsidies. A primary form of affordable housing subsidy in the U.S. currently, “The credit provides an incentive for taxable entities to invest equity in rental properties in which most of the units are reserved for households making 60% or less of the area median income (AMI).” Finally, vouchers, which are often combined with LIHTC make new developments of affordable housing profitable for developers. 

As has been found in a paper published by ESI (Econsult Solutions, Inc) Principal Dr. Richard Voith, stand-alone and clustered LIHTC properties have positive spillover effects on property prices in the surrounding communities. This means that these LIHTC properties have positive effects on the community. Moreover, neighborhoods with 3 or more LIHTC developments had even larger positive spillovers on neighboring property values. Thus, LIHTC developments tend to create more affordable housing directly, while improving neighborhoods and increasing nearby property values.  

Why Is Affordability So Challenging Now, and How Do We Move Forward?

In the second half of the 20th century, increased suburbanization led to an excess of housing supply in cities which was good for affordability. Unfortunately, it also came at the expense of reduced urban economic opportunity, and worsening living conditions in the urban areas. As cities typically rebounded after 2000, the supply of filtered urban affordable housing diminished greatly as private investment increased, renovating or replacing older filtered housing. No longer are US cities affordable.

Moving forward to tackle this issue, restrictions on housing production should be reduced. More housing production will lower average housing prices. Additionally, significant public subsidies will be needed to ensure that affordable housing is available throughout metropolitan areas and not just in declining neighborhoods. Additional funding will also be crucial in lightening the burden of homelessness and continuing to combat this issue. Recent policies are addressing these issues. For example, The Biden Administration has just announced an extremely ambitious funding package of $365 million in order to further address homelessness in the U.S. Along the same lines, the Administration had also set forth a Housing Supply Action Plan back in May of 2022 to address affordable housing, which would essentially grant towns and cities with reformed land-use and zoning policies with higher scores for specific federal grants. The plan also would increase federal financing options for housing, and re-emphasizes the call to pass tax credits, expand LIHTC, and create a new $1.75 billion grant program.

There is unfortunately some public perception that public housing is bad for neighborhood property values (which is not true), along with other opposition to it. As research has suggested, more investment in public and affordable housing will do quite the opposite, and will bring much needed relief to individuals and families across the world who are struggling to afford such a fundamental part of life.


Intern in suit

Salvatore Gullotta | [email protected]

Salvatore Gullotta is an intern at Econsult Solutions working in the Business Development and Marketing Department. He is currently a second-year student at Drexel University, and assists at ESI with proposals and content management (managing ESI Present Value [weekly blog] and social media).


Voith, Richard-webRichard Voith | [email protected]

Richard Voith Ph.D. is a Founding Principal of Econsult Solutions Inc. (ESI) and Research Fellow of the University of Pennsylvania Institute for Urban Research (Penn IUR). Dr. Voith is a widely published expert in real estate economics, transportation, and applied microeconomics. He oversees a wide variety of projects in the realm of housing, labor markets, transportation, and economic development. Just as importantly, he is involved in setting the strategic direction of organizations both large and small. Dr. Voith served on the board of directors of the SEPTA for 8 years and was Vice Chair for 3 years. He regularly provides analysis and testimony in support of litigation in real estate and transportation matters.

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