Housing Affordability Feels Like Generational Warfare


Emily Zhu 6/23/2020


Affordability crunch has affected two groups the hardest – millennials and first-time home buyers

A growing number of Americans are struggling to cope with high and rising cost of rental housing and homeownership in the United States. Places where real estate is cheap do not have many good jobs. Pleases with lots of jobs, primarily coastal cities, have seen their real estate markets go absolutely haywire. In New York, households managed to keep a roof over their heads only by spending more than 50 percent of their income on housing, sharply curtailing their spending on food, healthcare, and other needs. Generationally, for young people in high-opportunity metro areas, the route to home ownership is basically blocked without the help of a wealthy family member or some stock options. Meanwhile, older people who bought under much favorable circumstances have seen their equity stakes grow and grow.

One part of the problem is housing scarcity. We are suffering from an acute shortage of affordable places to live, particularly in urban areas where economic opportunity is increasingly concentrated. The decline in the $150,000 price tier between 2013-2019 is almost by 35%. So, now, in many cities with good economies that have drawn new residents, increased demand has not been met with commensurate supply. The so-called millennials, born between 1981 and 1997, have largely lacked the financial wherewithal to buy their own homes besieged by the recession, higher property tax rates and buried in student loan debt.

It seems that the affordability issues are not only for millennials but also for first-time home buyers. I suspect any of these factors played a role as factors keeping millennials from buying: a recession; higher median price; tighter underwriting requirements; lower wage growth; delay of marriage and kids; baby boomers competing for the same urban apartments with millennials; increased costs of health care; millennials spending much more of their discretionary income on food and experiences and not saving enough; and millennials’ moving jobs more frequently, and therefore being more cautious about committing to a city or region.

Algorithmic Everything

Today, you need to own a house to be able to buy a house. There are several factors limiting market growth and eventually results in unaffordability. You’d typically sell the old home first to buy the new one. You would typically need a 20% down payment and to afford to get a mortgage. Increasingly, the millennials and first-time home buyers are competing with Wall Street investors for real estate also known as ‘iBuyer’. That is, they buy in volume by leveraging algorithms to better at predicting patterns, yields, and seizing the best market value properties in the sea of commodities.

Algorithms is great at finding mispriced homes. It uses patternrecognition software to identify mispriced homes and says its technology can find properties fitting investment criteria within minutes of their listing. Two interesting companies in the space are Reonomy and Entera. According to Macieck Szamotulski, founder of 100Hz, Reonomy is property intelligence that helps developers and institutional investors discover new opportunities and insights – the single source of truth in real estate. Entera has 225,000 properties and can deliver personalized recommendations in under 15 minutes. But iBuying drives real estate prices and competition up, and it will work against Millennial buyers. A prospective buyer who needs a mortgage can have a hard time competing against a big investor making an all-cash offer on a house.

New Disruptive Approach

The civic-minded developers are thinking critically about their role in gentrification and are embracing new disruptive business models.

(1) Co-Living maybe affordable, but what if you cut out the kitchen.

The dorm-style division of apartments have emerged in urban city’s priciest neighborhoods. The idea is far from new. These buildings are still fundamentally often serving younger populations, yet little is available that caters to rent-burdened of just one or two people. With the mixed use now is around making WFH work, the design innovation centered around the kitchen.

Can we compartmentalize and hide away the kitchen when not in use (http://www.valcucine.com/en/special-features/new-logicasystem/). The lockdown has has tened some trends that were already underway. Before the pandemic, eating in America was rapidly becoming an app-driven, on-demand, customizable experience. Thanks to the shutdowns, many restaurants have shifted to takeout to pay their bills, which means you can now eat meals cooked by Michelin-starred chef at home-and save money on the booze (https://www.washingtonpost.com/outlook/the-pandemic-is-changing-how-we-eat-but-not-for-thebetter/2020/05/07/5e4623e6-906b-11ea-a9c0-73b93422d691_story.html).

If you cut out the kitchen, you have a lot more area to work with for WFH or other functions, and it becomes more affordable. Thus, making the dual use model can be helpful for socially conscious builders navigating ways to create “fair housing” for lower-income residents, and “changing the narrative” of gentrification.

(2) Micro Apartments

Micro apartments, with size of 350 and 450 square feet, help combat the space problem by enhancing space efficient, and make home ownership more affordable. According to Bentley Zhao, the President of New Empire, “The rise in single-person households, combined with a high population density and high living costs in the urban centers, is shifting housing demand to smaller dwellings.” Successful concepts expand limited private space with provision of communal areas such as roof terraces, communal kitchens, play areas and laundry rooms. However, bring down construction costs is the faster route to incentivize the creation of more affordable units.

(3) Sustainability, and Environmental Responsibility

In addition to affordability, passive or ‘zero energy’ and environmentally responsible houses are at the top of our minds due to the climate change and global warming. Millennials feel responsible for the energy saving. Environmentally friendly and smart buildings that use super-insulated building envelopes, energy recover ventilators that exchange interior and exterior air and energy-saving appliances are right for the American market.

Mr. Zhao said, “We only use windows that are three panes thick, so residences are so airtight that warm air won’t leak out in the winter, and cool air won’t leak out in the summer.”

Germany has thousands of passive houses, while New York City has about a dozen finished or in the works.

Millennials are seeking tranquility and a meditative feeling. They are eating smart – fresher and healthier. They want to incorporate plants into their house design, and many of them said the availability of outdoor space was an important factor in choosing a residence. Paris Farino’s recent design at the Neighborly Long Island City took a different approach and created a space to be enjoyed like a garden. Most of the rooms come with private outdoor space. The cutting-edge design, the affordability with the intimacy and the size of the condo conflate the experience of a boutique hotel.

Today, we need to solve affordability and unlock new buyers. All of this is a business model challenge, not a market segment challenge. One looming question is that whether the housing affordability will cause young adults to shy away from homeownership and stick with renting, or put off a wedding to save a down payment on a home. Subscribe to Our Blog