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AEI: New Construction Starts Is Key To Affordable Housing

According to new data presented by American Enterprise Institute (AEI), the quest for affordable housing still has a way to go. For one, the standards of accommodation and equipment are above what lower income groups are accustomed to and are also above the means of these groups. Secondly, the idea of achieving meaningful cost reduction through prefabrication and industrial reorganization doesn’t seem likely.

AEI went on to detail the relationship between house appreciation and new supply. Based on their analysis, a 10 percentage point increase in the newly constructed homes sale as a percentage all homes within a given price tier results in a .7 percentage point decrease in the rate of home price appreciation. As more new homes are made available for sale the increased supply tends to hold price appreciation levels down making housing more affordable. Lack of new home construction tends to affect the supply/demand imbalance in the opposite way.

This reduction in price increase is significant when viewed with wage growth. Assuming the year-over-year house price appreciation for the low-med price range is 6% and wages are growing at 3.5%, then the difference is 2.5 percentage points. If the price appreciation was 5.3% then they difference drops to 1.7 percentage points, a reduction of 30%. The result is that increased levels of new housing availability would keep unsustainable levels of home price appreciation more in check with wages.

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As can be seen in the chart above, a small percentage of new construction has been focused on the lower tier housing. In areas like Pittsburg, Pa. you have employment growing at a low rate, 24% of sales coming from the lower tier market and only 7% of new construction coming from the low/low-med tiers. These factors are likely to take the “affordable” out of affordable housing.

 

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