As 2018 draws to a close, a once-hot housing market has significantly cooled.
There are several contributing factors.
Rising interest rates are making mortgages more expensive. A general nervousness about the possibility of a recession in 2019 or 2020 may be making some buyers hesitant about a 30-year mortgage. Inventory is also still low, and in many markets there simply aren't enough homes for sale. But while the unemployment rate is historically low and household income has recently crept upward for the first time in decades, many renters are staying renters because they simply cannot afford a home.
For the first time in a long time, a lack of affordable housing is playing an important role in the cooling off of one of the most important sectors in the economy.
Here are a few things we need to do to address a growing affordability issue in the housing market, before it becomes a crisis:
1. Affordable housing needs to be elevated to an issue of national concern.
After you read this article, take a few minutes and visit the website of your preferred news source. It might be Fox News, it might be MSNBC--it doesn't matter. Scroll through each headline and count how many articles discuss serious public policy issues that impact the everyday lives of most Americans.
Chances are you probably didn't have to use too many fingers to tally up those articles.
Meaningful dialogue about complex public policy issues has all but disappeared from American politics. One of the few exceptions to that reality is criminal justice reform, which just passed the Senate with bipartisan support--proving that even in 2018, not all is lost.
The federal government doesn't have all the answers, but decisions (and money) that originate in Washington, D.C., have a dramatic impact on the housing market. Creating affordable housing for lower- and middle-income Americans will require the government to actually govern.
2. Federal Reserve policymakers need to have the right priorities.
One of the main ways the Federal Reserve manages the economy is by managing inflation.
However, several influential economists--including David Beckworth at George Mason University--argue that managing the economy by managing inflation is the wrong approach. While inflation did wreak havoc on the economy in the late 1970s and early 1980s, the inflation-management emphasis of the Reserve has led the institution to make the wrong monetary policy decisions at exactly the wrong time, including failing to lower interest rates fast enough at the onset of the last housing crisis.
In an effort to keep the economy from overheating, the Fed has steadily raised interest rates--despite the fact that the recovery from the last housing-induced crisis is still far from complete.
Instead of just worrying about wage inflation (aka regular workers making more money), the Federal Reserve should also worry about higher interest rates and more-expensive mortgages making nearly unaffordable housing completely unaffordable.
3. Investors should pay attention to the innovators and entrepreneurs who are playing a role in creating more affordable housing.
The public sector obviously plays a significant role in creating affordable housing.
So does the private sector.
"The reality is that increasing the stock of affordable housing won't come from a sweeping government mandate," says Bryan Bowles, CEO of Transactly and founder of three-time Inc. 5000 company Worth Clark Realty. "Everyone plays a role. Innovative platforms that lower the cost of purchasing a home by reducing transactional costs--including commissions and mortgage closing costs--make purchasing a home more efficient, transparent, and ultimately cheaper. Microeconomics play an important role in making housing more affordable, too."
The size and importance of the housing market should make innovators doing even small things to make housing more affordable a safe bet for investors.
Whatever the solutions are, affordable housing isn't just the dream of social service workers.
It's one of the foundations of our economy and society.
And if the experts are right and housing does become even more unaffordable in 2019, we could be in for a bumpy ride.