Sooner or later every real estate boom ends. Real estate has been the star kid of a ‘V’ shaped recovery during the economic recovery from COVID-19. But now, this real estate exuberance is facing an affordability plateau. Two powerful economic forces are at work here. Both imply the lack of affordable housing. There is no denying that the United States is experiencing the highest level of demand for affordable housing since millions of servicemen returned from World War II.
The GI Bill almost single-handedly built America’s middle class by meeting the basic social needs of unemployment, education, and health care. Most importantly, it did so through fixed rate, low interest, government guaranteed mortgages with zero or low payments with terms of up to 30 years. Indeed, the GI Bill made homes accessible to all American veterinarians, except the poorest. The American suburb was born.
A few years ago, President Roosevelt laid the groundwork when he said, “A nation of landowners, of people who have earned a real share of their own land, is invincible.
It was an affordable home revolution from our past. But what does this have to do with today’s need for affordable housing? More than a little. Although the 20-year war in the Middle East is drawing to a close, there will not be 15 million vets returning home in search of a family home. But there are still millions of Americans looking for an affordable family home.
The current shortage of affordable housing did not happen overnight. The end of World War II brought us baby boomers; the largest population increase in American history that was also to be housed. And with that came another rise in affordable housing as the economy experienced another big expansion.
Now the baby boomers have downsized and moved to condominiums in the Sun Belt. Prior to retirement, the prosperity of many baby boomers created two legacies that remain with us today. One is the next population increase which includes millennials which is roughly the same number of people that the baby boomers were at their peak. Today, the oldest of Millennials are turning 40, and many are still looking to buy their first affordable home. The second legacy of baby boomers is the multitude of McMansions built in the early 2000s at the height of baby boomer purchasing power. These mass-produced oversized and opulent homes are not the affordable homes today’s youth need.
The McMansions are also where many millennials ended their childhoods and what they now expect from their adulthood. It’s a big part of irrational exuberance that can’t last forever. In the future, came the pandemic which almost crippled new construction. Along the way, we see vast swathes of neighborhoods swept away each year by hurricanes, floods, wildfires and other disasters.
The result is what we have today – a total shortage of single family homes relative to demand nationwide 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 turning to McMansions due to higher profit margins and strong demand to fill the still limited building capacity. If nothing changes significantly, stocks will remain limited for the foreseeable future. But the change will happen.
Home quarantines caused by the pandemic, growing up in McMansions and their early adulthood urban experiences have created a millennial expectation that cannot be met from yesterday’s affordable 1,100 square foot home.
As soon as builders and the financial industry understand it, the new suburbs will be very different from the normal that existed from the 1950s to the 1990s. With demand from buyers still high and interest rate hikes coming, the McMansions will become even more unaffordable. The new scaled-down home will be much closer to 1,100 square feet with small yards in the suburbs. But neighborhoods will change to include open multi-purpose playgrounds for raising families. For millennial adults, neighborhoods will include familiar features of the high-density cities they flocked to in their twenties. Instead of separately developed commercial areas, housing districts will be mixed-use with high-tech office buildings that combine working close to home with the need for team collaboration. Malls will give way to malls comprising of warehouse-sized grocery stores surrounded by retail outlets 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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Photo by Breno Sitting on Unsplash
Author Biography: Brian Kline has been investing in real estate for over 35 years and has been writing about real estate investing for 12 years. He also draws on more than 30 years of business experience, including 12 years as a director at Boeing Aircraft Company. Brian currently lives in Lake Cushman, Washington. A vacation destination, close to a national and the Pacific Ocean.