Housing and Inflation

Nearly everyone is talking about housing in Utah.  The high cost of housing is a concern for young families considering purchasing their first home, for parents thinking about the next generation, for seniors on fixed incomes struggling with rising property taxes, for those without a home, and for those who rent.  Rising housing costs impact both urban and rural communities.  Much of our future wealth creation and community stability rest on our housing policy over the coming decades.

Structurally Short Supply
In Utah, we are building residential housing at a furious rate.  Along the Wasatch Front in 2022 we pulled 6,682 home building permits(1) and completed 11,773 multifamily units(2).  That is a an estimated 18,455 new housing units along the Wasatch Front in 2022.  In Washington County, we pulled 1,934 home building permits(1) and completed 470 multifamily units(2).  That is an estimated 2,404 new housing units in Washington County.  Adding 439 home building permits in Iron County, that is approximately 21,000 housing units statewide.

Utah grew by 61,242 residents last year(3).  That is 22,269 housing units assuming 2.75 people per household.  Except it doesn't account for short-term rentals and second homes.

For generations, owning a home was the American dream.  Today, in addition to owning a primary residence, owning a second home or a short-term rental is becoming much more common.  Individuals aspire to own a cabin in the mountains, a place on the lake, or an short-term rental in a vacation destination.  As travel and tourism increase in the state and as we see increase economic success, demand for housing is rising much faster than simply population growth.

This is the reason we have a structural shortage.  If demand were for just population growth, we would be building about the right number of homes.  To keep up with future housing demand, we have to consider how many second and short-term rental homes are needed to avoid being structurally short.

Housing and Inflation
In each of the last 7 decades, home prices have risen faster than inflation.  This makes sense because if the price of materials and labor are rising, then the cost of building a new home must also rise.  During high inflationary periods, such as the 1970's and the past three years, efforts to significantly increase the number of units built can backfire.  Intuitively, increased supply should result in lower cost.  In a high inflationary environment, materials and labor costs are rising because they are under supplied.  Efforts to increase housing supply too quickly will pressure labor and materials prices to rise even faster, making the problem worse in the short-run.

Reducing Regulatory Barriers
Some argue reducing regulatory barriers will reduce cost and therefore prices.  These regulatory changes will only reduce the price to the end consumer if it materially lowers the cost structure or materially increases supply of units built, or third materially reduces demand for second home and short-term rental investments.  If it doesn’t accomplish one of these requirements, then reducing regulatory barriers won't be effective in solving housing affordability issues.

Affordability
Many are worried about affordability.  I have heard it reported more than one once that 70% of Utahans can't afford to purchase a home today given their current income.  It is important to remember that 70% of Utahans already own a home and their payment is fixed.  If inflation drives wages higher, that increase in income may become discretionary--potentially creating more spending power and more inflation.  For those who don't own a home and are looking to buy, rising prices and the rising interest rates that accompany inflation push home ownership out of reach.

What should we do?  Most of our efforts to solve the inflationary home price problem make the problem worse.  For example, if we create a first time home buyer program to offset the rising cost of housing, we increase demand for housing and prices will be relatively higher than they would otherwise have been.  If rents are too high, subsidizing rents increases demand for rental units, causing rents to rise.  As a result, one of the best solutions in an inflationary cycle is to wait and try not to contribute to the inflation.

Affordable Housing
Affordable housing in this context is we are speaking of government subsidized housing.  Although well intended, affordable housing and deeply affordable housing can contribute to housing inflation.  If the supply of labor and materials is already constrained and creating inflationary pressure, building thousands of subsidized units will result in higher construction costs.  For affordable housing developments to have their highest impact, they should be built in a time when there is adequate supply of materials and labor so as not to significantly interfere with the housing market.

Affordable housing can be effective where it is designed to get people help and then get them moving to a market rate solution.  Affordable housing that incentivizes long-term residents with rent subsidies is a wealth trap and very expensive for governments.

Community Stability
It is critical for our communities to have stability in schools, church, government, and other civic structures.  When there are a high proportion of renters in a community, the housing structure can contribute to turnover and instability in a community as landlords raise rents and sell investment properties. The only way to control how long you stay, how much you pay, and what neighborhoods are available is to purchase a home.  Otherwise the Landlord will decide how long you stay, how much you pay, and what options are available to rent.

Home Ownership and Wealth
According to the Federal Reserve, the largest single contributor to household wealth is equity in a primary residence.  More than a 401(k), more than savings, and more than investment properties.  This information becomes even more valuable when we recognize wealth gaps in the country closely mirror home ownership gaps.  It is nearly impossible to close wealth gaps without addressing home ownership rates among demographic groups.

While some are persuaded to rent instead of buy, we should remember that you will buy at least one home during our lifetime…yours or your landlord's.

In summary, housing is a difficult challenge.  Supply is tight because we have to build for more than just population growth.  Demand will increase as more people can afford second homes and short-term rental investment properties.  Building more when prices are rising may make cause prices to rise even more quickly as builders compete for labor and materials.  Affordable housing solutions require keeping people moving into market-rate solutions.  Finally, housing is critical to community stability and wealth creation.  Given the current context of an inflationary economic cycle, a measure of restraint and patience may be the best solution so as to avoid pushing home prices even higher when policies were intended to keep housing costs down.
(1) ERA Brokers Consolidated 2023 Residential Review.  Click on the "Residential Market Research" link below for more information.
(2) NAI Excel | NAI Vegas 2023 Commercial Real Estate Outlook.  Click on the "Commercial and Multi-family Market Research" link below for more information.
(3) Utah Population Estimates Committee effective July 1, 2022.

Residential Market Research

Commercial and Multi-family Market Research