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An Assessment of the American Housing andEconomic Mobility Act of 2021ANALYSISAPRIL 2021Prepared byMark [email protected] EconomistContact [email protected] nation is struggling with an affordable housing crisis. There is not enough housing for saleor rent in communities across the country. This means families must pay more for their housing,renters have less to get by on at the end of the month, homeownership is out of reach for toomany, and those of modest means are forced to live farther from decent jobs. This has significanteconomic and social repercussions. The American Housing and Economic Mobility Act of 2021would help address this mounting housing crisis.U.S./Canada 1.866.275.3266EMEA 44.20.7772.5454 (London) 420.224.222.929 (Prague)Asia/Pacific 852.3551.3077All Others s.comMOODY’S ANALYTICSAn Assessment of the American Housing and Economic Mobility Act of 20211
An Assessment of the American Housing andEconomic Mobility Act of 2021BY MARK ZANDIThe nation is struggling with an affordable housing crisis.1 There is not enough housing for sale or rent incommunities across the country. This means families must pay more for their housing, renters have less toget by on at the end of the month, homeownership is out of reach for too many, and those of modest meansare forced to live farther from decent jobs. This has significant economic and social repercussions. The AmericanHousing and Economic Mobility Act of 2021 would help address this mounting housing crisis.2Affordable housing crisisHomebuilding collapsed during the housing crash over a decade ago and has beenslow to recover. Construction of high-endhomes and apartments recovered first, andthere is now an oversupply in some urbanareas across the country. However, the construction of affordable housing—homes reasonably priced for lower-income householdsto rent or own—has only recently begun toincrease and continues to lag demand.The worsening affordable housing shortage is clear in the low number of vacanthousing units, which continues to decline.The percent of the housing stock for rent andsale that is unoccupied has fallen sharplysince the housing crash and is now as low asit has been in more than 30 years (see Chart1). The shortfall in affordable housing is closeto an estimated 1.8 million homes, equal tomore than a year of new construction at itscurrent pace.And this housing shortage continues toget worse. The current annual supply of newhousing units is still running an estimated100,000 below the trend for new-housingdemand. Total supply equals new single- andmultifamily units and manufactured homes,and trend housing demand equals householdformations, new homes needed to replaceChart 1: Plunging Vacancy Ratethose that become obsolete, and second andvacation homes. Trend demand abstractsfrom the near-term temporary ups anddowns in demand.Even these figures understate the severityof the problem. The lion’s share of the undersupply is concentrated in the lower end of themarket, particularly in areas that offer significant economic opportunity, driving up houseprices and rents for low- and moderate-income families precisely where they want tolive (see Chart 2).3 Prices for homes sold inthe bottom quartile are up nearly 8% perannum over the past decade, almost doublethat for homes in the top quartile. And rentsChart 2: Shortages Across the CountryVacancy rate for homes for sale and rent, 4-qtr MA, %5.04.54.0Current housing 01,200,000400,000100,000Adequately supplied3.53.0Trend housing demandHouseholdObsolescenceSecond 0Sources: Census Bureau, Moody’s AnalyticsSources: Census Bureau, Moody’s AnalyticsMOODY’S ANALYTICSMarch 20211An Assessment of the American Housing and Economic Mobility Act of 2021March 202122
decade ago, buildersput up only 600,000Hrs of traffic delay per person, 2005 100homes per year. New140construction todayDC135is approaching 1.7Dallas130Atlantamillion units. Yet125Chicagomuch of the increaseSan Francisco120in homebuilding hasSeattle115been at the highPhoenix110end of the housing105market. Demand100by higher-income95households recov05 06 07 08 09 10 11 12 13 14 15 16 17ered more quicklySources: Texas A&M, Moody’s Analyticsfrom the recession,and the higher housefor those families who rent because theyprices and rents builders could charge thesecannot afford to own, rather than by choice,households have been a strong incentive tohave increased nearly 4% per annum over the build more.past decade—a trend that has continued evenConstruction of affordable housing—during the pandemic.homes that low- and moderate-incomeThe rising rents leave more and morehouseholds can afford to rent or buy—hasrenters with little to live on. Today, one inbeen much slower to bounce back. The storyfour renters pays over half of their monthly is one of demand and profit margins. Lowincome toward rent, leaving barely enough and moderate-income households wereto cover food, clothing and healthcare,much slower to recover from the recession,much less save for emergencies or buildonly hitting their economic stride again inwealth. The typical renter saves less thanthe year or two before the pandemic. And the 500 a year, not enough to cover run-ofprofit margins that builders could get fromthe-mill financial emergencies let alonebuilding affordable housing have been toosave for a down payment on a home. Andlow to incent the investment, with pricingthe rise in house prices is putting thetoo low to adequately clear the high fixedeconomic opportunity of homeownershipcosts of building.out of reach for more and more families,The economics of building affordableparticularly those of color. Today thehousing have improved more recently, withhomeownership rate for Hispanics is 48%skyrocketing house prices and rents finaland for Blacks it is 42%, a level not seenly creating a wide enough profit marginin decades.4to justify more investment. But the factThe housing shortfall is not just depressthat the economics of building affordableing savings and increasing the wealth gap.housing are still precarious and appear toIt is also forcing those at the bottom of therequire pricing that is not affordable foreconomic ladder to live farther away frommany homebuyers and renters, especiallythose at the top and, more importantly, faras mortgage rates normalize on the otherther from economic opportunity. The mostside of the pandemic, indicates the probdesirable cities are becoming affordablelem remains acute.5only to the wealthy, while many of those ofMeanwhile, the constraints on buildingmore modest means are forced into longeraffordable housing units, including buildingcommutes, creating more traffic, more envi- materials and labor, lending, and land, reronmental strain, and greater social divisionmain significant. These are key inputs into(see Chart 3).building a home, and they have all beenin short supply since the financial crisis,Homebuilding constraintsdriving up their cost and reducing builders’Homebuilders have steadily increasedprofit margins and thus their incentiveproduction of new housing since the housing to put up more homes, particularly lowcrash. During the worst of the downturn aer-priced housing with lower margins.6Chart 3: Increased CongestionMarch 2021MOODY’S ANALYTICS3While prices of many building materialshave risen in recent years, the rise in softwood lumber prices has been especiallydramatic, up close to 10% per annum sincethe housing bust and nearly double overthe past year alone.7 The higher materialcosts reflect a range of factors, most recentbeing the disruption of global supply chainsduring the pandemic and the Trump administration’s imposition of higher tariffs andgreater trade restrictions on most major U.S.trading partners.Homebuilders have also struggled inrecent years to develop and maintain a consistent labor force, reflecting the difficultythat many of the trades face in attractinghigh school graduates into careers requiringspecialized skills. Prior to the financial crisis,this labor gap was largely being filled byimmigrants. But, just as housing demandbegan to warrant ramping up housing supplyagain, the Trump administration all but shutdown this source of labor through restrictiveimmigration policies. Labor cost pressureshave eased a bit during the pandemic, butthis appears temporary and will almost surely worsen again if there is a large federallyfinanced infrastructure effort.8As the cost of materials and labor hasgone up, builders’ access to financing hasgone down. Bank acquisition developmentand construction lending is an especiallyimportant source of financing for smallerbuilders who often do not have ready accessto other forms of financing.9 Yet banks havebeen pulling back on these loans since the financial crisis and show little signs of expanding them again. The retreat has been strongest for smaller banks that cater to smallerbuilders. This constrains supply at the lowerend of the housing market, where smallerbuilders often focus.The most significant impediment to building more affordable housing is the availabilityand cost of land. There simply is not enoughbuildable land to meet the demand in manyareas, and the costs associated with securingand developing the land that is available toooften push builders’ total costs above whatthey could get from the sale of an affordableproperty. The cost of land has soared to anestimated 55% of the total price of the median-priced home nationwide, and upwards of70% in high-opportunity areas such as Seattle and San Francisco (see Chart 4).10An Assessment of the American Housing and Economic Mobility Act of 20213
Chart 4: Land Costs SoarCurrent combinedfunding is severalLand share of house price, %hundred million80dollars a year based2012 20207570on a fee charged65on loans purchased60by Fannie Mae and5550Freddie Mac. The45HTF provides funds40to state housing3530authorities for the25development of af20U.S.Atlanta Baltimore Chicago Pittsburgh Seattle San Fran.fordable rental units.Housing authoritiesSources: CoreLogic, Engineering News Record, Moody’s Analyticshave flexibility in allocating these funds,American Housing and Economicsince each has different objectives and goalsMobility Actbased on the needs of the local population.The American Housing and EconomThe CMF provides funds to Communityic Mobility Act provides just over 500Development Financial Institutions andbillion in federal support over the nextother nonprofit developers for increasingdecade to alleviate the shortage of afthe supply of affordable housing. CDFIs arefordable housing units (see Table 1). Thismission-driven financial institutions thatis done through funds to incent localitiesprovide financing for development in unto ease regulations and other building rederserved communities. The HTF and CMFstrictions and provide down payment ashave the flexibility necessary to significantlysistance to lower-income first-time home- increase the supply of affordable housing inbuyers living in low-income communities.real estate markets encumbered by a rangeMost significantly, the funds are to beof complex and costly problems.used to scale up the Housing Trust FundThe American Housing and Economic Moand Capital Magnet Fund. The plan is paidbility Act is designed to be deficit neutral on afor by scaling back estate tax exemptionsdynamic basis over the 10-year budget horiand other reforms.11zon. The costs of these affordable housing iniThe HTF and CMF were established bytiatives are paid for by reforms to the estatethe 2008 Housing and Economic Recoverytax, most importantly by rolling back estateAct, but funding began only a few years ago. tax exemptions to their 2009 levels.March 20214Housing and economic impactThe Moody’s Analytics model of the U.S.economy is simulated to determine the impact of the expansion of the HTF and CMF inthe American Housing and Economic Mobility Act on housing and the economy.The simulation is based on several assumptions, including that the legislation becomes law later this year and takes effect in2022. It also assumes there are no other fiscalpolicy changes other than what are in currentlaw and that monetary policy is endogenously determined—the model is used todetermine how the Federal Reserve managesshort-term interest rates and its quantitativeeasing program.Another important assumption is that itwill cost close to 200,000 to produce a typical affordable housing unit in 2022. This isconsistent with the cost to produce a unit ina Low-Income Housing Tax Credit project. Weexpect that cost to increase more than 3%per annum in the next several years, given thestrengthening economy and ongoing globalsupply chain problems, and to moderatecloser to 2% growth by the second half of the2020s, consistent with overall price inflation.Given the magnitude of the increase infunding for the HTF and CMF, Moody’s Analytics assumes it will take several years toget these programs up to full speed. Each willneed some time to expand its infrastructurefor evaluating uses of the increased funds anddisbursing them effectively. The AmericanHousing and Economic Mobility Act doesnot change current law with regard to howTable 1: Economic Impact of American Housing and Economic Mobility Act of 20212022202320242025202620272028202920302031Annual spending, bilHousing Trust Fund Capital onal affordable housing unitsHousing Trust Fund Capital ,618286,3081,992,282769,873Additional 348402,302394,414386,6802,802,582Note: Total includes the HTF, CMF, and various other smaller programs in the legislation.Source: Moody’s AnalyticsMOODY’S ANALYTICSAn Assessment of the American Housing and Economic Mobility Act of 20214
the HTF and CMF operate. Under currentlaw, at least 70% of CMF funds must be usedto support affordable housing projects, andno more than 10% of an affordable housingproject’s costs can come from the CMF. Theseand other rules under current law slow thedisbursement of funds and are key to why ittakes several years to ramp up the productionof affordable housing.Under the legislation, our model showsthat affordable housing construction increases by close to 225,000 units in 2022,increasing to over 300,000 units annually bymid-decade. Over the 10-year budget horizonthrough 2031, affordable housing productionincreases by 280,000 units per annum onaverage. This would more than fill the currentshortfall in annual affordable housing construction and would at worst quell the affordable housing crisis by the end of the decade.The crisis should come to an end even soonerif market forces continue to support moreconstruction, which is likely if the AmericanHousing and Economic Mobility Act easesregulatory restrictions on affordable homebuilding as anticipated.Since the legislation significantly increaseshousing supply, it will have the added benefitof improving housing affordability, particularly for affordable rental homes. WithoutMOODY’S ANALYTICSthe legislation, rents are expected to increaseby approximately 4% per annum. With thelegislation, rent growth will be near 3% perannum. A decade from now, affordable rentswill be approximately 10% lower than theyare today, or about 100 per month in today’s dollars.More housing construction will increasethe economy’s growth rate and the numberof jobs as activity increases. In 2022, theincreased housing construction will lift employment by 250,000 jobs and by as much as400,000 jobs at the peak of the impact in themid-2020s.There is very little impact on the economy and jobs from the scaling back of theestate tax exemptions and other reforms. Thewealthy households that will pay more in estate taxes have substantial financial resourcesand will not significantly change their spending and saving behavior. Moreover, since theincreased tax revenues pay for the expansionof the HTF and CMF and other programs, itensures that the American Housing and Economic Mobility Act is deficit neutral, with noresulting impact on interest rates.This simulation likely understates theeconomic benefit of the legislation, becauseit does not consider that the measure willfacilitate the ability of low-income house-holds to move closer to their employmentor potential jobs. The housing shortage anderosion in affordability are constraining theability of low-income households to take therecord number of open job positions that arecurrently available in places where housingis simply too expensive. Affordability is alsoforcing low-income workers to live fartheraway from their work, requiring long andcostly commutes and reducing productivity.ConclusionsMore than a decade after the housingcrash and financial crisis, the nation is stillsuffering a housing crisis. A decade ago, theproblem was egregious mortgage lending andoverbuilding. Today, it is a mounting lack ofaffordable housing. Low-income and minorityhouseholds are struggling to make their rentand mortgage payments, suffering throughincreasingly long commutes, and unable totake better jobs because they cannot affordhousing near the available work. The American Housing and Economic Mobility Actwould help to address these problems. It isfiscally responsible legislation that empowersprograms that are already in place and shownto be effective in meeting the challenges ofproviding affordable housing to low-incomehouseholds and underserved communities.An Assessment of the American Housing and Economic Mobility Act of 20215
Endnotes1 This white paper relies heavily on “Overcoming the Nation’s Daunting Housing Supply Shortage,” Parrott and Zandi, Urban Institute andMoody’s Analytics white paper, March 2021.2 Massachusetts Senator Elizabeth Warren initially introduced the American Housing and Economic Mobility Act in September 2018. Moody’sAnalytics evaluated the economic impact of this legislation in “Addressing the Affordable Housing Crisis,” Mark Zandi, Moody’s Analytics whitepaper, September 2018. The currently proposed legislation, the American Housing and Economic Mobility Act of 2021, makes only small changes to the 2018 legislation. Our economic analysis of the 2021 legislation shows somewhat lower new housing production than in the analysiswe did of the 2018 legislation due to the significant increase in housing construction costs over the past several years. However, the estimatedemployment impacts of the 2021 legislation are meaningfully less than those estimated in 2018 because of different assumptions concerningthe mix of new single- and multifamily homes that will be constructed due to the legislation. We now expect the construction of substantiallymore multifamily units, which results in just over one full-time equivalent job, and fewer single-family homes, which supports closer to threefull-time equivalents. The change in our estimated employment impacts is not due to a change in the legislation, but a change in the assumptions underpinning our analysis.3 See “Housing Constraints and Spatial Misallocation,” Hsieh and Moretti, American Economic Journal: Macroeconomics, 2019.4 These homeownership rates are for 2019 from the Census Bureau’s Housing Vacancy Survey. The HVS for 2020 has significant measurementproblems due to the pandemic.5 In an economy operating at full employment and with inflation at the Federal Reserve’s 2% target, fixed mortgage rates will be near 5.5%.6 The National Association of Home Builders’ 2019 Construction Cost Survey provides a good breakdown of the costs involved in building atypical single-family home.7 This is for the producer price index for softwood lumber from the Bureau of Labor Statistics. Random Lengths data indicate that softwoodlumber prices are up even more, from 350 per thousand board feet in April 2020 to 1,040 in March 2021. The National Association of HomeBuilders estimates this has added 24,000 to the price of a typical home.8 This is based on the employment cost index for construction workers from the Bureau of Labor Statistics.9 This includes one- to four-family residential construction loans and land development loans from the FDIC.10 We estimate land values and the land share of house price across metropolitan areas based on data from the FHFA, CoreLogic, and theEngineering News Record. The FHFA land value methodology and estimates are available from “The Price of Residential Land for Counties,ZIP codes, and Census Tracts in the United States,” Larson, Shui, Davis and Oliner, FHFA working paper, November 2020.11 To be more precise, the American Housing and Economic Mobility Act of 2021 is deficit neutral over the 10-year budget horizon on a dynamicbasis, which accounts for the benefit of the plan on the economy and thus on the government’s finances.MOODY’S ANALYTICSAn Assessment of the American Housing and Economic Mobility Act of 20216
About the AuthorMark Zandi is chief economist of Moody’s Analytics, where he directs economic research. Moody’s Analytics, a subsidiary of Moody’s Corp., is a leading provider of economic research, data and analytical tools. Dr. Zandi is a cofounder of Economy.com, which Moody’s purchased in 2005.Dr. Zandi is on the board of directors of MGIC, the nation’s largest private mortgage insurance company, and is the lead director of Reinvestment Fund, one of the nation’slargest community development financial institutions, which makes investments in underserved communities.He is a trusted adviser to policymakers and an influential source of economic analysis for businesses, journalists and the public. Dr. Zandi frequently testifies beforeCongress and conducts regular briefings on the economy for corporate boards, trade associations, and policymakers at all levels. He is often quoted in national and globalpublications and interviewed by major news media outlets, and is a frequent guest on CNBC, NPR, Meet the Press, CNN, and various other national networks and newsprograms.Dr. Zandi is the author of Paying the Price: Ending the Great Recession and Beginning a New American Century, which provides an assessment of the monetary and fiscal policy response to the Great Recession. His other book, Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis, is describedby the New York Times as the “clearest guide” to the financial crisis.Dr. Zandi earned his BS from the Wharton School at the University of Pennsylvania and his PhD at the University of Pennsylvania.MOODY’S ANALYTICSAn Assessment of the American Housing and Economic Mobility Act of 20217
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T he nation is struggling with an affordable housing crisis.1 There is not enough housing for sale or rent in communities across the country. This means families must pay more for their housing, renters have less to get by on at the end of the month, homeownershi
