Greater Greater Washington

Development


DC area incomes fall behind skyrocketing housing costs

This is the first in a 5-part series about how the Washington metropolitan area can provide housing options for its growing workforce.

It's no secret that the Washington area housing market is one of the most expensive in the country. With median home prices well above the national average and rents continuing to rise, finding affordable housing can be a challenge for area residents. It's particularly hard when looking for housing close to jobs.


Photo by NCinDC on Flickr.

Housing costs have increased faster than incomes

Over the past 40 years, median home values and rents in the Washington region have increased much faster than household incomes. While the median household income increased by only 46% since 1970, rents rose by 69% and home values increased by 144%.

When a household spends 30% or more of its income on housing costs, housing researchers typically identify it as "housing cost burdened." In 2010, about half of all renters in the DC region fell in this category, and 83% of renters with household incomes below $50,000 were burdened. Nearly one-third of the region's homeowners spend more than 30% of their incomes on their mortgages.

On top of that, many so-called "drive to qualify" households, or those households that were only able to find affordable housing far away from where they were looking, have very high transportation costs. According to the National Association of Realtors Affordability Index, the Washington region ranks as the 5th least affordable major metro area overall, with only San Francisco, Los Angeles, New York, and Boston less affordable than our region.

Several factors have contributed to declines in affordability in the Washington area. Some are due to changing preferences of those that seek housing, or demand-side factors:

Population growth. The Washington region added 2.4 million people over the four decades between 1970 and 2010. Over the same period, household sizes were shrinking and more people were living alone which accelerated housing demand.

High-income households. These households created demand for larger and more expensive housing and builders rushed to meet demand. While overall household income growth has been relatively modest over the four decades between 1970 and 2010, a sizable share of the region's workers earned very high wages.

The growth of the high-wage professional and business services sector began in earnest in the 1980s when federal procurement spending increased and the government contracting workforce expanded. Many of these jobs were high-wage jobs in engineering, computer programming, program management, and other fields that suddenly became the fastest-growing sectors in the region's economy.

The workers in these fields benefited from high and rising salaries and demanded larger homes, more owner-occupied homes, and more expensive housing. Builders were happy to meet this growing demand, and as a result, the region saw fewer rental units and fewer smaller houses built over time.

Homeownership incentives. During the recent housing boom, easy mortgage financing and public policies that encouraged homeownership put upward pressure on home prices and fueled demand for higher-priced homes.

Speculation. Speculative demand by investors artificially boosted prices at the same time. Although values and prices dropped temporarily, Washington's economy and job growth proved stronger than those in much of the country, and home prices rebounded, particularly in areas close to the core.

Demographics. Changes in demographics and lifestyles have increased demand and prices in DC, areas inside the Beltway, and areas along Metrorail lines.

Overall, this demand for homeownership has diminished the supply of rental housing. In 1970, the region's housing stock was split about 50/50 between rental and owner housing. Over the next four decades the development of for-sale housing far outpaced the supply of rental housing.

The rental housing that was built was often targeted at the higher income households, and involved redevelopment of affordable rental housing. Lower income households, who are more likely to rent than own, faced a declining stock of housing with rents they could afford.

Developers and landlords have also responded to the changing conditions in the market. These supply-side factors include:

Land. The amount of land available for residential development is fixed and has grown scarce. Within the geographic boundaries of the Washington metropolitan area, there is only so much land on which to build. Even though the construction of I-495, I-66, and Metrorail have made it easier for housing to be built in the farther out suburbs, land itself remains a constraint on residential development.

New higher-end condos. As builders sought to meet the demands of higher income households given the land constraints, cheaper homes in the suburbs gave way to luxury homes and modest rental buildings were shunned in favor of amenity-rich condos.

Condo conversions. Older and more affordable rental apartments have been converted to condominiums to meet the demand for homeownership.

Zoning. Land is also constrained by local regulations that determine the types and sizes of housing that can be constructed under different zoning and land use categories. Lot size and coverage regulations require that large homes with large yards be built in some areas. Height and density restrictions can prohibit the construction of higher-density, multi-family residential development.

Other regulations. Local government regulations affect the time required to construct new housing, delaying the availability of new units to meet growing demand.

Even as the housing bubble burst and regions across the country experienced dramatic drops in home prices, the Washington region is staring down the affordability issue once again.

Housing affordability is particularly a problem in inner-ring suburbs and the downtown core where land is expensive and scarce. The most desirable locations are those near transit stations or hubs, yet those infill locations are where development is most difficult and time consuming, and where resulting housing will be most expensive.

While there has been an uptick in residential construction, it has been primarily high-rent multi-family development in the District of Columbia and close-in suburbs. Single-family and townhouse construction seemed to slow to a halt and is only now beginning to pick up.

Over the last few years, thousands of workers have flocked to the Washington region to take advantage of its healthy economy. As a result of this recent demand, rental vacancies have been low and rents have been high. In some jurisdictions, home prices are back to the peak seen at the height of the housing boom.

Next in the series: How much housing will the Washington region need over the next 20 years?

Lisa Sturtevant is Deputy Director of the Center for Regional Analysis at George Mason University. Dr. Sturtevant's primary areas of research include housing, demographics, and economic development. Prior to working at the GMU Center for Regional Analysis, she spent four years as County Demographer in the Arlington County Department of Community Planning, Housing and Development. 
Agnès Artemel became interested in revitalizing cities after growing up in France and Germany, where livable and walkable have always been the norm. She is a founder of the Northern Virginia Streetcar Coalition and Alexandrians Delivering smart growth Around Metro (ADAM). Her professional focus is on market and feasibility studies, real estate development approvals, and economic development partnerships. Agnès has a Masters in urban and regional planning. 

Comments

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Maybe we'll get lucky and incomes will crash to bring housing prices down?

by Tom Coumaris on Oct 4, 2012 12:15 pm • linkreport

You can't have a discussion on this without looking at the credit side. Making credit easier to get obviously has a huge inflationary effect on housing prices. It creates a double whammy on the bottom (unemployed) end: if you don't have a steady job you can't get a loan, and the existing renting stock is being upgraded around you.

by charlie on Oct 4, 2012 12:22 pm • linkreport

So glad you are focusing on this. It is the single most important issue and the largest portion of the budgets of most families.

I love the GGW is pulling in more academics.

I have always felt that we should have a progressive land tax rather than a flat housing tax. Such a tax would change little for condo owners, but would be focused on SFH west of the park or close-in jurisdictions. Any SFH within walking distance of a Metro would get hammered and thus governments could capture money back from the rent-seekers.

by MW on Oct 4, 2012 12:31 pm • linkreport

@MW-i don't know anything about "progressive land tax". How would this affect someone who has lived in a house for 50 years and is currently retired, and planned to pay ~x amount of annual property taxes on the house they paid off 30 years ago?

by Tina on Oct 4, 2012 1:03 pm • linkreport

Given that housing is taxed on current value, which has nothing to do with "realized" value, it already is weighted, or at least not flat.

2. re charlie's point, during the real estate boom I used to say that the boom, counterintuitively, was produced by the fact that the economy wasn't doing well, which is why interest rates were so low, assisted of course by international flows of capital to the US, which saw the US as a safer place to invest.

So yes, cheap interest rates, tax credits, mortgage interest tax deductions, among others, significantly shape the market.

Yes though, for profit development firms aim to produce the most profitable "product" which usually targets upper income buyers and renters.

by Richard Layman on Oct 4, 2012 1:24 pm • linkreport

A comprehensive posting. Well done.

by tmtfairfax on Oct 4, 2012 1:41 pm • linkreport

While I generally support changes to regs that artificially raise the price of housing, I am not sure that returning income/housing ratios to 1972 levels is either possible or desirable. As the posters point out, this is a much larger metro area than it was then, and larger metro areas (even ones that have done great things in cheapening via densification, like Chicago) will have higher rent to income ratios than smaller metros.

I am glad the posters mentioned the drive till you qualify issue, as I have never seen that mentioned in other work I have read by CRA, or in anything I have seen by Prof Stephen Fuller, CRA's founder. The impression one sometimes gets is that Fuller and CRA advocate for more housing develpment in the region period, without much concern for the kinds of issues frequently raised on GGW. I look forward to the next post in this series to see how these issues are addressed.

by AWalkerInTheCIty on Oct 4, 2012 1:44 pm • linkreport

not to derail things, but a more moderate and feasible version of MWs idea would simply be to have a higher rate on land than on improvements (ultimately this is derived from Henry Georges "single tax" idea) The notion being that high taxes on improvements disincentivize their production - land can't be "built" anyway, so their is no downside to raising tax rates on it. DC has this in a limited way with their punitive charges on abandoned properties. Of course to the extent that what we need is local property holder buyoff on new transit and similar changes, and a high land tax would confiscate some of the windfall profit landowners get from things like that, it could change the political dynamic in negative ways.

by AWalkerInTheCIty on Oct 4, 2012 1:48 pm • linkreport

"there is"

by AWalkerInTheCIty on Oct 4, 2012 1:49 pm • linkreport

@RLayman, we tangled about this on your blog a few days ago (whether houses are investments) but sometime in the 1970 we set about a national goal having the best housing in the world. We successed, but among the costs is we kind of threw the community part out.

It is also cleaer in retrospect that we decided to give people perceived wealth in terms of housing assets but that was it was mostly based on debt. Housing is not a particularly productive investment although it keeps Home Depot in business.

by charlie on Oct 4, 2012 2:03 pm • linkreport

@charlie

Not sure how you figure housing isn't a "particularly productive investment" when home value constitutes the largest portion of most Americans' net worth. It's certainly a more productive investment than the alternative: renting.

by no can do on Oct 4, 2012 2:54 pm • linkreport

Not a productive investment? For many people it's their one opportunity to lower their expenses in retirement, while also providing capital. Things like automobiles are not productive investments--they rapidly depreciate from day one and the return on investment in terms of greater income or access to less costly goods is probably nil for a great many people.

by Rich on Oct 4, 2012 3:38 pm • linkreport

This condition is the inherent outcome of the inefficiency of suburbanization. Home building cannot be the basis of a County economy. Residential housing requires more in services than it can pay in taxes. Land subdivision appears to create value; $x value/acre land becomes $20x/quarter acre. The taxable value increases, and a housing unit increases the value even more, but the service liabilities of the future were never acknowledged. The tax increment should have been banked, but wasn't.

A facilities deficit ensues. Developers put in the infrastructure and dedicate it to the County. Developers never pay for anything; it goes into the unit price. So homeowners paid for public infrastructure at market rates, rather than if the infrastructure were funded through a municipality. All housing values then rise to reflect this fact. Developers don't maintain a grid road system - that is too (long term) expensive (to pass on to buyers).

The suburbs give privacy (really isolation). This is all because people "can't live close to one another," e.g. efficiently (densely), although throughout human history, that is how we did live. Rural and city households were large, due to family size, but the practice of “manners” enabled populations to get along.

Suburban style housing, in county suburbs and suburbanized cities and towns, is two dimensional. Little use is made of the vertical, either above or below ground. Grid road networks are costly, yet they also are the grids for utilities, so they bring more and more value to any parcel. That enables the burying of lines so they are not subject to, say, falling trees in windstorms. This was advocated in the 1950's by utility directors, but what could they have known? So, real cities are 3D in their use of the land to support civilization. There is some of this in the U.S., but the suburban value system and its inherent dependence on the automobile is the primary value proposition.

The grid system of municipal services is high maintenance, but more importantly of high value. There really isn't anything of high value that isn't high maintenance. Even dumb gold requires lots of high maintenance security.

Cost are high relatively speaking and getting higher due to both long term cost of living inflation plus the asset inflation supported by easy credit/debt. Everyone is in the equity game, but there's not enough to go around.

The land use patterns are, in some respects, a dead hand. The zoning laws were designed to protect value for the lenders and that has become the game for homeowners too. The only way to make any money in a housing market like Greater D.C. is to cash out and go to a market where housing is cheaper. Of course, those areas will be remote from Greater D.C. amenities and will have far fewer amenities themselves.

Historically, cities grew because there was an expansion in employment. Housing came in response to that and within the corporate territory. The service liabilities of residential housing were offset by the tax base of the employers. New housing proposals did not have to answer the question: "Will the tax revenues pay for the cost of the new children in the school system?"

Balance is achieved where employment and housing are within the same taxing jurisdiction. That is why annexation is so important to keeping tax revenue and service costs, including the maintenance and improvement of the infrastructure in perpetuity within a municipal geography. The County function is law and order, the sheriff, courts and deed book. The municipal function is the provision of services which enable a high-wage economy in the always global world. In many areas, the county and municipality are coterminous. The importance of the County function is illustrated by the formation of Broomfield County by the City of Broomfield in the Denver Metropolitan area.

Since consolidation or merger result in loss of identity, these paths will not be taken. Functional consolidation of services to achieve economies of scale is the route for Greater D.C. or any multi-jurisdictional region in the world. This can be achieved by recognition that we all hold multiple identities related to our political geography. If you have a vote, pay direct taxes and get direct services, that is an identity.

It may make sense to abandon the terminology of urbanism and metropolitanism and instead work on the existing political geography of cities, counties, towns - and states/district to focus on functional efficiency. The suburban/exurban large lot dream and a vehicle for every driver in the household has given us long and fragile supply lines and is, net net, malinvestment for the society. Neither the housing nor the vehicles make one more productive, only more indebted. That is the huge problem of the balance sheet applied to the household economy. The things purchased with credit/debt have no enduring value. Those manufactured collectibles gather dust in the closet.

A way forward is to sideline the "profit motive" and bring to the fore what I posit as the "community motive." Community is what has enables survival, perpetuation and improvement in life. It works for free because life is an unfunded mandate. It is the basis for cooperation, the method for solving problems, of which security is first and foremost. It now requires a multi-layered world view where we are citizens of a county/city/town/state/nation and humans on our local planet, Earth. So, we need think local planet and act regionally, across borders to meet the efficiency demands of nature.

Getting to equity and balance will be difficult. Many solutions are in the past, things we might have done better or should not have done at all. Where we to be able to come back to the area in 300 years, we’d find that the geographic features and infrastructure of roads, cities and towns still in the same place and usable. That is the nature of human settlements. Those that endure, build on centuries of investment by waves of communities. The planning horizon should be 300 years. That is the sort of vision the early settlers had, based on the known history of Europe and the world.

To learn about the connection of suburbanization to security, read: "The Reduction of Urban Vulnerability: Revisiting 1950s American Suburbanization as Civil Defence" by Kathleen A Tobin, Purdue University, Cold War History, Vol.2, No.2, January,2002. This is a UK publication, so defense is “Defence.”

by Tom Christoffel on Oct 4, 2012 3:48 pm • linkreport

@NocanDo and RIch; and that is my macro point: Once we treat houses as wealth, we are in trouble and asking for this sort of appreciation.

The problem with housing at wealth it is a highly imperct market (pricing) and tranasactions costs are incredibly high (5%?).

When I say productive, however, I am contrasting the trillions we have invested in housing over the past 40 years vs investments in factories, roads, airports, or machine goods.

As I said, we made a collective decion to have the best housing in the world. Turns out that isn't so great.

by charlie on Oct 4, 2012 3:52 pm • linkreport

35 years ago I bought my home for $25K plus $75K in renovations. My last appraisal was $1.3M. Friends rented and put some savings into mutual funds. The economy stalled and houses stalled in appreciation but mutual funds tanked. I'm better off by a long shot.

Today young people are paying $500K for houses in renovating neighborhoods in DC. Will they get the same percentage appreciation, especially if home mortgage deductions are eliminated? Maybe, maybe not. But they will probably get the same dollar appreciation. The risk in other investments is too much greater.

(I am not a realtor).

by Tom Coumaris on Oct 4, 2012 10:40 pm • linkreport

@Tom; my parents bought a house in 1972, a bit outside your window, for $22,000 in Cleveland Heights. It sold recently for $76,000. And yes, it is two blocks from Whole Foods. different markets, different result.

when housing is your best peforming asset class there is something very wrong with your economy. How many jobs did your house create in those years?

by charlie on Oct 5, 2012 8:19 am • linkreport

Most people I know who own homes own stock as well.

How many jobs are created from owning stock? I own quite a lot and don't feel like I have created jobs. As a homeowner/investor, you certainly often employ people for maintenance work or improvements.

Not saying one way or the other is better, just saying its open for discussion.

Other than directly starting a business (which is quite risky itself, also), how is capital allocation creating jobs?

by H Street LL on Oct 5, 2012 8:27 am • linkreport

I realize all markets aren't like DC. And I also realize that the housing employment market has nationally gotten "stuck" on providing jobs with new-built housing. But that's where we have to move to a "greener" market of rehabing existing stock. And, at least in DC, there are a tremendous number of jobs developing devoted to rehab and they pay extremely well. They also concentrate on smaller rehab firms instead of large corporations.

As an Urbanist, an Environmentalist and a Preservationist, I'd rather DC keep renovating the huge good existing stock we have (and creating density by sub-dividing into more units) than either building more exurbs or building "towers-in-the slums" as most American cities do.

by Tom Coumaris on Oct 5, 2012 11:02 am • linkreport

Im not sure what city is building towers in the slums these days. If you mean large publicly subsidized towers in the park, thats been out of fashion for a while, and quite a few have been torn down.

if you mean the construction of new midrise and hirise units in gentrifying neighborhoods, that seems to happen alongside of rehabbing of existing stock, and seems to mostly be mutually supportive of it.

by AWalkerInTheCIty on Oct 5, 2012 11:12 am • linkreport

In most cities I visit when a close-in location becomes desirable new vertical gated communities are built by corporations because that's what they know how to do profitably. The existing housing stock is often neglected because big corporations aren't geared to that. Maybe it leads to eventual renovation of close-by existing stock, but often not very much. Richmond and Baltimore are close cities people often say we should be more like and I see examples of upscale towers-in-the-slums in both, both commercial and residential.

In any area you're going to have a certain demand for each type housing. Buyers want turn-key units with everything finished and included. DC is rare in having a decent renovation industry that knows how to convert existing stock into marketable units. It's not outlandish to assume that 90 units in a new-built subtracts 30 townhouses that could have been divided into the same number of units in a renovating neighborhood and done just as turn-key by small local businesses.

And the pay is so much greater in the small businesses. I know someone who works for a corporation that prefabs for projects at a factory in Stafford and the employees make just over minimum wage. Except for the rare government union-scale jobs, manual workers I talk to on large projects in DC joke about how low their wages are.

OTOH I know that my roofer (who has 2 employees) has sent 4 four children to college and that my electrician (1 employee) has a beach house in Rehoboth. Besides renovating homeowners, they also work for a neighborhood contractor who renovates and are recommended by a neighborhood architect who does renovations. There are many of us in my neighborhood who live off rentals of converted existing units where the housing is at least as good as new-built and the rents are much lower. And Lord knows there is a huge cottage industry here of real estate agents who make extremely nice incomes off selling renovated housing (sometimes I wonder if they could ever manage any other decent employment).

by Tom Coumaris on Oct 5, 2012 12:22 pm • linkreport

Zoning got three sentences in this post, but it should have been 80% of the content.

In a functioning market we shouldn't see long-term shortages or price spikes. Most of this post focused on demand-side issues, but that shouldn't cause the problems we're currently seeing.

Developers like making money, and the fact that needs aren't being met suggests that something is getting in the way. It might be time to admit that zoning, community input, smart growth, historic preservation, and other controls are barriers to affordable housing.

by Michael Hamilton on Oct 8, 2012 11:43 am • linkreport

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