Here & Now

Homeownership Dreams Foiled by a 'Perfect Storm'

Frederica Freyberg:

If they can’t buy, millennials stay with renting, pushing those prices up. Our next guest, UW-Madison professor and housing expert Kurt Paulsen calls the need for affordable housing a five-alarm fire and the factors leading to it a perfect storm.

Kurt Paulsen:

The reason it’s a perfect storm for housing right now is, prior to COVID, you had a real difficult situation in the housing market. We weren’t building enough homes, and we weren’t building enough rentals. So prices are already up, people are already stressed in being able to buy. And then you just layer COVID on top of it, that’s why it’s a perfect storm. The other reason it’s a perfect storm is COVID messed with the supply chain. So in the long run, one of the ways to solve the housing crisis is to build more homes, right, because there’s high demand for housing so you need to build more. But now builders are building fewer units in ’21 than we did in 2020. Because you can’t get garage doors, you can’t get appliances, you can’t get carpeting, and the price of lumber is five or six times what it used to be prior to COVID. So anything that’s new, being constructed, is really expensive. And that doesn’t solve the affordability problem at all.

Frederica Freyberg:

By how much does demand outstrip the supply?

Kurt Paulsen:

So in Wisconsin, for example, we built, last year, about 10,000 single-family homes. And I estimate in a normal market, we should build about 30,000 homes. So we’re about one-third of where we need to be. We underproduce thousands of housing units every year relative to population growth and job growth, and that doesn’t even account for in some of our fast growing job centers, which would be Dane County, Waukesha County, Brown and Outagamie, Green Bay, Appleton, there’s far more jobs than there are housing units, so people who want to work there can’t even find a decent place to live.

Frederica Freyberg:

The other thing that you described this as was as a five-alarm fire. Why?

Kurt Paulsen:

Well, it should be ringing alarm bells in every state and local policy makers, you know, system to understand, we need to do something now, because if we don’t do something now, it’s only going to get worse. But it should be a five-alarm fire, but it never quite rises to that level because the legislature and local governments oftentimes don’t think they have the capacity or the policy to really address some of the macro issues in terms of the supply chain, but they can address the local zoning and the local financing to make sure that new housing units are built.

Frederica Freyberg:

Because what are the implications of it going forward, if it continues in this way?

Kurt Paulsen:

So if we continue on the path we’re on, house prices keep going up, and that means a couple of things. For first-time home buyers, for moderate income households, particularly for Black and Hispanic households, that means that entry level rung on the housing ladder is pulled up, which means you can’t buy a home. And even if you have good credit, you can’t find something that’s in your price range. So a lot of these households will stay renters for a long period of time, and that puts pressure on the rental market, causing the rents to go up on the low end. So when supply is squeezed, it affects everyone, but it disproportionately affects people on the lower end of the wage scale. The other implication is, millennials, the largest generation in history, are at their peak home buying age. They’re about 30 or 31 years old. If they can’t find a decent place to live, they’re going to move to another state. So if you want to keep your workforce, you have to house your workforce.

Frederica Freyberg:

So in the market as it currently exists, should millennials who might be seeking the American dream of home ownership just forget about it?

Kurt Paulsen:

My advice to millennials would be, first of all, you should hoot and holler and get angry because that opportunity that was available to your parents is not available, and pressure policy makers to do something. But on a practical matter, you just have to start getting your finances in order, make sure that you have savings for a down payment, pay off any student loan debt that you can, but I’ll be honest, a lot of millennials are pretty frustrated. Because they see that that dream is increasingly out of reach. And even if they play by the rules and save and go to college and get a good job, they just can’t afford a decent entry level home.

Frederica Freyberg:

Because what is the average cost of a home now in Wisconsin?

Kurt Paulsen:

Well, it really varies. So in some parts of the state, the median price is about $180,000 or $200,000. But in places like Dane or Waukesha County, the median price is well over $300,000. And part of what is driving this is, when the cost to build something new goes up, the cost of all the existing homes also goes up. Because the closest substitute to a new home is an existing home and the closest substitute to an existing home is a new home. So if you own your home now, you’re very happy. Because prices have skyrocketed. So on paper, at least, you’re much more wealthy. But if you’re looking to buy, you can’t find anything in your price range, and then as you also know the stories, there’s 20 or 30 bidders, all cash, asking over the asking price, and so again, for anyone who’s a first-time home buyer, particularly if you’re using like a VA loan or a USDA loan or an FHA loan, one of those affordable starter home products, you’re going to lose out to someone who’s offering all cash.

Frederica Freyberg:

Does the market kind of cool at all with the interest rates going up?

Kurt Paulsen:

Yes. Absolutely. So interest rates for mortgages have gone up over 1 percentage point or 100 basis points since Christmas. So that means, again, for that first-time home buyer, that kind of moderate-income millennial, the house you could buy now is less, because of the interest rate. So the same income translates into less mortgage. So it’s a double whammy, right? It’s actually a triple whammy because your rent is going up so you can’t save for a down payment, the money you do have doesn’t go as far, and there’s just a shortage of supply so the prices are out of reach. So it won’t crash, but it means that thousands of people in this state who otherwise would own a home are just never going to own a home.

Frederica Freyberg:

Paulsen says he doesn’t see the crunch for home buyers getting better for at least three to five years, because of supply-chain issues and rising interest rates.