How To Tackle The Recent Housing Crisis

The demand for housing is high and the inventory and labor required to build homes are low, leading to low supply. This has led to a market where the higher interest rates are making it harder for homeowners to pay off mortgages and for homebuyers to find houses. 

Causes of the crisis

The crisis in housing cost inflation is the result of several factors such as less labor available after the pandemic and an increase in prices of house material due to a shortage of supply. Less labor means less housing is built which causes a shortage of supply in a time of high demand, leading to an increase in home prices. Additionally, mortgage rates have been substantially increasing due to rising interest rates set by the Federal Reserve which makes it even harder to buy homes for reasonable and affordable prices. 

The Fed’s Role

Since the goal of Fed policymakers is a stable level of inflation, raising interest rates to lower inflation is a valid solution. To keep the economy in check and keep inflation down, the Fed raised interest rates for the 7th consecutive time in 2022 on December 14th. The Fed has the duty of keeping inflation stable, maximizing employment, and delivering economic stability. However, the rate hikes have led to mortgage rates increasing due to the increased cost of borrowing with higher interest rates. 

The Fed wants housing prices to go down while keeping the economy in check. Fixed mortgage rates could solve this problem by keeping interest rates low in times of inflation. Fixed rates would guarantee the same interest rate throughout the loan which lets the borrower have financial security in times of rising interest rates. However, if the mortgage rates are too low it can also increase demand for housing which would not be met because of the labor and supply shortage. 

To reduce inflation, the risk of recession rises as interest rates increase. By setting reasonable interest rates conscientiously, the Fed can potentially counter inflation while making housing more affordable. Raising interest rates is the main tool of reducing inflation so how it’s used will consequently affect home ownership interest rates. Fixed mortgage rates can increase homeownership and if the Fed allocates more resources towards making housing more affordable homeownership rates will increase.

Government Solutions

There are several ways the government can make a substantial impact to decrease housing inflation. First, they can increase funds for HUD (U.S Department of Housing and Urban Development) programs, making it much easier to allocate more resources towards the housing crisis. By providing more low income families with the money to pay off their houses or to buy new homes, the housing crisis would significantly improve in the lower class. However, the tradeoff of increasing government spending to consumers is that the increase in GDP would increase inflation, so this solution might solve the housing crisis for some but doesn’t address the root cause. 

Another government solution is to try to increase supply in the housing market. Easing tariffs and construction regulations would make it easier for material to be imported, and more manufactured supply would lead to more housing, driving down prices. Furthermore, if policy makers reduce restrictions placed on zoning, it could lead to more housing and greater affordability of prices. However, taking these policies and implementing them is very complicated as policy makers have several things to keep in mind with their decisions. The Fed wants to keep the economy stable and decrease house prices but it is hard to reason through because increased interest rates keeps inflation down. It’s hard to speculate an ideal solution as there are many factors in play when it comes to the supply and demand of housing prices. To reach a perfect equilibrium as shown below, either the supply of the houses would have to increase to match the high demand of seeking buyers, or the demand would have to decrease to match the supply. 

The cost of housing is becoming more unaffordable to those with average incomes. Building new homes and increasing the supply could help bring prices down. However, this isn’t a viable option because of the shortage of resources. Building new homes also is an investment for the government which must be balanced with several other capital investments for the betterment of the United States. There are many consumers seeking to buy which is not met by the supply of housing material which has led to the housing price to increase. The government is looking to implement new ways to strategically decrease housing density so that there are more affordable housing options for those in need.

Alternative Solutions

3D printing can produce extra material needed to build houses for much cheaper costs at a more efficient rate. This will also result in considerable reduction in expected waste material to build a house and help provide economic stability for less production of goods. In the construction industry it is known that up to 30 percent of the material in a construction site goes to waste. One way to actively engage in a solution of less waste material and more affordable housing solution is by allocating the supply of 3D material. An example of this is shown in a 3D housing project in West Medford, which is exceptionally unique and the developer claims for it to be the first ever 6 acre lot of 3d printed houses in the U.S. Implementing neighborhoods with 3D housing such as this could potentially transform the market of housing and decrease homelessness, home ownership issues and the cost for shelter. The first 3D printed house on sale was listed on Zillow for $299,999 making it substantially cheaper than its neighborhood in New Long Island, New York. 

1400 square feet home in Long Island, New York; 3 bed 2 bath and detached two car garage 

Conclusion

High demand for housing with low inventory and labor has led to a market with high home prices and higher interest rates, making it harder for homeowners to pay off mortgages and for homebuyers to find houses. To fix the issue of low supply and labor, we can use alternative supply sources such as 3D material, and since rising interest rates have been affecting supply, the government could lower tariffs on wood, lumber, and metal imports from Canada, Brazil, China, Mexico, Korea, and Germany. The government could also play a role through easing policies on tariffs and construction regulations to allow for more material and more land. By bridging the gap between demand and supply, we can bring price stability back to the housing market and ensure affordability for homeowners and homebuyers.