My View: Building Housing Improves Affordability, Even When the Housing Is on the Upper Levels of the Market

Photo by Marco Raineri on Unsplash

I keep hearing from folks who want to argue that Davis doesn’t need more “unaffordable housing” – but for the most part they are neither presenting data nor studies to back up these assertions.

For what it’s worth, I completely agree that Davis needs more affordable housing.  As I pointed out last week, that’s one of the reasons the state is mandating around 40 percent of the total housing units built be “affordable.

However, as I have argued many times – Davis doesn’t just need “affordable” housing – it needs housing of all kinds.

One of my goals in all of these columns is to introduce new ideas into the Davis ecosystem.

This week, I read in the National Multifamily Housing Council Newsletter a pretty interest report on “How New Supply Impacts Affordability Across the Board,” authored by Chris Bruen, NMHC Economist and Senior Director of Research.

Bruen writes that in 2024, nearly 500 thousand multifamily units were built in the US – more than 2023, which itself saw the highest number since the late 1980s.  That figure was reached before data for November and December has become available.

(As a note, I’m going to greatly simplify the findings here in hopes of engaging the average reader, but hit the link if you want to read the more complex data analysis).

It turns out that most of the new rental units consist of higher-end apartments.  For example, he notes, “Approximately 77% of 2024 apartment deliveries were assigned 4- or 5-Star ratings by CoStar (a 5-Star rating indicating the absolute highest quality in design and construction); 22.4% were rated as 3 stars.”

The key point here: “While the U.S. currently has a shortage of millions of homes, many have questioned whether this higher-end development has had a positive impact on affordability…”

Sounds familiar?

Their answer: “We find that between 2015 and 2024, markets with higher levels of supply tended to record lower rates of rent growth among 1- and 2-Star apartments, even after controlling for various measures of demand and metro-level differences.”

There is a trend of increased high-end development and also rising rents even among the more affordable units.

Bruen argues that this leads many to assume that there is a “causal relationship” here, “that new, higher-end development is, in fact, a driving force behind worsening affordability.”

The problem however, is that, “demand is often outstripping supply, causing rents to increase.”

Here he cites previous work, by Myers and Park.  They found that “from 2000 to 2018, rents in lower classes increased due to demand outstripping supply overall.”

What many do not understand is that higher-end development tends to relieve pressure from other segments of the market – experts all this “filtering.”

For instance, Bruen sites that the development of these high level apartments absorbed nearly 400,000 thousand new households over the last year and over 1.6 million over the last few years.  Without this supply, it would have forced the high end households to dip into 1, 2, and 3 star spaces, that would have driven up those prices.

Are you following the logic here?  Constraining the supply of higher end housing, means that people normally who would be in the market for and able to afford this higher end housing, would suddenly be competing with people for lower end supply, driving up the cost of that supply.  Basically you are increasing the demand for lower end supply because you lack sufficient upper end and overall supply.  That drives up the cost of housing for all.

Here is the conclusion:

“Our analysis provides strong evidence that the development of new, high-end apartments results in lower rent growth among all apartments, even more affordable 1- and 2-Star units. More broadly, our results suggest that what happens at the higher-end of the market influences lower-end apartments as well: higher demand for 4- and 5-Star apartments leads to higher rent growth among 1- and 2-Star units, and higher vacancy in the 4- and 5-Star space leads to lower rent growth among 1- and 2-Star units.
“While the most direct way to preserve affordability at the lower-end of the apartment market would be to simply build more lower-end, 1- and 2-Star apartment units, these types of projects rarely pencil out in the absence of some sort of subsidy due to significant development costs. Our analysis shows, however, that even higher-end development should help to relieve rent pressures among more affordable class types, albeit to a lesser degree.”

Their analysis basically confirms what we have been arguing for some time.

First of all, I have argued we need more supply in Davis.  High end supply alleviates pent up demand which results in less upward pressure for lower end, more affordable units.

Second, yes we need more affordable housing.  There is no disagreement on this point.

Third, building more affordable housing is necessary and a more direct way to increase affordability among lower end units.  However, that approach runs into market forces.

Developers need to be able to actually build the housing and given development and construction costs, that is tricky, especially in a market like Davis.

We clearly need to figure out better ways to subsidize housing and support low and moderate income families looking to get into the local market.

But at the end of the day, we need more housing of all kinds.

Finally while this report looked at rent, I have seen similar analysis for ownership housing.

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