Founder and President of Apartments Near Me, an affordable housing brand focused on multi-family communities in the United States.
Like everything in the economy, the price of goods is defined by demand and supply, but does affordable housing actually go by this concept? In basic terms, the higher the demand for goods, the higher the price; and the higher the supply, the lower the price.
The Demand Side
Let’s break down the demand side of affordable housing. If the quantity available in the market is limited, then as demand goes higher, the price will go higher as well. With affordable housing, this price has a glass ceiling, as the prices can only go as high as the next tier of residential solutions. If there is a limit to the rent and the supply of affordable housing is limited, then how will the demand increase? Over time, the median wage is not increasing at the same rate as inflation (cost of living), and this is especially true for low-income jobs. As new housing is added to the market with prices out of reach of the lower-income tier, over time, the demand has been increasing for low-income housing.
So, to summarize all of that, low-income wages employees are in need of low-income housing. The low-income housing quantity is limited (you cannot just manufacture more homes), which means the demand increases and the prices go up. As rents go up, this makes housing unaffordable and creates more shortages in affordable housing, which in turn drives the prices higher.
The Supply Side
On the supply side of the equation, the ability to create new affordable homes and increase inventory is not something that will take a short amount of time. Hence, we can assume that the supply is almost constant. In addition, I’ve observed that new development is not focused on affordable housing (unless it’s part of a program), which creates a supply problem by itself. Moreover, as real estate properties change hands, which happened in a higher volume in recent years, the new investors usually invest in renovation, pushing the prices higher and lowering the available inventory of affordable housing. In a way, there is a trend for less affordable housing available while the demand is increasing, so the prices of rent are being pushed up. Most affordable housing communities are old developments, and this shortage, at least in the near future, is likely to stay.
The cycle of increasing demand causes rent prices to go up, and in turn, lowers the inventory of available affordable housing, which increases the demand again. Thus, it creates endless pressure, as the rent prices can only go up to the next tier of residential properties, and this is where we are seeing something unusual. Apartment complexes built in the ’70s now have rent prices that are almost as equally priced as apartments that were built in early 2000, which usually targets the middle-class market. Affordable housing is one of the most important industries, and when done right, it creates the right grounds for low-wage people to have stability and increasing the chances to get out of poverty.
Why Create Affordable Housing
A real estate investor that has an eye for creating capital should also have an eye for ongoing optimization. Someone once asked me how my company is able to keep affordable housing profitable and keep them affordable. My answer to this question was simple: It’s all about balance. Managers must understand that if you meet the investments targets and balance the market needs, you can create a sustainable business. If managers seek to only increase the bottom line, they can lose satiability, which can increase operation costs due to high turnovers.
In a previous article about affordable housing, I wrote that if the only focus is on ROI, you lose the balance and the long-term gains or the property management is less service-oriented. Yes, a business should be profitable, but it also should serve the purpose of helping the clients, aka renters in this industry. Focusing on the bottom line will hurt the bottom line in the long run. In addition, based on the game theory, if everyone increases rent and ROI while the housing becomes less affordable, it will create economical stress that the policymakers will not be able to ignore. The general public will start to create pressure, which can lead to economical problems, new policies and laws.
Housing equals the basic need of a person. When done right, everyone enjoys the outcome, and when abused, the industry becomes less stable, creating unforeseen events that could have been avoided.