Supply is the crux of housing woes—we’re missing millions of homes. Mortgage rates matter, too, but not nearly enough. A Moody’s economist, Nick Villa, has said it before: an interest rate cut won’t fix the housing crisis.
Now that the Federal Reserve has cut its key interest rate by half a point, he’s saying it again, with a plan.
“So, while rate relief is one part of the equation, the other, more important part, in my opinion, is supply,” Villa wrote in an analysis following the Fed cut. “Naturally, increased homebuilding comes to mind, but the type of properties that do get built should reflect varying price points and not just be concentrated on the upper end of the market.”
In the last 25 years, the share of class A multifamily units—upscale, luxury apartments targeted at rich tenants—rose 18%, making up slightly more than 50% of the multifamily sector.
In other words, the share of class B and C multifamily units has fallen by 18 percentage points, as developers have been prioritizing buildings that command higher rents, he explained.
Class B apartments are older but considered well-maintained; class C are decades old and sometimes charge below market rents. Both are needed because not all Americans can afford luxury apartments, let alone buy their own homes.
Still, inventory growth for class A multifamily units increased by nearly 19 percentage points since the end of 2019, yet for class B and C units growth was just 2.6%, Villa said.
And the difference in rents is substantial and expanding. Class A asking rents were 45.4% higher than class B and C. In the first quarter of 2000, they were 41% higher. Basically, developers and builders see more revenue associated with premier buildings, so they’re constructing more.
But there’s demographic changes to account for as well, Villa noted. The share of households in the country earning more than $100,000 increased from 31.9% in 2000 to 37.5% in 2022, he said, citing data from the Census Bureau.
Still, the bottom line for him is more supply across the board.
“Instead of ‘Drill, baby drill!’ maybe it ought to be ‘Build, baby, build!’ Either way, with America’s housing crisis entering the political arena lately, it remains to be seen whether any bipartisan support moves the needle going forward,” Villa wrote.
In fact, both presidential candidates have weighed in on housing. Kamala Harris’s plan incentivizes more construction and offers first-time homebuyers some assistance. Donald Trump has vowed to get rates lower, cut out red tape, and crack down on immigration.
In recent years, I’ve interviewed high-earners who are renting instead of buying; while they all had their own circumstances, affordability was a key reason. One couple, whom I spoke to last year, lived in a one-bedroom condominium in Los Angeles; they’ve since moved. But at the time, he and his partner earned more than $200,000 a year, and still the idea of owning a home in the city was laughable to him.
On the other hand, the Wall Street Journal recently published a story with the headline: “These Millionaires Can Afford Their Dream Home. They’re Renting Instead.” Either way, people who make good money are renting and choosing apartments that fulfill their higher standards—builders can see that.
But for someone making the median income or less in Los Angeles, which is $79,701 a year, they need class B and C buildings. So it isn’t just about building homes, it’s about building all kinds of homes for everyone. That isn’t something the Fed can do, and Chair Jerome Powell even said that after delivering the rate cut.
“I mean, the real issue with housing is that we have had and are on track to continue to have not enough housing, and so it’s going to be challenging,” Powell said. “It’s hard…to zone lots that are in places where people want to live…All of the aspects of housing are more and more difficult, and you know, where are we going to get the supply? And this is not something that the Fed can really fix.”
Powell later added that it was up to the market and government to deal with. But clearly it isn’t easy to build homes, or else it would be happening, whether it be because of land-use regulation or local controls.
