The issue of affordability continues to be the heart of the discussion in Real Estate for so many reasons.  But, today we dig deeper beyond rent and sale prices, the seemingly obvious culprit causing concern with affordability.  While we can agree that working to decrease costs to renters and potential homeowners is important and arguably has the most immediate impact, it’s possible this has become the scapegoat of larger concerns. 

Whenever there are challenges or a problem persists, regardless of the industry, it is essential to address the system as a whole.  A complex system requires critical thinking and more complex solutions–thinking that pushes back on the temptation for oversimplification. What is sustaining the issue? Where do the roots begin? Specifically in this case, What are the contributing factors that leave sellers, landlords, and developers little leeway with rates?

Last week an important article was published locally about the issue of low wages and the impact on affordability. The article in Philly Curbed (June 2, 2017) analyzed affordability in housing and highlighted that, “it could be argued Philly’s rent isn’t necessarily high, but that its wages are too low.”  This is one systemic factor that has gotten much less press and attention and seems to be a critical factor when we talk about affordability.  What is a fair, just wage? Why is it that the median income often leaves individuals and families in a monthly struggle to make ends meet? Is this critical conversation being had with and heard by employers?

In addition, on a bigger scale spanning outside the city of Philadelphia questions about eliminating the mortgage interest tax deduction are currently up for debate and point to a way to reduce costs and consequently increase affordability.  Writer Kriston Capps for CITY LAB notes in her article Here’s How to Make Homes 10 Percent More Affordable that, “Eliminating the mortgage interest tax deduction would destroy 10 percent of home values, says one economist. Put another [more positive] way: It would make them that much more affordable.”  The research in this piece doesn’t solely look at reducing rent or slashing sales prices, a burden that falls unrealistically on the owner alone, but addresses a more far reaching and evidenced based reason for high costs across the board. Who does this deduction benefit? Where did it originate? Does it serve the purpose for which it was created?

Ideas have been proposed to possibly reduce the deduction and/or convert the deduction to a tax credit using the logic (among other points) that statistically speaking it is those at the top that benefit from the deduction and not those struggling to afford a home.

“As it works now, the deduction is a tilted benefit, generationally and geographically. Homeowners in high-cost, high-income California corridors recouped about 20 percent of the national aggregate benefit of the deduction in 1999, according to a 2004 paper released by the National Bureau of Economic Research.” 

In the article, Christie Peale, executive director for the Center for New York City Neighborhoods, points out, “If we’re really trying to get people into affordable homeownership, we can change the way that we’re doing that contract so that it’s easier, more accessible, for folks to get maybe a tax credit instead of the MID.”

This same topic was raised poignantly in The Wall Street Journal recently, and again by Matthew Desmond in The New York Times Magazine where he writes about, “How Homeownership became the engine of American Inequality: An enormous entitlement in the tax code props up home prices — and overwhelmingly benefits the wealthy and the upper middle class.”  Are we holding the right people accountable for the changes we hope to see in affordability and housing access?

The issue of increasing wages or restricting the mortgage interest tax would not be an instant fix.  No doubt in order to be done efficaciously it would require a slow, thoughtful, and strategic rollout in order to protect all involved and all impacted.  However, it’s a conversation worth having and an economic factor worth considering–it goes without saying there are certainly more factors in addition to these (inflated costs of infrastructure and construction, cumbersome zoning regulations, parking requirements, costs of delays due to government inefficiency, etc.)

This isn’t about shirking responsibility or passing the buck. All involved can continue to reflect on the part they play.  However, it’s easy to point the finger at those that have to set the cost of a home or charge the rent, it’s harder to look at the system as a whole, upset the apple cart of those higher up the chain, and work to identify the trickle-down factors that land in the lap of the person holding the keys.

Let’s not be afraid to think deeper and ask the tougher questions, not just about the “what” but about the “why.” 

Related Reading: 

How You Define the Problem Determines Whether You Solve It