It’s no surprise that the housing market continues to circulate news cycles, even as it begins a stunted, uneven recovery.
Home prices continue to rise, yet they are only increasing at a rate of 2-4%, and mortgage rates are stabilizing around 6%. While things are still far off from the desired 3% rates of the past, it has begun a hopeful trend towards recovery. And the reason may be a surprising development in the luxury real estate market.
Honolulu’s big numbers
The Atlantic reported new trends in Hawaii, where the luxury and tourist real estate markets tend to push out ordinary buyers, pointing to new developments as the creation of opportunities for those looking to find a new home, without an increased price tag.
Drawing on research from the Lewis Center for Regional Policy Studies at UCLA, the fact of the matter is that new housing creates lower prices for everyone. This is because new constructions often offer an opportunity for those looking to make an incremental change then leave other, more affordable homes, open for purchase to those who are shopping with less in their budget.
There’s specific evidence of a construction in Honolulu called the Central that, when opened to the high-end and luxury markets — pricing units between $700,000 and $1.5 million — more affordable apartments were left behind. In turn, this created even more affordable options after their occupation: creating a chain of affordable housing all the way down, with opportunities at every price point.
The construction created at least 557 vacancies when it was first opened, even though it only contained 517 units. Across Honolulu, people looking for new options were gifted with a wealth of opportunity, which left their previously occupied homes and apartments open to new residents as well.
Because of families separating or new families forming and moving in together, these vacancies continue to fluctuate in number, but the consistent evidence perpetuates that new constructions create affordable options down-river, that is as long as there are people shopping in the luxury market…
Nationwide application
Researchers worked hard in Honolulu to track down just how realistically the affordability chain was operating. They discovered that new residents of the Central left behind units that were 38% cheaper per square foot and, when the chain was traced all the way down, they discovered new units made available were 44% cheaper than these new condos.
These revelations are especially exciting, considering the cost to create new low-income housing units. Even when utilizing defunct public buildings, new housing costs much more than they’re sold at, such as in Boston, where new affordable housing units can cost as much as $650,000.
Conversely, building new units at or above market price finds a significant return on investment, while also offering large sums of money in jobs for construction and taxes. The catch is that the market needs to be big enough to see these new construction fulfilled. Cities like New York, Los Angeles, and Chicago can easily expect fulfillment due to their large population of wealthy individuals. However, in places like Flint, Michigan or Gary, Indiana, where wealth isn’t as high, the high-end market won’t be fulfilled, yet that’s also where affordability is needed most.
These vacancy chains are the result of exciting research, yet fall short when applied to the areas where they’re needed most. More suburban and rural areas often see chains with only three links, meaning less opportunities and much less change in pricing. While prices do decrease from link to link, it often doesn’t go far enough to reach the people desperate for true affordable housing.
The potential solution for the affordability crisis in a push for high-end housing to create a strong vacancy chain is at first attractive, though it falls short in an analysis of its execution. High density cities certainly benefit from new constructions because they have the population to satisfy the necessary moves, but its inefficiency outside of those areas makes the idea a non-starter when applied to those truly in need.
