Partners, Volume 15, Number 2, 2005

Is Affordable Housing Facing Extinction?

Lately it seems you can’t open a newspaper without reading about rapid increases in real estate values all over the country. According to the Office of Federal Housing Enterprise Oversight, the housing price index (HPI) climbed 12.5 percent over the past 12 months, and housing appreciation during the last year and a half was the highest in 25 years.

While many states reported more modest growth in the HPI, several recorded increases over 20 percent in just one year. In the Sixth Federal Reserve District, Florida, where the overall housing price differential was 21.42 percent higher than the year before, ranked fifth behind Nevada, California, Hawaii, and the District of Columbia. Coastal areas such as Melbourne, Sarasota, West Palm Beach, and Miami registered some of the most dramatic spikes.

So who is benefiting from this phenomenon? Current homeowners who now show greater wealth on paper are the first group that comes to mind. However, they would have to sell their homes to reap the rewards of this double digit appreciation; and unless a homeowner relocates to a cheaper area, moving is not usually a viable option.

Landlords who opt to sell their single-family investment dwellings rather than keeping them as rental property also benefit. Sale of rental property doesn’t stop at the detached single-family home: owners of multi-family apartment buildings are transforming units into condominiums for sale.

The rapid increase in property values has also attracted speculators who can purchase homes sight unseen and resell them for a profit, sometimes without even making the first loan payment. This type of activity further exacerbates the situation.

Yes, there are clear winners when property values climb; however, not everyone benefits. Condo conversions may force people out of their apartments, leaving them with limited housing alternatives. This displacement can accelerate negative gentrification and quickly change the fabric of a community.

Existing property owners are likely to face higher real estate taxes. Though some markets have set caps on tax increases or created incentives to protect existing homeowners, especially lower income households, these programs are the exception rather than the norm.

Those in the market for the first time are possibly most affected by escalating home prices. What’s affordable one day may be out of reach the next. Potential homebuyers may have to start looking in less desirable areas to find affordable property.

There is no clear evidence that appreciation of home prices will slow down anytime soon. In some markets the damage is already done, and should interest rates become higher, housing may become that much less affordable. These are some new challenges community development practitioners face.

Juan C. Sanchez
Community Affairs Officer

Federal Reserve Bank of Atlanta

Previous Article | Return to Index | Next Article