How Affordable Housing Impacts Economic Growth

Updated: Nov 24, 2020

The impact of housing costs on a low-income household comes down to simple mathematics. The more money a household must pay for housing, the less it will have available for other necessities such as food, clothing, transportation, and medical care. A household that cannot afford a home is said to be cost burdened. The traditional standard by Housing and Urban Development (HUD) for housing cost burden has been 30% or more of household income. Severe housing cost burden is defined as 50% or more of household income {1,2}.

The number of households burdened or severely cost burdened has increased over the years {2}. This is in part due to wages not increasing for most Americans, when accounting for inflation. The purchasing power of the average hourly wage in 2018 is essentially the same as in 1964. In fact, the purchasing power of the average wage was higher in 1973 than in 2018. Additionally, the recent recovery of wages from 2000 to 2018 have largely gone to the top earners. Adjusted for inflation, the bottom 10th percentile wages have grown only 3%, while the top 90th percentile of earners have seen their wages increase about 16% {3}.

“Therefore, a combination of wage stagnation and increasing housing costs have contributed to the cost burdens of many American households.”

Wage stagnation alone does not explain the increase in the number of Americans that cannot afford a home. The growth of housing costs over the last 50 years has also played a role. Sales prices of existing home have increased about 60%, when looking at the same time period from 1964 to 2018, and adjusting for inflation {4}. Rent costs have also increased. Annual rental cost represented about 17% of a median household income in 1960, about 22% in 2010 {5}, and 29% in 2018 {6,7}. The low-rent stock has also shrunk in recent years, leading to an increase in renter cost-burden rates {1}. Therefore, a combination of wage stagnation and increasing housing costs have contributed to the cost burdens of many American households. Having more affordable options would release the pressure of housing costs on many families. It would also allow opportunities for other economic and educational activity, such as financial investments, private schooling, college education, small-business entrepreneurship, along with basic necessities.

Lowering housing costs has the potential of improving the economic prospects of many families struggling to survive month-to-month, including the 10 million renter households who are severely cost burdened {8}. The recent economic woes brought by the COVID-19 pandemic has intensified the financial difficulties of many people. Food insecurity is now being added to the lack of access to proper healthcare and affordable housing of many households {9}. At the root of the matter, the main goal of bringing affordable housing should be to simply improve the lives of many households that are struggling financially.

Lack of affordability impacts the community.

Housing has the potential to impact the local community in different ways, depending on the type of community. A region of low-income, cost-burdened households is not a thriving economy because of the lack of spending power by the people living in such areas. This leads to a sluggish commercial sector near the cost burdened housing zones. Lack of affordable housing and a sluggish local economy leads to areas of low demand, which usually have poor infrastructure. This type of community tends to lose its residents over time, especially the younger segment of the working age population. Eventually, housing costs decrease due to a lack of demand. However, most households continue to struggle financially due to the decrease in economic activity, which lowers their wages. This downward spiral is created by the negative interaction between housing costs and the local economy.

Regions of rising real-estate demand can also influence the local economy in a negative way. Often, these areas are overcrowded and do not have the proper infrastructure for the number of people residing there. Businesses may also suffer in this type of conditions. Growth in demand for their property space increases rental costs. If there is an insufficient labor force, wages may also go up, reducing their margins {10}. In turn, businesses are forced to increase their prices or move out. Over time, this type of region requires higher-income residents who can pay the rising costs of housing and local businesses prices to move in.

Once the conversation moves from the home to the community, not only should housing costs need to be considered but other factors must be addressed as well. Particularly, the effect of housing on surrounding businesses, transportation, labor, and demographics should be assessed together. A comprehensive approach must be taken to create a region of economic growth {10}. Additionally, the existing demographics need to be understood in order to create a plan that would benefit them. Quite often, the pouring of capital into a region can bring in new residents and business while at the same time displacing the previous residents.

This process, commonly known as gentrification, brings economic growth to a region but not to the people who lived there originally {11}. Additionally, those displaced by gentrification usually end up in very low-income locations {12}. Instead of trying to change a region by displacing working-class residents, careful planning must be undertaken to bring economic growth to the region along with its people. Some influx of new residents will be needed to establish a sufficient labor force for the growth of businesses. However, by maintaining housing costs low, the original residents can remain in the neighborhood and participate in the economic gains.

“A comprehensive approach must be taken to create a region of economic growth.”

Some experts have suggested the solution is to increase the supply of housing by developers along with increasing the demand by working-class residents. However, their idea for increasing demand is to provide vouchers to residents to afford the costs of housing {13}. Although this solution is mathematically sound, it creates a burden on taxpayers that might not be sustainable in the long-term. In general, demand-side policies only help alleviate the needs of a few beneficiaries {12}. The housing supply must be increased but by providing the correct type of housing. Affordable housing has the potential to have the same effect of a voucher program. Lower housing costs increases demand without the need for taxpayers to subsidize the program in the long-term. Therefore, a combination of increasing the housing supply, including the necessary stock of affordable housing, could help maintain housing prices from over-inflation.

However, developers trying to bring affordable housing are usually met by some barriers, such as land-use restrictions or regulatory constraints. Additionally, affordable housing is usually understood as low quality, highly dense, or both. Pressure by surrounding neighborhoods and local laws can sometimes be used to block efforts by developers to build affordable communities. This is usually due to fear by some residents that their own property may decrease in value or simply due to not-in-my-backyard (NIMBY) opposition {1,13}.

Type of housing needed and wanted.

A trend among millennials is the desire to reside in walkable neighborhoods. Used to the city life, many in the millennial generation (currently 24-39 years old) are seeking semi-urban areas to reside which offer walkability, and near mass transportation and job options. They are seeking more than just a house, but a community. The mid- and high-rise apartments which they have occupied no longer fit their needs of a growing family {14}. The majority favor urban and semi-urban over suburban communities, although the difference is not overwhelming (60% to 40%) {10}.

“Although there are barriers in bringing housing to those in need, it is important to remember that affordability can still be achieved by building the type of communities where people desire to live.”

Nevertheless, the desire is still strong towards affordable housing in more connected communities. Some urban planners and developers are seeing the solution in what is known as ‘missing middle housing’. This type of housing includes duplexes, triplexes, fourplexes, courtyard apartment, bungalow courts, townhouses, and multiplexes. It encompasses housing options denser than detached single-family homes but less than mid-rises {15}. Along with being preferred by millennials, this type of housing could also fulfill the needs of many empty-nesters looking to downsize {14}.

Some experts are also calling for developers to think about ways to reinvigorate smaller towns and rural areas with millennials and other age groups. Along with an increase in middle housing, detached, single-family housing is also needed to keep up with demand and provide more affordable options. As previously mentioned, there is also significant interest in the millennial generation for suburban housing options {10}. Additionally, middle and single-family housing options have lower construction costs, compared to buildings with higher densities (four stories or more) {16}.

A common objection to the increase in the housing density and even to the development of new communities is the fear of amenities and infrastructure congestion. It is usually a barrier when trying to bring more affordable housing to a region. The recent American Housing and Economic Act of 2018 calls for less-restrictive grants to be used in infrastructure by communities that enact less restrictive housing policies {12}. Such grants could be used by local governments to meet the infrastructure demands of a growing population. Although there are barriers in bringing housing to those in need, it is important to remember that affordability can still be achieved by building the type of communities where people desire to live.

Thriving communities for all.

Creating a brand-new, thriving community presents a bigger challenge than only building houses or apartments. Trying to revive a dying sector of a town is even more challenging. However, an integral solution can be used to make a significant difference in the economic outlook of a community. The solution includes the combination of business growth, infrastructure improvements, and affordable housing. When only business growth is emphasized, it ends up driving away the original residents due to a rise in housing costs, which ends up benefiting only property owners {17}.

Similarly, a solution consisting of only affordable housing options usually fails because it does not attract the various populations segments needed for business growth to occur. This is due to a lack of job opportunities in the area. The combination of growth in housing, business, and infrastructure is known as place-based economic development. The concept is based on the economies of agglomeration, which considers that creating a location dense in jobs and people will make it more efficient and productive {17,18}. Although evidence shows mixed results in terms of employment growth and decrease of poverty, most research points to an increase in housing prices as the cause for negative results {17}. Therefore, as previously mentioned, it is paramount to create and maintain affordable housing options.

Significant amounts of capital are required to create affordable housing and walkable communities with desired amenities and infrastructure, while at the same time providing incentives for new businesses to grow. Such private capital is usually available for investment in the type of communities that can bring a good return on investment (ROI), but not on affordable housing in low-income neighborhoods. As a consequence, in order to incentivize capital flow into distressed and at-risk communities, the opportunities zones initiative was created under the Investing in Opportunity Act in 2017 {19,20}. This law allows private-sector capital (potentially $6.1 trillion in unrealized capital gains) to receive tax preferential treatment when invested in a qualified opportunity zone. Opportunity zones are low-income communities with at least a 20 percent poverty rate or with a median income below the state or nearby metropolitan area {20}.

A partnership of investors, developers, and builders is ideal to create thriving communities and bring economic growth in opportunity zones and other communities. Developers and builders must be committed to create or maintain affordable housing options to help the original residents remain in the area. Additionally, investors must be committed to help grow existing businesses or create new ones in partnership with community residents. Transportation infrastructure investment, such as roads, bus routes, sidewalks, or bike lanes would also be beneficial to the community. This integral approach would help maintain a socio-economic stratum, keep away the effects of gentrification and bring about economic benefits for everyone.

At Petros Builders, we believe in thriving communities for everyone {21}. Our goal is to partner with investors, developers, non-profit organizations, and government institutions to bring affordable, dignified housing to those in need; and to create communities in which families can grow, businesses can thrive, and everyone can find a place to call home.

Partner with us today:




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2. U.S. Department of Housing and Urban Development. Rental Burdens: Rethinking Affordability Measures. PD&R Edge Home

3. Desilver, D. For most U.S. workers, real wages have barely budged in decades. Pew Research Center (2018). Available at: (Accessed: 6th April 2020)

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10. Talbot, D. Housing Is Connected To Economic Growth -- But Only The Right Housing In The Right Place. Forbes (2018). Available at: (Accessed: 6th April 2020)

11. Saunders, P. How To Understand Gentrification. Forbes (2016). Available at: (Accessed: 6th May 2020)

12. Shoag, D. Removing Barriers to Accessing High-Productivity Places. Hamilt. Proj. (2019).

13. Florida, R. How Affordable Housing Can Improve the American Economy. CityLab (2019). Available at: (Accessed: 6th May 2020)

14. Shaver, K. Cities turn to ‘missing middle’ housing to keep older millennials from leaving. The Washington Post (2017).

15. Opticos Design. Missing Middle Housing. Available at: (Accessed: 6th May 2020)

16. Ellis, John, G. Explaining Residential Density. Places 1, (2004).

17. Neumark, D. & Simpson, H. Do Place-Based Policies Matter? Economic Letters (2015).

18. OpportunityDb. Inequality in America and the promise of place-based policies. Available at: (Accessed: 6th August 2020)

19. Economic Innovation Group. Distressed Communities Index. (2018). Available at: (Accessed: 6th August 2020)

20. OpportunityDb. The Investing in Opportunity Act. Available at: (Accessed: 6th August 2020)

21.Petros Builders. Home. (2020). Available at:

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