Downtowns across the United States continue to grapple with the pandemic’s aftermath. The once-vibrant business hubs of Seattle and San Francisco now appear deserted. They see only a fraction of their previous office occupancy and foot traffic.

However, some downtowns are experiencing a surge. Downtown Salt Lake City, for example, witnessed a foot traffic increase to 139% of pre-pandemic levels this spring, as per the University of Toronto’s cellphone data. Salt Lake City’s transformation offers insights for other cities.

Here’s an example from a story in Marketplace:

On Monday mornings, a queue forms outside Eva’s Bakery in downtown Salt Lake City, eagerly awaiting kouign amanns and ham and cheese croissants. Micay Sanchez, an employee for around five years, commented, “Post-pandemic, we’re busier than ever. It’s wild.”

She notes that many customers come from the finance sector, including transfers from Goldman Sachs. They prefer Salt Lake City over pricier metropolises like San Francisco and New York.

With a lower cost of living, picturesque landscapes, and a thriving economy, the Greater Salt Lake area welcomed 51,000 newcomers last year. Dee Brewer from the Salt Lake City Downtown Alliance clarified that while office occupancy remains 40% lower, people frequent the downtown for leisure.

Brewer emphasized, “Our nightlife and cultural economy are flourishing. Sports and arts entertainment are attracting visitors.”

Salt Lake City increasingly attracts younger residents. Predictions show the downtown population might double in two years, thanks to new condos and office-to-apartment conversions.

Tracy Hadden Loh from the Brookings Institution advises other cities to consider housing solutions for vacant downtown offices. She observes, “Downtowns offering live-work options, where jobs are within walking distance, have higher office utilization.”

Sanchez recently signed a lease for a downtown apartment, a mere five-minute stroll from the bakery.

What’s Driving Growth Downtown?

Zillow data between January 2019 and May 2023 shows that Salt Lake City’s condo prices depreciated at a slower rate than single-family homes. In May, a typical condo went for $365,300, marking a 3.7% annual decline. In contrast, a standard single-family home stood at $546,300, down 5.2% from the previous year.

Hannah Jones, an analyst at Realtor.com, highlighted the increasing preference for condos and townhomes due to soaring housing prices. The current U.S. housing shortage significantly impacts housing prices, exacerbated by the Federal Reserve’s rate hikes leading to higher mortgage costs.

This shortage affects most Americans, barring the extremely affluent, impacting wealth-building opportunities and increasing homelessness risks.

Estimates vary, but Freddie Mac recently assessed the U.S. housing deficit at 3.8 million units, taking into account new household formations. Major factors contributing to this shortage include labor scarcity for home construction, stringent land-use regulations, and NIMBYism. Additionally, homebuilding took a massive hit post the Great Recession and hasn’t fully bounced back. The work-from-home trend further strained the housing supply.

Redfin reports that the current median home price of $419,103 marks a 40% increase from January 2020. While many speculated higher mortgage rates would significantly lower prices, this didn’t materialize. Daryl Fairweather, Redfin’s chief economist, attributes this to a resilient economy. With 60% of mortgage holders having moved or refinanced in the past four years, fewer are looking to relocate now. Currently, the market has 39% fewer homes for sale than five years ago, contributing to steady prices. If not for the Fed’s rate hikes, prices might have shot up by at least 15% in the past year, says Fairweather.

First-time buyers, initially deterred by rising mortgage rates, are now re-entering the market, says David Ostrowsky from CrossCountry Mortgage. They’re prioritizing future monthly payments over interest rates and often find themselves in bidding wars. The lack of inventory largely restricts buyers, especially first-timers.

Freddie Mac’s Chief Economist, Sam Khater, recently emphasized the long-standing housing deficit, which intensified during the pandemic. Our research suggests the U.S. faced a 3.8 million unit shortfall by the end of 2020. From 2018 to 2020, this deficit swelled by approximately 52%.

Historically, housing supply constraints have plagued an otherwise robust housing market. Numerous challenges, from labor shortages in construction to restrictive zoning regulations and the lack of land developers, impede housing supply growth. Raw material costs, especially during the pandemic, have also burdened builders. A significant challenge remains the severe underproduction of entry-level homes, particularly with Millennials entering the housing market. The lack of single-family home construction, especially starter homes, has been a chronic issue. This decline grew even more concerning when considering entry-level homes.

To illustrate, between 1976 and 1979, the U.S. averaged 418,000 newly constructed entry-level homes annually. However, in 2020, this figure plummeted to a mere 65,000. Various factors, from fluctuating mortgage rates to changing economic conditions, have influenced these dynamics over the decades.

The early 2000s observed significant growth in new housing due to low mortgage rates and the introduction of subprime and Alt-A products. Consequently, the construction of single-family homes peaked at 1.7 million in 2006, the highest in six decades. But, despite these highs, entry-level housing continued its decline. Throughout the 2000s, average annual supply of entry-level homes was 150,000 units, down from 207,000 in the 1990s. The peak in 2004 was only 186,000 units, which aligns with the homeownership peak for that decade, illustrating the relationship between entry-level housing supply and homeownership.

In the 2010s, the average annual new entry-level housing supply reduced further to 55,000. By 2020, only 65,000 new entry-level homes were completed, a stark contrast to the late 1970s and early 1980s.

Future Projections: Persistent Housing Shortage

The housing deficit is intensifying, partly due to the COVID-19 pandemic’s effects. The shortage soared by 52% between 2018 and 2020, reaching 3.8 million. With the continued low mortgage interest rates and increased demand, this shortage is expected to persist. The decline in entry-level homes is especially pronounced, dropping from 40% of total construction in the early 1980s to 7% in 2019. This imbalance between limited supply and high demand is causing entry-level prices to surge, making it challenging for potential homeowners.

Market Snapshot

March marked a slow start to the homebuying season. Housing supply-demand mismatch and resulting price hikes remain a post-COVID economic issue. Existing home sales decreased by 2.4% in March month-over-month and by 22% year-over-year. The median sale price was around $376,000, 40% higher than pre-pandemic figures. Limited inventory and high mortgage costs are some of the factors affecting sales, as confirmed by Jessica Hansen from D.R. Horton. However, this scenario is benefiting builders like D.R. Horton, which saw a nearly 6% share price surge due to better-than-expected Q1 profits. For potential buyers, Hansen suggests that new constructions might be the answer.

Appendix

• Households: Data from the CPS-ASEC 2020 survey showed there were 128.5 million households in March 2020.
• Target Households: Using the Oaxaca Blinder decomposition, we estimate the target households to be around 129.8 million. However, different sources present varying estimates. Using a conversion factor of 0.97 based on the CPS-ASEC and HVS data comparison, our target households adjust to 126.2 million.
• Vacancy Rate: As per HVS, the vacancy rate for Q4 2020 stands at 10.9%, with 15.4 million vacant units.
• Target Vacancy Rate: Maintained at 13% or 18.9 million units for a well-functioning housing market.
• Housing Stock: The 2020Q4 estimate from HVS was 141.2 million

CITATIONS
Housing Supply: A Growing Deficit – Freddie Mac
Here’s why there are few houses to buy in America (axios.com)
America’s housing shortage is keeping home prices high (axios.com)
Salt Lake buyers turn to condos over single-family homes – Axios Salt Lake City