Thinking Small in Unaffordable America

America has become a nation of renters, rather than home owners.[1] Even though more than 70 percent of renters would like owning their own home, the prospect is becoming more and more unlikely for many.[2] Over the last ten years, home-ownership has remained flat, while the number of renters has jumped dramatically—more than half of those who live in America’s largest 100 cities, for example, are renters. Fewer people are transitioning from renting to owning.

Vacancy rates are at historic lows, which has pushed rents upward. Stagnant wage growth has also contributed to affordability problems: rents in the U.S. have increased 22 percent on average between 2006 and 2014, but average incomes have decreased by 6 percent.[3]

As housing affordability becomes a more widespread problem, larger consequences loom. “Renters are devoting more money to housing and have less and less left over to spend on other things,” says Akerman’s Marc Heller. “This is not only bad for their personal finances, it is bad for the economy at large.”[4]

It’s anyone’s guess how long it will take for the affordability issue to become a political and market regulation issue, but already the chorus of voices is growing. “In the global gateway cities like Miami, like San Francisco, like Los Angeles,” says Akerman’s Neisen Kasdin, “the drumbeat about the lack of affordability continues to get louder and louder. Because of this, governments are listening to their constituents.”

And this, according to Kasdin, is prompting local governments to find more ways to get the private sector to pay for affordable housing. One suspects that within the next few years, it the politics of housing affordability in America will increasingly take center-stage.

Until then, one solution for the rent-burdened may be to think smaller.

Let’s Get Tiny

A tiny home (ranging in size between 100 and 500 square feet) may have a small frame, but it can contain great perks. From staircases and lofts to full-size washers and dryers, tiny homes with big amenities manage to avoid a large price tag: a top of the line tiny home may cost $100,000, less than a third of the national median sale price for a new home.[5] A DIY tiny home may cost around $10,000, which presents a 97 percent cost savings over the national median price.[6]

Their growing popularity doesn’t mean that tiny homes will soon answer the question of housing affordability. Most city zoning and building regulations don’t know what to do with tiny homes. Neither do most banks, so financing has been difficult to obtain. Some of this is changing, as national “first-of-a-kind” ordinances allowing tiny home construction have emerged in Utah, Texas, and California, and the inclusion of tiny homes into the latest version of the International Residential Code (IRC) may make it easier to get financing.[7]

In the rental market, American renters are taking a page from South Korea’s “goshiwon,” or small rooms (about 55 square feet) that come with a shared kitchen, hallway bathroom, and low rent cost. This micro-living idea has caught on in the U.S. Some developers are betting that price and location of dorm-style living will appeal to students, millennials, gig-workers, and others who need to be in the city but don’t need the big city apartment price tag.[8]

“Increasingly,” says Heller, “the problem of housing affordability in America applies to people either priced out of homeownership or involves people for whom wage growth has been stagnant—and these people just need a place—a nice clean place—to live.”

In San Francisco, a company has developed a professional dormitory model where residents pay between $1,400 to $2,400 per month for a room, compared to the average price for a one-bedroom in the Bay Area of $3,300 a month. Amenities include laundry service, room cleaning, and even doggy day care. Another company developed buildings near Washington, D.C. and New York that feature small apartments and amenities such as shared office space and housekeeping at monthly rental rates that are competitive with comparable apartments in the area.

In Chicago, Akerman’s Jack George has noticed a distinct uptick in micro-unit development. “Owners are getting $1,400 a month for small 400 square foot units because they’re finding that millennials would rather accept the small apartment size in exchange for the reduced rent with amenities—with places to congregate on the roof of the building, with a fire pit, say, rather than just sitting around in their apartment.”

Observers of micro-living suggest that demographics, economics, and increased job transience will probably continue to support this trend for some time.

Cecelia Bonifay is chair of Akerman’s Land Use and Development Practice and Meg George serves as a managing partner of Akerman’s Chicago office. The views expressed here are the author’s own and not those of ALM’s Real Estate Media Group.

[1] “American Families Facing a growing rent burden,” Pew Research, April, 2018, https://bit.ly/2GdJ02A.

[2] “A shocking number of Americans live in housing they can’t afford, according to Harvard study,” CNBC, July 2017, https://cnb.cx/2HTAyb9, and see also: “American Families Facing a growing rent burden,” Pew Research, April, 2018, https://bit.ly/2GdJ02A.

[3] “The Global Housing Crisis,” Citylab, April 11, 2018, https://bit.ly/2EDAvNq.

[4] “The Great Rent Squeeze,” Citylab, November 11, 2016, https://bit.ly/2KRslFc.

[5] As of March, 2018, the national median sale price of a new home was $337,200, U.S. Census, https://bit.ly/2pauaoK.

[6] “Tiny houses: Big future, or big hype?” Curbed, July 18, 2017, https://bit.ly/2uAdIRn.

[7] “Tiny houses begin to take off with new mortgage options,” The Mortgage Report, February 7, 2018, https://bit.ly/2G8Tqk1. And see also: “Tiny houses: Big future, or big hype?” Curbed, July 18, 2017, https://bit.ly/2uAdIRn.

[8] “Urban living at a bargain price, but how small is too small?, The Boston Globe, February 2, 2018,