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Shortage Hits Home

Greg Spears

IN THE CENTER OF the Maine village where I spend my summer, a few residents live in a makeshift encampment. It consists of four popup trailers—the kind towed by cars—plus some cars, dilapidated lobster boats and a couple of pup tents, one containing children’s toys.

The residents live without running water, so they bring it to the site in gallon jugs. Their laundry hangs on clotheslines strung between trees and a lobster boat. The site looks forlorn and temporary, but this is the second year it’s been occupied.

A resident of the camp told me he lost his house in a divorce and can’t afford another place. He has family in the village who help him, and he has made money by digging clams at low tide. No doubt his life choices played the biggest role in his predicament. Yet there are also broad economic forces at work, here in Maine and across the nation, that give rise to rough living.

By chance, the place I live, Lincoln County, Maine, received a detailed report on its housing situation this May. The crux of the problem—here and elsewhere—is that U.S. housing prices have outrun the growth in incomes. In five years, the median home price more than doubled in Lincoln County, to $399,000 in October 2022 from $189,000 in October 2017, according to the housing study that was commissioned by the regional planning commission.

Meanwhile, median incomes rose 2.5% a year in Lincon County from 2017 to 2020, the latest figures available. The study’s author, Camoin Associates, estimates that county house prices are 45% above what a typical household can afford.

The situation is similar nationwide. According to Census data, home prices have risen 118%, after inflation, since 1965. Meanwhile, wages have grown just 15% in real terms over the same period, according to Labor Department data. As a consequence, in 2021, the average home costs 5.4 times the average household income, more than double the recommended price-to-income ratio of 2.6.

Lincoln County was more affordable in the past. In the 1980s, a clammer or lobsterman could afford to buy a house, with many starter homes then priced around $30,000. What changed? I can think of five factors.

First, there aren’t enough affordable houses to meet demand. “This has led to more residents living in campers or unsafe situations due to lack of other options, including even temporary shelter services,” the Camoin study found.

Homebuilding plunged during the Great Recession and has never fully recovered. Between 2010 and 2020, only 115 housing units were built In Lincoln County, compared to 2,644 in the decade before. Nationally, homebuilding starts plunged 75% during the Great Recession, according to data from the Federal Reserve Bank of St. Louis. The Great Recession, which began in the housing sector, seems to have put a permanent damper on construction.

Second, the approvals required to build a new house are hard to obtain. Only eight new houses are permitted to be built each year in our village, none within 250 feet of water. Because the rural character of the village is so well-loved, there’s a strong NIMBY culture here—not in my backyard. It’s kept the area looking like a picture postcard. Until you see the housing encampment.

Third, 15 years of rock-bottom mortgage rates allowed buyers to bid up the price of scarce housing, not just in Maine but elsewhere. “In Boston,” writes financial author Roger Lowenstein, “the median home, which had sold for a reasonable 2.2 times median income in the mid-90s, soared to 4.6 times a decade later. Similar leaps were tracked in other high-growth and coastal cities.”

The median home price is now five times Lincoln County’s median household income of $80,700. That puts the county in a league with cities like Miami, Sacramento and Seattle.

Fourth, the town won a grant to extend broadband service in 2020, just before the COVID-19 pandemic hit. This allowed remote workers with big-city incomes to move into a rural community that makes most of its money catching lobsters.

The newest home in our village is a glass building constructed by an executive from Meta Platforms. As my lobsterman friend David said with amazement, “You can see right through it.” Across the channel, popular musician Ray LaMontagne bought 100 acres on an island where he’s been building a large home for two years. It’s still not finished.

Fifth, more real estate investors have entered the housing market, with short-term rentals making up about 4% of the county’s housing stock. The house nearest the encampment is an Airbnb that does a steady business in summer. Cars with out-of-state plates cluster in the driveway. The owner put up a seven-foot stockade fence to hide the encampment from view.

I’m not faulting the landlord. Rental homes produce real income at a time when bonds have lost ground. Vanguard Total Bond Market ETF returned 1.4% annually over the past 10 years, lagging the 2.7% inflation rate. It’s easy to see why rental homes that produce income, along with rising home equity, are so attractive.

What can be done? The best thing would be a building boom, not just in Maine but nationally. According to a study by economists at housing lender Freddie Mac, the U.S. is 3.8 million housing units short of what’s needed to house its population. Lincoln County, with 36,215 residents, needs 401 new housing units in the next decade just to handle its expected population growth and a total of 1,048 year-round units to prevent housing affordability from getting worse.

The housing needed most are starter homes—single-family houses below 1,400 square feet that don’t cost a fortune to build, buy or rent. Currently, they make up just 7% of new homes built nationally, compared to 40% in 1980.

To get more starter homes off the ground, building codes need to be relaxed. The NIMBY movement has discouraged homebuilding by, for example, requiring that new houses be built on big lots. The rising cost of land, lumber and labor have made starter homes more difficult to build and afford. Tiny houses, which are just 400 square feet, often aren’t allowed by code.

Many of the houses in the village were built by their owners long ago. The farmhouse that I live in was built in 1876 by an ancestor of the man in the encampment. That do-it-yourself spirit is still strong here, and people should be encouraged to homestead by building homes incrementally, as they have the money to do so.

Last, we’re due for a housing price correction. When homes cost more than the local population can afford, something has to change. The tide may already be turning now that 30-year mortgage rates are reaching 7%, double what they were a year ago. Nationally, rent prices fell 1% in June, according to Realtor.com data, suggesting the overheated housing market may be starting to cool off.

Greg Spears is HumbleDollar’s deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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