Delaware’s Housing Sector: Factors Affecting Affordability and Availability

 By: Jane Brady, Chair, A Better Delaware

Delaware has a housing shortage. Why, you ask, when it seems like every time you turn around, there is a new development?!

In large part, it is the cost.  According to data from the Federal Reserve, in 1984, the median sale price of a home was 3.5 times median income; now it is 5.8 times.  In order to buy a median priced home today, a buyer would need to earn over $100,000 per year.  According to the US Census Bureau, the median income for Delaware is $82, 855. Housing is simply priced out of the market for many.

There are several reasons for the high cost. The bottom line is that there is very low inventory. There are not enough houses for sale to meet the demand buyers are placing on the market.  In the law of supply and demand, which pushes the price of housing up.

Low interest rates is a big part of the picture. After the housing crash in 2008, there was a prolonged period with low interest rates that made the long-term costs of home ownership less expensive.  Increased demand pushed the price of homes higher. Now, those buyers are facing higher interest rates and, even if they want to move, are staying put because they do not want the added interest burden.

Additionally, Delaware’s transfer tax is the highest in the nation.   That tax, on a home sold for $384, 079, is over $15,000, and is usually split between the buyer and seller.  That is a lot of money.

Further, a new generation, millennials are entering the housing market, pushing demand, and therefore, prices, higher. And, finally, there has been a huge increase in large investors buying properties and turning them into rental units, taking them out of the housing market.

Another aspect of inventory that affects prices is not just how many units are available for sale, but what kind of units they are.  Inventory needs to be diverse, including condo, townhome and single-family units.  And the best and most competitive markets are always moving.  Delaware’s housing market is not robust, but rather stagnant at the moment.

Many people moved to Delaware, particularly, but not exclusively, Sussex County, during the pandemic. New York and New Jersey residents could now work remotely and live in a more tax-friendly state with lower housing costs. That pushed to cost of housing up, significantly in some areas.

What are some of the consequences of an expensive housing market? Well, consumer spending on other items, including essentials, is curtailed.  Fewer families can afford to eat out, take vacation, visit a water park or the beach for a weekend.

Our economic freedom is affected.  People may not move to take a better job because they can’t afford housing in a new location. According to Visual Capitalist, there are severe shortages of workers in many cities because lower wage workers cannot afford to live in those cities, affecting market efficiency and productivity growth.

The costs of construction and the expense that regulations and restrictions add to those costs also factor into the cost of buying a home.  According to the National Association of Home Builders, government regulation overall accounts for about 24 percent of the final price of a new, single-family home, and it is more than 40% for a multi-family development.

And it is not just home sales that have been affected. Rental costs are very high as well.  Only 39% of renters in the U.S. are earning enough to afford a median-priced apartment. That doesn’t mean they’re not still renting—just that their rent consumes more than 30% of their income,

According to the US Department of the Treasury, from 2000 to 2020, median rents rose faster than median household income in 88 percent of U.S. counties. There may be some relief soon, however. According to Sheharyar Bokhari, Redfin Senior Economist, “Rents are growing at a snail’s pace compared to the rapid increases we saw during the pandemic and are unlikely to soar again anytime soon. As a result, wage growth should continue to outpace rent growth in the coming months, as it has been doing since 2022. That will help narrow the affordability gap for renters.”

Recently, there has been discussion in the Delaware General Assembly about introducing rent control legislation to address the increase in rent.  However, research has consistently shown that rent controls are counterproductive. Rather than increase the number of rental units available and keeping costs down, rental inventory typically declines, neighborhoods become static, and ultimately, renting becomes less, rather than more, affordable.

According to economists at the Federal Reserve Bank of St. Louis, “Rent-control policies can have other downsides beyond dampening the growth of rental housing stock. Several economists found negative effects on housing quality; their studies show rent-controlled buildings or areas with large concentrations of rent-controlled units tend to have more dilapidated units, suggesting that rent control reduces landlords’ incentives to maintain their units.”

Delaware should adopt policies that increase the availability of affordable housing. Those policies include reducing regulation and costs of construction, reducing the transfer tax on the sale of homes, and avoiding intrusion into the free market with regard to rent, by declining to adopt any rent control measures.

Jane Brady serves as Chair of A Better Delaware. She previously served as Attorney General of Delaware and as a Judge of the Delaware Superior Court.