Sam Khater, chief economist at Freddie Mac, believes we’re starting to see American metros becoming more like European cities, where low- and middle-income individuals live in the suburbs, rather than dense urban cores.

Aging homes have historically been the best source of lower- and middle-income housing, but a reverse of that trend in the center of cities could lead to the “Europeanization” of American cities, driving lower- and middle-income families to the suburbs, according to Sam Khater, the chief economist of Freddie Mac.

Sam Khater | Photo credit: Freddie Mac

Khater, in a presentation on housing supply for the Urban Institute, explained that filtering — the theory that newer housing is built for higher-income brackets, which means the older housing gets the more affordable it is — has typically been the best method to create affordable housing supply.

“Filtering is the primary mechanism by which the housing market provides affordable supply,” Khater said. “We’ve never built affordable new construction and it’s only gotten worse over time.”

Homes have historically filtered down by 0.4 percent a year, according to Khater, meaning that, as a new home ages over time, it becomes more affordable for a lower monthly income every year. Eventually, around 60 years old, the affordability trend is reversed and the home becomes less affordable.

“It hits its peak depreciation age at about 40 to 60 years of age,” Khater said.

Khater’s research also found that filtering rates have a wide variance, depending on the city. Cities like Chicago and Detroit saw homes become significantly more affordable as they aged, while cities like Washington D.C. and Los Angeles saw homes continue to increase in price — or upward filtering.

In areas where there is upward filtering, Khater said you’re seeing consumers flock to suburbs outside of the city core in search of affordable housing, or micro areas where there’s downward filtering. In the nation’s 26 largest metros, Khater found that home price appreciation increases are much higher, the closer you get to the city core.

“There is even greater variation in filtering within metropolitan areas, but city cores have more persistent upward filtering,” Khater said. “The variability of filtering rate across metropolitan areas has implications for migration, sorting, homeownership and housing policy.”

Khater believes we’re starting to see American cities becoming more like European cities, where low and middle-income individuals live in the suburbs, rather than dense urban cores.

Mark Fleming | Photo credit: First America

Mark Fleming the chief economist at First American also took part in the discussion and said the biggest challenge is simply that we’re not building enough housing stock to serve everyone’s needs.

“When things are filtered by income, it’s affordable housing that gets hurt the most,” Fleming said.

Fleming said policymakers need to adopt policies that increase the elasticity of supply — any supply, not just affordable housing — which would allow filtering to increase the available stock of affordable housing.

“The best housing affordability policy is: build more homes, any homes, at any level,” Fleming said.

The elephant in the room, of course, is the global pandemic that has seized the housing market, leading to less sales and less supply. In the short term, sales are down about 40 percent and supply is down about 50 percent, according to Khater.

But the longer-term concern is on the supply-side. Khater said he’s still in a wait-and-verify mode, when asked what demand will look like, especially in major cities.

“I’m really worried about development financing for small and medium-sized builders,” Khater said.

Email Patrick Kearns

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