Rising housing costs are changing the equation for ecosystem builders

Rae’Mah Henderson got her stake in her hometown of Birmingham, Alabama. 

“I bought a house a couple years ago for $91 grand — three beds, two baths, fully renovated,” the Techstars Birmingham lead told me on the last recording of our monthly Builders Live podcast. “Now the same houses in that neighborhood are going for $250 to $300k.”

Henderson’s experience represents an American trend: From December 2019 to November 2021, US house prices grew by almost a quarter, the fastest rate on record, per a 2022 paper. It continued on: median house prices this year were up by half from five years prior.

Henderson is a young, friendly local, core to the logic of a place-based tech startup accelerator: Lure founders to a lesser-known Southern city with the reputation of a prominent, if beleaguered, startup accelerator, then win them over with culture and community. Pre-pandemic, cheap housing was a big part of the mix. That’s gotten complex.

Every sensible region in the country has an attraction, retention and creation economic development strategy now. So how does your ecosystem measure alongside the relative expense for living there? 

The affordability bind

This isn’t only about Birmingham, because in truth the story is complicated. 

US housing production intensity has been falling for decades, as documented by Brookings research from economists Edward Glaeser and Joseph Gyourko. The 1950s and ’60s were a golden age of construction, and it’s been declining since then. The Great Recession made it worse (I myself couldn’t recover a plumbing job so I dove back into journalism). By the 2010s the national housing stock was growing at less than 1% annually, slower than population growth.

Look back 30 years, and housing permits per 1,000 residents tell an interesting story: compared to today, economically calcifying states like Maryland, Ohio and Pennsylvania are building less. States that have thrived in terms of population growth and economic dynamism, such as Colorado, Georgia, North Carolina, Tennessee, Texas and Utah, are building much more. Superstar states like California appear to be strangling their own growth. 

But no one should get cocky. The COVID pandemic was another shock. A further slowdown is hitting even the Sun Belt cities — Phoenix, Miami, Atlanta, Dallas — that were once seen as endlessly elastic markets. 

A recent Brookings podcast put it starkly: Housing supply used to surge in places where demand was high. The relationship between price and new building has largely broken down. Sun Belt metros are starting to look like supply-constrained coastal markets. Earlier this year, the Atlantic asked: Are “low-cost” Republican-led states just behind the “high-cost” Democratic states in the rising housing-cost struggle they so often mock? 

Nearly half of Americans have become rent burdened, according to the Census Bureau. Of course, though costs have gone up for everyone, they’re crueler for people who earn less. The French poet Anatole France once skewered this: “The law, in its majestic equality, forbids rich and poor alike to sleep under bridges, to beg in the streets and to steal their bread.”

This matters: Of the 25 million Americans who moved last year, 2 in 5 did so for lower housing costs, a growing and largest share of a shrinking pie.

Brisk building in once-costly Austin and Washington DC created enough supply to respond to demand, cooling prices. Rather than cheer it, declining housing prices is sometimes considered a worry like worsening employment. No doubt there are personal consequences. Victor Hwang, chief of pro-entrepreneurship nonprofit Right to Start, noted his parents bought a house in fast-growing Austin and then experienced falling value.

That’s real pain. Hwang also notes that there is no single American housing market, but rather hundreds of what is more a local and regional one. True, but the broader lesson is that it’s better now to think of falling home costs as a win: From Little Rock to San Jose, to even Chicago and Philadelphia. 

Economic development has added creation to attraction and retention to its pro-business growth, so it’s clear: Ecosystem builders ought to pay attention to housing costs. 

That became the focus of this month’s Builders Live episode, in which Henderson joined Hwang, investor Brian Brackeen and myself as our newest host — her predecessor is taking well-deserved maternity leave. We asked: How important is a macroeconomic issue like housing costs to pro-entrepreneur efforts, and is anything about to change about sky-high prices?

What’s new risk-wise

At present, the big American economic story is one of stasis: Few people are changing jobs, and fewer are moving. In contrast, enduringly high rates of business starts are a bright signal. All the better to focus on entrepreneurs — who don’t choose places to start businesses, but rather choose places to live, and then start businesses. 

Housing matters. Federal Reserve Governor Michelle Bowman warned last month that declines in house prices could accelerate. After years of suppressed affordability and higher rates, demand is softening. Her worry: If falling prices sap construction and confidence, housing may no longer play its usual role in pulling the economy out of downturns. That’s a different kind of risk for entrepreneurs and regions alike.

It creates a paradox. Prices are too high for many to buy in — but a correction could stall new supply when we most need it. The denominator of the ecosystem equation is unstable in both directions. So the math for any local ecosystem builder developing a strategy is now:

Entrepreneurial Value ÷ Cost of Living = Who are we the best fit for now?

Look at your ecosystem stack: Put together reputation, community and resources with how expensive the beer is. Consider, though, what success might do to your home.

“There is no greater set of gentrifiers than entrepreneurial startup founders,” said Brackeen, of Lightship Capital. A class of tech founders have an unfriendly reputation — obsessed with a problem in a way that investors might love but neighbors might not: Locked away in a home office but disconnected from the nearby community event.

Let me scream from the top of my lungs then: Your SaaS startup is not as important as the fabric of relationships with real people around you. 

Housing is a necessity, so it’s a rotten asset class. Entrepreneurs are curious voices on the subject matter: They often start off poor, but a few of them end up rich. Their experiences can benefit others.

For example, when applying for a mortgage, most lenders prioritize salaried workers over business ownership, said Hwang, the founder of the pro-entrepreneur advocacy group.

“We have an entire mortgage system that’s based on W-2s, which is basically discriminatory against entrepreneurs,” he said. To many, this might sound like a rare form of justice: Give the noble employee something over the greedy capitalist. But – and here I can offer personal experience — that’s not quite right. Even as a W-2, salaried employee of a modest small business I founded, I struggled to get a mortgage for my home, a lender explicitly told me that it would be easier if I didn’t have an ownership stake in my small company 

Many economic developers, especially those outside superstar cities, may have never considered housing as anything other than a benefit to their pitch. It’s time to think critically.

What economic developers can do 

Now that local pro-entrepreneur organizers are convinced, what can be done on the housing front?

• Founder housing pilots. Cohousing or “landing pads” that give entrepreneurs 90 days to test a market. Aspiring entrepreneurs should go right at the problem. In Birmingham, one founder has done so with B.Home.
• Entrepreneur-friendly underwriting. Work with local banks to accept shorter self-employment histories or bank-statement income. This can be done at state and local levels with regional funders, though national strategies will play a role.
• Fast-track missing-middle supply. Pre-approved ADUs, by-right multifamily near transit, modular and manufactured housing. This classic YIMBY policy set suddenly feels very pro-entrepreneur. 
• Bundle the welcome. Transit passes, coworking desks, childcare stipends for new arrivals. Don’t overlook how people join your ecosystem. Technical.ly is about to unveil an online course that will take this into account for anyone joining one of our ecosystems.
• Invest in storytelling. Narrative is leverage. As Brookings notes, demand-side perception now runs ahead of supply response. You’re in sales mode: How does your ecosystem offering plus your relative cost of living offer the best package? Tell people. That’s what Technical.ly helps with.

Ecosystem builders love to talk about capital, talent and culture. But housing is the denominator that makes all of it work. If it’s too expensive, or too scarce, your entrepreneurs leave—or never arrive.

“You can live here and you can afford here,” said Henderson, the Birmingham rep for Techstars and a new Builders Live co-host, “but is it where you want to build?”