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Confronting the Affordable Housing Gap

The solution will come from various sources working together.

The concern voiced so often today about housing affordability reflects a sobering truth: Rents are rising more quickly than wages—and most new houses and apartments are priced such that only the wealthiest people can afford to live in them.

“We have an affordable housing crisis. In the rental housing space, that crisis is very acute,” says David Brickman, executive vice president and head of the multifamily business for Freddie Mac.

The latest spike in housing prices is just the most recent indication that the shortage of affordable housing has been building for decades. Building more new homes will be part of the solution, but will require much more complicated negotiations over how and where those homes are built. Most developers no longer have easy access to greenfields in unincorporated areas where they can build. New construction now involves long conversations—over issues ranging from zoning and schools to gentrification—that add time and expense to the development process.

Land Shortage = Housing Shortage
Simple economics have pushed the cost of housing higher and higher. Over the past 10 years, as the U.S. has slowly recovered from the Great Recession, the total number of new houses and apartments has fallen short by hundreds of thousands of units every year.

“The general housing supply hasn’t kept pace with the demand from new household formation,” says Andrew Aurand, vice president for research for the National Low Income Housing Coalition (NLIHC).

And the price of a rental apartment has risen accordingly. In order to afford a modest, two-bedroom apartment in the U.S., renters need to earn a wage of $20.30 per hour. That’s nearly three times the federal minimum wage of $7.25. It’s also higher than the estimated average wage of $15.42 earned by renters nationwide, according to the latest Out of Reach report, put out every year by the NLIHC. Many workers make up the difference with multiple jobs, overcrowding, substandard housing, or a mix of all three.

“Clearly, more housing production is needed—if you increase supply, that would generally relieve pressure on the housing market,” says Aurand. “But that’s just one component.”

The affordable housing shortage has been going on much longer than the latest economic cycle: The NLIHC published its first Out of Reach report in 2005.

The growing shortage of affordable housing represents the end of an era. After decades of development, the areas around many job centers have filled with sprawling, low-density communities. “There is no cheap land left on the periphery, with few exceptions,” says Brickman. “The country is getting full up—we’ve reached the natural limits of some metro areas.”

During the housing boom, developers found some of the few remaining greenfields to build on the exurban fringe, often more than an hour’s drive from job centers. These distant houses were often all that potential home buyers could afford and still qualify for a mortgage, even with the lax lending standards of the boom years. In the years since the crash, the cost of developable land has recovered relatively quickly and continues its rise. “Land prices are fundamentally driving the supply equation,” says Brickman.

At the same time, wages have grown slowly, while banks are much less willing to lend to potential home buyers. “The home ownership rate has declined, and there’s been a huge growth in the demand for rental housing,” says Aurand.

The Rise of New Rental Development
Demand is strong for all types of rental housing, but, like home builders, apartment developers can no longer easily find cheap land and large sites to build relatively inexpensive, new, garden apartments. More-expensive land means developers need to look for sites where they will be able to both squeeze more apartments onto an acre and charge higher rents.

Young people often express a preference to live in bustling neighborhoods within walking distance of amenities like shopping or transit. The rise of the information economy has also concentrated many jobs back in the urban core, which increases the concentration of workers who need to live within commuting distance of those jobs, pushing even more density into new development.

Many top apartment developers now focus on building mid-rise, elevator buildings with four or more stories of apartments on top of a concrete podium for first-floor retail space. These are much more expensive to build than three-story, wood-frame, garden apartment buildings.

Regulation also adds cost. Developers once escaped local government oversight by choosing sites in unincorporated areas. As developers squeeze into smaller sites in existing neighborhoods, however, they have to deal with rules, regulations, and other obstacles ranging from local building codes to impact fees to zoning board meetings, where area resistance can slow or stop the development.

Despite these challenges, developers are starting construction on new apartments at a rate of well over 300,000 a year. “There’s more multifamily rental development [going on],” says Robert Dietz, chief economist for the National Association of Home Builders. “That’s basically going to remain elevated.” Yet, so far, these new apartments haven’t been enough to make up for the shortage of housing overall. “The supply of rental housing hasn’t kept pace [with demand],” says Dietz.

And because of the high cost of development, these new apartments typically charge very high rents that only high-earning households can afford. “People’s income levels aren’t in line with the cost of producing new housing,” says Brickman.

These new apartments are likely to become more affordable with age, however. New construction can also help relieve stress on a housing market.

“If you build new housing, higher-income people can move out of older and less-modern units, making those apartments available,” says Aurand. Even this has a downside, however: The development can also attract new residents to neighborhoods that have been less expensive, raising rents overall. “The downside is potential displacement,” he adds.

Housing advocates hope that communities that now resist development may, eventually, be convinced to allow new housing at greater density than their zoning currently permits, such as the development of single-family townhouses and mid-rise apartment communities in suburban areas. “The development opportunities are in the inner-ring suburbs,” says Dietz.

Government affordable housing programs are also a piece of the puzzle.

The lowest-income households have very few choices outside of housing that receives some kind of government subsidy. That’s because the private sector can’t produce or even maintain housing at a cost affordable enough for people with the lowest incomes. “There’s a price point at which a private landlord doesn’t find an incentive to maintain their housing,” says Aurand. If subsidized housing is unavailable, overcrowding and substandard housing may be the only viable solutions.

Developers will continue to find some greenfields to build on, particularly on the edges of younger cities, though these sites continue to become more elusive. But new technology like driverless cars may make more of these fringe sites work for new development.

“There isn’t a silver bullet that’s politically feasible,” says Brickman. “The solution has got to be a lot of little things added together.”

Source: http://www.multifamilyexecutive.com/design-development/confronting-the-affordable-housing-gap_o