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Can We Build Our Way to Affordability?

This past summer I wrote about the difference between Housing Choice and Housing Affordability. This is an important distinction to recognize in your local market economy and, in most communities, we're still severely lacking in both choice and affordability. However, as we have worked to partner with local communities on reducing the regulatory barriers to more housing choice, we have heard some concerns from housing advocates that new construction is still too expensive and the additional choices in the market are not affordable enough to many buyers and renters. To this, our most common reply is 'Yes, and...'

The cost of new construction is expensive.

For the most part, newly constructed homes, apartments and condominiums are more expensive than similarly sized and finished older housing products. This has been true for a very long time. If you're familiar with the concept of asset depreciation - the assumption that a property will lose value over time as it ages - this should make quite a bit of sense.

However, the primary issues making housing unaffordable to roughly 40% of the population in West Michigan are:

1) There isn't enough housing supply to satisfy demand in the regional market and this shortage of supply creates competition. Competition drives up prices. Prices rise most quickly in neighborhoods where there is greatest demand and relatively little supply. In recent years, we have seen the most competition and the most dramatic price increases in neighborhoods with access to very good schools OR in neighborhoods within walkable, amenity-rich areas of town. Where a neighborhood has both of these assets, prices have more than doubled since 2010 in some instances.

2) The cost of construction has increased by roughly 30% over the last decade. Meanwhile, average wages have increased by only 4% over the same period of time. This means the average wage buys significantly less in the housing market than it did 10 years ago. The impact of this is significant and important to the rest of this post.

Middle-Out Housing Strategies

Ten or fifteen years ago, a middle-class household earning $50,000 per year could afford to purchase a newly built starter home. Their monthly mortgage payments (principal, interest and taxes) would have easily been less than 30% of their gross income. A basic starter home would have sold for $150,000 to $225,000 prior to the great recession.

However, due to the cascading impacts of the recession - a significant loss of laborers, an increase in material prices and a relative scarcity of land with access to utilities - this price point no longer exists for the middle-class home buyer. A new construction home today is typically priced between $295,000 and $350,000, at the low end of the market.

As a result, those middle-income buyers are either continuing to compete for a limited supply of older housing stock, or they are remaining in rental apartments for much longer periods of time. Either way, these potential middle-class buyers are still able to out-compete the low to moderate-income buyers and renters for older housing products. So, although middle-income earners are now in a position where they can afford less than they could have 15 years ago, they maintain a competitive advantage over low to moderate-income households.

This means that those low to moderate-income households have only two options in many cases:

1) They could choose to pay significantly more than they can afford in order to maintain their housing (i.e. 40% of their income or more), OR

2) They can leave the traditional housing market. For some, this means doubling up with other families. For others, this means moving out of the community to more far-flung areas. And for some, there are no good options left and the result is an increasing number of families living in motels, or out of their cars, or in tents (this is far more common than any of us would like to believe).

The unfortunate reality is that given the cost of land, labor and materials, we cannot currently build an adequate amount of new housing for low and moderate-income members of our communities without some form of housing subsidy. The average cost to construct new housing today is around $180 per square foot. This means, in order to justify the investment, a traditional builder/developer needs to charge about $900 per month for a 600 sq ft, newly built apartment.

This new efficiency unit will rent for $800 to $975/month or more, depending on location.

The bad news is that the $900 rate is unaffordable for anyone earning less than $17 per hour and working full-time. However, there are thousands of renters in West Michigan who are willing and able to pay this rental rate for the right product in the right location. These renters are currently occupying the older housing stock that could be rented for much less in many circumstances. Yet, if new apartments are not built, the renters with the most income will continue to out-compete the renters with the least income for the limited amount of existing and available housing units. And, for as long as the market will bear annual price increases, there is a continuing incentive for landlords to raise rents each year. In other words, if we have any intention of reducing the rising costs of existing housing, we must build more new housing - even if its not affordable to low and moderate income renters.

While all of the above is an accurate depiction of how the housing market actually works, I understand why so many housing advocates are dissatisfied with taking such a supply-oriented approach to solving for the lack of affordability. This approach does not produce more affordable housing to low and moderate-income workers in the short-term. Any effort to re-balance supply with demand is likely to take a decade or longer before we get back to a market where there is a truly adequate amount of choice to satisfy every household's income. For the families of four living out of a motel room, or a tent, or their car, we cannot in good conscience argue that if they just wait long enough, the market will correct itself.

This gets back to our common refrain at the beginning of this post - 'Yes, and...'

Much more market rate housing is needed across West Michigan. Yes, and...

We should be making investments to support our low and moderate-income households now, while we build more supply at all price points. Yes, and...

This will require conversations about how to offset the costs of making housing more affordable to those earning the least. Yes, and...

This will also require conversations about how to ensure those earning the least have ample and equitable opportunities to access educational and job training resources which allow them to earn more and require less long-term housing subsidy. Yes, and...

We cannot afford to stop building new market-rate housing with access to jobs and amenities simply because it is not affordable to everyone. Yes, and...

The short-term subsidies needed to ensure we are providing housing options to all families will require our entire community to grapple with how we might contribute to solutions (government, corporate investment, non-profit partnerships and faith leaders). Yes, and...

Developers - whether - for-profit or non-profit - cannot simply provide affordable housing options because they are needed. If the math doesn't work, the project won't happen. Yes, and...

We cannot afford to allow entire neighborhoods to transition from low-income to high-income. Creating new market rate options cannot be at the expense of existing affordable options. Yes, and...

We must be providing financial supports to get to the levels of affordability needed in each community. Many of these supports will come from government sources (local, state and federal), but they can also come from philanthropy, corporate partnerships, volunteer labor, and other support mechanisms.

Yes, and...

We need community support for new projects at all price points.

When a market-rate project is proposed - assuming it is not displacing existing affordable housing - we need housing advocates to say Yes, and... don't forget about the need for affordable housing.

When a project is proposed that includes units at affordable prices, we need neighbors to say Yes, and...

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