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What Is "Affordable Housing"? (Part 1)

This question comes with a fairly simple answer and a whole lot of baggage. This post is intended to help unpack the baggage so that we can clearly see all of the influencing factors that inform what we think about when we hear the term 'affordable housing'.

Basic Metrics

Across the U.S. for several decades, we have defined housing as affordable when it costs equal to or less than 30% of a household's gross income. All housing is intended to be affordable. Whether you earn $18,000 a year or $100,000 a year, your income compared to your rent/mortgage determines whether your housing is actually affordable to you.

Gross Income * (.30) = Max Monthly Housing Budget


So, if you're earning $100,000 per year, an affordable home should cost you no more than $30,000/yr ($2,500/month), including taxes, insurance and utilities. This means a $500,000 mortgage is probably not affordable relative to your $100,000 of income.

Let's instead assume that you're earning $26,000 per year. This is the equivalent to $12.50 per hour, or the typical wage for a young employee working in manufacturing, medical office, retail or a pre-school setting. Now your annual housing costs should not exceed $7,800/yr or $650/month. This means the current Ottawa County fair market rent for a one-bedroom apartment of $763/mo is not affordable for you.

Wages for young employees are often not enough to cover the rent.

The math is exactly the same regardless of your income. The major factor is simply whether or not there is a specific type of housing available in the market that aligns with your budget. In some cases, families either choose to, or are forced to, spend more than 30% of their income on housing related expenses.

The trade-off means that they must then reduce the amount of their annual savings for college, retirement or a down payment on a home. It likely also means that those families are then less able to spend money at local businesses, which then has a bottom up impact on the entire regional economy. Unfortunately, we often hear about families making much more dire sacrifices in order to pay rent.

Currently, more than 9,700 households (44% of all renters) are spending more than 30% of their income on housing in Ottawa County. Almost 13,000 households (17% of all home owners) are spending more than 30% of their income on housing.

How do we make housing affordable?

Over the long term, the best way to make housing affordable at all price points is to increase the supply of available housing so that it matches the level of demand. A healthy rental market will have a roughly 5% vacancy rate across the market. This keeps enough competition among building owners and landlords to ensure that they are keeping price increases in check. It also demonstrates enough demand to developers to continue to build more housing. The current rental vacancy among market rate units in Ottawa County is 2.8%. For tax credit and subsidized rental units, the vacancy rate is well below 1%. put together this great summary of how supply and demand can impact price in a growing market.

Housing as Musical Chairs

Simply building an adequate amount of market-rate housing supply is not enough to solve all of the affordability problem for every household. However, this approach goes a long way toward balancing the market and leveraging private investment wherever possible. Other housing supports will also be required and we cannot assume that a market-based approach can create affordable housing for every household. But we may be able to solve the housing needs for a large segment of the population by simply allowing the market to better respond to demand.

Later in this post we'll talk about some of the mechanisms available to bring more affordable units into the market and how the market can often be constrained by local zoning and neighborhood opposition to more supply.

County-wide Data

As you may have read in our recent post about the housing needs assessment for Ottawa County, we will be short about 3,500 rental units and about 3,400 for-sale units across the County by 2022 if there is no additional supply built in the next 4 years.

The good news is that Ottawa County permit data shows builders are on track to satisfy residential demand among single-family homes each year over that time period with an average of about 950 new single family homes coming on line per year. If there are no major interruptions in available financing, materials or labor, this trend is likely to keep pace.

As a result of that new construction - even where new homes cost well above the affordable price range for many families - the price to purchase an older home will begin to stabilize in many neighborhoods. This doesn't mean we have effectively solved for affordability among single family homes, but at least the data is trending in the right direction.

Despite the positive growth trend, it's also important to be mindful of the significant impact that location and amenities can have on price. Most homes located in close proximity to amenities like restaurants, coffee shops, recreational trails or the waterfront - whether 100 years old or brand new construction - are going to continue to be in significant demand. Prices in these neighborhoods are likely to continue an upward trajectory that outpaces the rest of the market where other factors like schools and safety are comparable.

This 1,100 sq ft home near downtown Grand Haven recently sold for $306,000 or roughly $278/ft.

Home builders would be wise to consider the importance of place and walkability when considering where to build their next development. Local communities would be wise to allow for a greater diversity of housing types and sizes to accommodate the increased demand in these neighborhoods and leverage those new investments to help support other community priorities. More on this later...

Rental Market

The trend line for new construction of rental product in Ottawa County is not as good. Based on permitting trends over the last three years, the County is likely to be dramatically under supplied among rental units by 2022. The gap between the demand for more rental units and the available supply will continue to drive up rental rates and make housing more expensive for households who are not able or not interested in buying a home.

In order to keep up with the anticipated rental demand, an average of roughly 875 new rental units are needed each year for the next four years. Over the last three years, an average of only 260 new rental units were built. If this trend continues, we will be short changing the market by more than 600 units per year.

What's getting built now?

Currently, the market is still able to provide new two-bedroom apartments for around $1,200/mo and new one-bedroom units for around $950/mo in Ottawa County. We aren't building enough of these units, but where they are getting built, this is an affordable rate for middle income households earning $53,000 per year or more. However, $53,000 is the middle of the income spectrum. This means that half of the population in Ottawa County is not making enough income to afford that new $1,200 a month, two-bedroom apartment.

Piper Lakes Apartments is a new market rate development in Grand Haven serving middle income earners. Rents range from $965 to $1,345.

For those who might be groaning at the thought of a household spending $1,200 per month on rent when they could easily afford a mortgage payment on a starter home, this recent article from Forbes is a great dissection of the pros and cons of home ownership. It's not always in your best interest to own a home. It's also not in the best interest of a community to drive a majority of the housing product toward only owner-occupied dwellings. During the last recession, it was communities that had a healthy balance of owner-occupied and rental product that fared best. In these communities, the decline in property values that resulted from an unprecedented number of foreclosures was buoyed by the rental product that suddenly became much more in demand.

How do we build more product at affordable prices?

The cost to build any type of housing is based on several factors. The cost of land, building materials, construction labor, financing and infrastructure connections are all major factors that influence the final cost for the renter or buyer.

Minimum requirements related to lot sizes, unit sizes, setbacks and dedicated green space can also have a dramatic effect on price. The lack of studio apartments in Ottawa County is a great example of this. Of the more than 8,500 market rate apartments available in the market, only 68 of those apartments are studio units.

400 sq ft studio apartment

Much of the development market in West Michigan has begun to recognize that smaller apartments are in demand where renters are sensitive to price. Many renters today are much more willing to rent a studio or small one-bedroom if it means they can save a couple hundred dollars a month in rent. Since more than 30% of households in Ottawa County are single adults without children, studio apartments can make a lot of sense for a lot of people. However, most local jurisdictions require that any dwelling unit be a minimum of 750 square feet or larger. Effectively eliminating the option of the studio apartment across a majority of the County.

Given the cost of land and construction, smaller units in multi-family buildings could be made available at market rate rents of around $600 to $750 per month, depending on land values and allowable density. If we use the cost calculation at the top of this post, $650/mo would be an affordable market rate rent for that young worker earning $26,000 per year. No housing subsidies required.

Once again, this isn't a silver bullet solution. There are plenty of households that need larger units at lower prices to accommodate bigger families. However, where we can make minor modifications to allow the market to respond to demand, its a fairly simple correction to make.

More to come...

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