Costly gateway markets are battling an affordable housing crisis, but even smaller inland U.S. cities are tackling their own affordability problems. Active government may be making the problem even costlier.
High rents and home costs in places like Boston and San Francisco are routinely in the news and have driven some residents away from the coasts to more affordable, smaller cities elsewhere in the U.S. But scarce supply and limited wage growth are driving prices up in places like Milwaukee and San Antonio.
While home prices nationally are up 4%, prices in smaller markets like Milwaukee and even Dayton, Ohio, are up nearly 9%, according to Redfin. Experts caution all municipalities to be careful about regulatory overreach when looking for a viable affordability solution.
“All these well-intentioned regulations have inadvertently added additional cost, and, unfortunately, that has impacted a lot of people,” San Antonio-based Alamo Community Group Executive Director Jennifer Gonzalez said last month at the National Association of Real Estate Editors conference.
While she recognizes development costs are astronomical in bigger cities, the affordable housing developer added regulations have made affordable housing projects hard to pencil out in San Antonio.
Land, planning, zoning and survey costs for a single-family affordable project can cost as much as $55K before the first materials arrive to the construction site, according to Gonzalez. Most of that money goes to the land cost, but some is also spent on city requirements like a tree survey on potential greenery displacement during construction.
That puts a cost crunch on projects the developer needs to keep below a $150K development ceiling to remain affordable to residents making between 80% and 120% of the area median income.
“We’re concerned about all these things, but also seeing if there is a way to do this differently. So if we’re serious about affordable housing, there’s a way to mitigate expenses and shave some of these costs off,” Gonzalez said.
Bisnow/Cameron Sperance Redfin Chief Economist Daryl Fairweather, Alamo Community Group Executive Director Jennifer Gonzalez and Allied Orion Group CEO Ricardo Rivas
The rapidly rising rate of construction and labor costs puts even greater pressure on municipalities to streamline zoning and approval processes to make affordability more obtainable.
Ricardo Rivas, the CEO of Houston-based multifamily investment and construction firm Allied Orion Group, attributes construction and regulatory costs as the two biggest headwinds facing affordable housing. The developer’s construction costs have been up 7% annually since 2012, meaning rents have had to go up 4.5% each year to make deals pencil out, according to Rivas.
Prolonged zoning and approvals processes only add to the cost headache.
“When these affordable deals take so long to put together, you can have a deal that could be feasible to start, but by the time shovels hit the ground, costs could have gone up 25%,” Berkadia Senior Director Gemma Geldmacher told Bisnow.
Extended development timelines aren’t helping those most in need of affordable housing.
Redfin Chief Economist Daryl Fairweather said the affordable housing struggle is, at its core, a problem of supply and income inequality. While the economy has recovered since the last recession and the unemployment rate has dropped, income growth has been stagnant. That has made finding a home to rent or own a more expensive proposition in supply-starved markets.
Median home prices rose 41% faster than the rate of inflation between 1990 and 2016, according to a 2018 Harvard study on the state of the U.S. housing market. The national median rent rose 20% faster than inflation in the same time frame.
Whlie Fairweather noted lower-income earners are finally seeing some boosts to their paycheck late in the current economic cycle, home costs are still outpacing late-stage wage growth.
“Even people at the bottom are starting to see a little bit of wage improvement, but it’s almost too late because home prices have gone up so much,” Fairweather said.
A tangible, national affordable housing solution is still years, if not decades, away.
The U.S. needs nearly 5 million apartments by 2030 across all price points to meet growing demand and not send prices even higher, according to the National Multifamily Housing Council. Additionally, nearly 12 million apartments will need to be renovated in the same time frame to maintain the existing housing stock across the country.
Modular construction has the potential to bring down construction costs, but Rivas and Geldmacher both said there are further efficiencies and technological improvements needed in the sector before it becomes a viable solution.
“There’s a lot of time being devoted to talking about affordable housing,” Geldmacher said. “It just seems like everyone is talking about it, but we have to innovate well past where we are now.”
There are some examples of government intervention the housing experts at the NAREE conference last month said could help generate the needed supply to the national housing stock.
A California bill under review encourages density around California transit stations. President Donald Trump issued a June executive order to form a panel focused on removing regulations around affordable housing construction. U.S. Sen. Corey Booker (D-N.J.) has a plan to use transportation funds as an incentive for local governments to scale back regulatory and zoning headwinds.
But rent control, an idea increasingly batted around in city halls across the country, got unanimous disapproval from the developer, economist and affordable housing advocate.
“Rent control is a cuss word when it comes to affordable housing,” Rivas said.
This article was originally written & published by July 8, 2019 Cameron Sperance, Bisnow Boston on Bisnow.com