Affordable Housing Is Doable For Builders And Buyers, But Here’s The Problem

Real Estate

Attainable housing aims to make homes affordable at lower income levels.

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As home prices rise across the country, middle-class Americans and first-time home buyers often struggle to find housing within their budgets. And many would-be buyers are simply not eligible for subsidized affordable housing.

A new report, Attainable Housing: Challenges, Perceptions and Solutions, by the Urban Land Institute’s (ULI) Terwilliger Center for Housing and real estate consulting firm RCLCO explores the shortage of housing affordable to moderate-income home buyers, including first-time buyers, and offers solutions to increase the supply.

For the purpose of the report, attainable housing is defined as non-subsidized, for-sale housing that is affordable to households with incomes between 80 and 120 percent of the area median income. So, for example, in Phoenix, attainable housing would be for-sale housing affordable to households with incomes of $71,000 or less.

According to ULI, very little non-subsidized home-building activity is geared toward the middle-class price point, but evidence indicates industry leaders are starting to respond with new homes aimed at a growing and underserved market.

Innovations are coming from publicly held home builders, developers of master-planned communities, neighborhood-based real estate investors and a new breed of entrepreneurs from other industries, the report states.

ULI says today’s home buyers don’t care about having four or five bedrooms. Instead, they would rather have amenities such as a restaurant, fitness center, farmer’s market or nature trail nearby.

The report also finds that although attainable housing represents as much as 60 percent of demand in some markets, supply constraints are driving up prices on virtually all for-sale housing, and are causing lower-cost, entry-level homes to remain out of reach for renters who want to become homeowners.

The report recommends several solutions, from building higher-density neighborhoods to creating townhouse, duplex and triplex communities. Developers could also simplify their high-end homes by putting homes on the market with less square footage without compromising amenities and finishes.

“Home buyers really want that walkability,” said Christopher Ptomey, executive director of the ULI Terwilliger Center for Housing,” adding: “They want to have shared outdoor spaces, they want to live in a community where they have access to the services, the retail, jobs, transportation and good schools. They want all of those things, and where you’re tending to see access to all those things these days is in walkable, higher-density communities. And they are willing to accept smaller units, but they still want a high-quality finish in those units. So they are willing to sacrifice size for quality and location.”

Ptomey said there is a divide between what buyers say they want, what exists on the ground and what is being built. “My suspicion is that when that question was asked, that developers interpreted it as OK, how do I best meet a buyer at this price point, and the answer that the developers gave tended to be things they had control over,” Ptomey says. “Frankly, it’s often easier to build a larger house on a larger lot a little bit farther out from an urban core than it is to build a smaller house in a higher-density location in an urban core area.”

Greg Ugalde, chairman of the National Association of Home Builders (NAHB), says, “A shortage of buildable and affordable lots is forcing builders to increasingly look further outside of suburban and metropolitan areas to find cheaper land that provides more building opportunities.”

In a sign that housing affordability is becoming a growing issue nationwide, home buyers are expanding their searches beyond the suburbs to far-flung exurbs, which are outlying counties of large metro areas.

Exurbs were the only region that registered single-family permit growth on a year-over-year basis as of the first quarter of 2019, according to a new NAHB Home Building Geography Index.

“The exurbs were really the only growth area at the start of the year, and the reason why is because that’s where land is relatively cheaper,” said NAHB’s chief economist Robert Dietz.

Relatively sparsely populated areas that include exurbs, small towns, rural communities and outer suburbs of small metropolitan markets have shown the largest annual single-family growth over the past four quarters while other areas have shown no change or declines.

Dietz cited several challenges to delivering affordable housing. He said, “It’s not a lack of vision or market recognition, but rather building smaller, more affordable homes is difficult when regulatory costs are high, construction costs are going up, you have this persistent labor shortage, and now we’ve got building material costs going higher because of tariffs.”

Ptomey also acknowledges numerous builders would like to focus on the moderate-income group of potential home buyers, but he says a combination of cost drivers makes it difficult.

“The labor shortage is a cost driver that there’s very little that developers can do anything about other than some of the technology that’s being developed in modular housing,” said Ptomey. “There’s a certain amount that over time technology will be able to help out with, but we’re not quite there yet. We’re only seeing 3D-printed houses in showcases. I think the panelized housing, modular housing, those technologies are growing and will help reduce the labor demand.”

Costs for materials have been increasing rapidly, particularly for steel and lumber. “It certainly is partially due to the tariffs that are in place,” Ptomey said, adding: “Some of the lumber problem is also driven by the mountain pine beetle that has devastated forests in Canada. And again, these are things that builders have very little control over. And then you lay on top of that regulatory costs and regulatory timelines. When you have labor and material costs going up 5% to 7% a year, the longer that development timeline is extended, the higher and higher the costs get, and the harder and harder it gets to serve a moderate-income household.”

Ptomey is optimistic that builders will focus more on smaller households. “Sixty percent of households are now one- or two-person households,” he said. “People are getting married later, if at all, and having children much later. So that’s driving the demand for the smaller units, and again, as the industry recognizes this you’re going to see more and more focus on that smaller housing that’s more affordable to a moderate-income household.”

Ptomey and Dietz are of the same opinion that the NIMBY (not in my backyard) movement is standing in the way of affordable housing construction.  

“Frankly, it’s often easier to build a larger house on a larger lot a little bit farther out from an urban core than it is to build a smaller house in a higher-density location in an urban core area,” said Ptomey. “I think there are two reasons: one is NIMBYism, and it can be a lot more difficult to sell a higher-density project to an existing neighborhood than it is to sell a lower-density project a little bit farther out. NIMBYism tends to be just a little bit more difficult to deal with.”

Dietz asserts builders also have to contend with exclusionary zoning requirements, which require minimum lot sizes.

“We estimate that when you add up state and local regulatory burdens, they take up about a quarter of a typical newly-built single-family home’s price. So 24% of that price is due to regulatory costs,” he said. “Those can be establishments of outright minimum lot size or a setback requirement that sets the distance between the street and the structure. They all have the same kind of effect, which is causing density to be lower. Communities do that to prevent development, and they are often doing it at the behest of NIMBYism, people who are opposing any new development. The impact of that is where higher-density, single-family attached for-sale housing that offers homeownership opportunity is being discouraged.”

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