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Affordable Housing in America. Will efforts to build more and cheaper work?

Acknowledging the Majority's Pain

The financial crisis of 2008-10 illustrated the immense danger of a malfunctioning housing market. According to The Economist, between 2000 and 2007, America’s household debt rose from 104% to 144% of household income, and house prices rose by 50% in real terms. San Francisco and other large metropolitan areas in the U.S. are experiencing rents that represent 40% of the average person’s earnings. Housing is too expensive, which is damaging to the economy and poisoning politics. 

The Great Recession was a symptom and reminder that the next crisis was yet to come. And here we are again bearing the large costs of the COVID-19 crisis in terms of health, lives lost, and efforts by individuals, private institutions, and governments to mitigate these health impacts. Once again there was a wave of unpaid rents and loan defaults, accompanied by massive unemployment which led to a recession. 

The housing shortage mixed with strong buyer demand since the pandemic is prompting home prices to rise rapidly. According to the National Association of Realtors, the median existing-home price for all housing types in February 2021 was $313,000, up 15.8% compared to a year earlier. 

The housing shortage is most prominent among entry-level homes, and it’s making it more expensive for first-time buyers to enter the market. It is a recipe for frustration for Millennials whose housing aspirations are as a benchmark of economic stability. Costly housing is also inadequate for the growing population of renters, forcing them to spend less on other goods and services. And finally, it is unsustainable for an economy that relies on homebuyers taking on large debts. So how did we arrive, once again, at this precarious state of affairs? 

There are three major culprits. First, current property taxes reduce the profitability of investments, discouraging developers, and entrepreneurs willing to invest in low-income neighborhoods. When we think about the specific challenges facing less affluent neighborhoods and those overcoming decades of neglect and conflict, it becomes even more clear why traditional property taxes are a barrier to needed progress. 

Second, over lending and cheap lending make households bid up house prices to unsustainable levels. This situation has naturally led to extremes. Potential buyers compete for an already limited supply of housing units, most of them at a price they cannot afford unless they borrow more. Banks, in turn, see the value going up and lend even more in a vicious speculative circle leading to systematic overvaluation. 

Artificial supply restriction, our third culprit, has made global house prices quadruple in real terms over the past 70 years, according to The Economist. Overtight land regulations are the root cause of high house prices. Landlords and homeowners have, collectively, created a housing shortage. This has been achieved through a series of ordinances preventing the construction of new buildings or limiting land use through height restrictions on building and parking ratios. The planning system in the US has more in common with an old eastern European command economy than a functional market economy. “We do not have a planning system,” argues Anthony Breach of the Center for Cities, “we have a rationing system.” Common land-use regulations across America include zoning rules which allow only single-family houses and prevent the construction of apartments.

A Big Refurbishment: Increasing Housing Supply, Homeownership, and Affordability

The Biden Administration has proposed a major increase in federal funding for affordable housing that would move the nation closer to achieving those goals. For the plan to work and increase supply, homeownership, and affordability, it should substantially expand the construction and finance of entry-level/for-sale homes at a more accessible cost (-20, 30, 40% below the area estimated medium home value). The equity available to homeowners is something that drives first-time buyers to enter the market and start building generational wealth. Increasing rates of homeownership in minority communities can be a force for social healing by closing the racial and ethnic disparities in housing markets and transforming challenged neighborhoods into thriving communities. 

Mr. Biden’s construction plan is sure to contend with the same problems faced in years past: limited lot supply, supply-chain issues, limited construction finance, restrictive zoning laws, costly permits, and labor shortages. These problems make it almost impossible to make a profit on entry-level homes, which is the price point that is hurting the most in today’s housing market. 

The profound disruptions of the past year have made clear how urgently bold steps are needed. An expanded supply of for-sale homes would help to slow the rise in housing prices. New construction also has to pick up sustainability to keep homeownership affordable. 

Allowing developers more flexibility in land use and reducing the procedural barriers to development would make the building of housing less expensive. Flexible planning systems, appropriate taxation and financial regulation, creative design, innovative construction technology, and better land management can produce more housing. As the nation recovers from the COVID-19 pandemic, it is essential to expand the supply of housing both for sale and rent.

What Are the Long-Term Solutions to the Housing Problem?

The following recommendations represent a new approach to urban policy. They’ve built on best practices since the mid-1970 in places as distinct as Medellin, Bogota, Melbourne, Vancouver, London, Mexico City, Sao Paulo, and Chicago.

    • Focusing on creating wealth. Disinvestment is the reason behind the fall in property values in some neighborhoods, leaving long-time owners trapped in negative equity. The priority should be investing in infrastructure, public spaces, community facilities, and energy efficiency projects which create wealth for all members of the community and improve the quality of life of current residents.
    • Unlocking innovative financing and levering on private capital. Under the Community Reinvestment Act (CRA) depository institutions will help meet the credit needs by increasing construction-to-permanent loans to develop multifamily housing projects in low and moderate-income (LMI) neighborhoods in which they operate. Loans will be secured by a first lien against the land and will be available for ground-up construction and substantial rehab work. Once units are buyer move-in ready the debtor will subrogate/refinance and render payments to the subrogee (homebuyer) instead of the original creditor (developer). Construction-to-permanent loans are a best practice in housing markets worldwide, and are a fast-growing FHA product right now because banks are tightening their construction financing requirements.

    • Recycling and taking land out of the cost equation. Unit trust or income trust is made up of a pool of money and land collected from many investors to invest, maintain and develop housing projects. Take on the growing numbers of abandoned properties in a neighborhood and with Land Banks work through the entanglements of ownership, addressing tax issues and tearing down structures to get the vacant property back on the market or give it over as a public space. Transferring land to the trust avoids large upfront costs for developers and allows landowners to take underperforming assets off their books while lowering their tax liability. At the closing of the Trust, profits (including land) are passed directly to investors rather than reinvested in the fund.
    • Relying less on inefficient taxes. State and city agencies should be mindful of the effects of the increase or decline of property values, taxes, and fees on long-term homeowners, renters, and landlords. A proper Land-value tax would weaken the perverse incentives to keep city centers underdeveloped and encourage landlords to build or sell up. Henry George argued that taxing the land value is the most logical source of public revenue because the supply of land is fixed and public infrastructure improvements would be reflected in (and thus paid for by) increased land values with the tax burden falling on land owners, encouraging development and avoiding foreclosures and displacement. Keep government efforts to help first-time buyers may include purchasing assistance, grants for down payments, and property taxes concessions. Make available grants to renovate the houses of property owners so they can build an extra unit to rent, fix issues and modernize (energy efficient).
    • Adopting new construction technologies. A recent report on the off-site manufacture for construction presented a strong case for the wider adoption of offsite methods of construction backed up by evidence and case studies that demonstrate the benefits through improved productivity, greater sustainability, and affordability. Community developers can make significant progress in setting out a roadmap for the commercialization of smart construction and propose new commercial models to support demand creation, investment, and volume surety (focused on the need to produce more homes). It is expected that an additional number of on-site opportunities would be created for self-employed and small businesses which would provide finishing for housing.
    • Adopting flexible ordinances. Adopt a rules-based system, with local authorities declaring loose zones of development. Eliminate exclusionary zoning and discriminatory land-use planning and reduce overall barriers to housing development. Authorities should consider conveying publicly owned land to affordable housing developers at a minimum cost and fast-track approval processes for development. Improve design standards and accept additional height and bulk required for part of the neighborhood as deemed appropriate. Consider examining cities’ parking standards for residential developments, reducing lot size requirements for future phased residential units, and incorporating adjacent properties and relief from or reduced permit and impact fee costs.

The Need to Act Now

The homeownership rate in the US was 64.6% in 2019, down from its peak of 69% in 2004 before the financial crisis. In 2019 the difference between the homeownership rate among non-Hispanic Americans and Black Americans was 31.2 percentage points, the largest gap since the census time series started in 1994. There is no single solution or magic plan. What is needed are lessons learned and best practices, creative solutions, bold ideas, proactive strategies, and an “all-hands-on-deck approach,” while working with lawmakers at all levels and with the private sector. Flexible planning systems, appropriate taxation and financial regulation, creative design, innovative construction technology, and better land management can result in more production and supply, while turning housing into a force for social and economic stability. Anything short of this is an abdication of the public’s trust and our responsibility. 

Much of the current housing that has been produced is largely out of the price range that many working families can’t afford. This is due to malfunctioning housing markets and overly costly regulatory burdens that make building affordable housing economically unfeasible in most areas. “For too long those in a position to deal with these problems have ignored this gathering storm by relying on outdated programs and not challenging antiquated views,” says David Schwartz, CEO chairman & co-founder of Waterton and chair of the National Multifamily Housing Council (NMHC).

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