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August 22, 2024Housing Affordability Crisis: Inventory + Compressed Developer Yields
Today, it isn't easy for most Americans to find a home that they can afford. Many areas need more homes, and the ones they have are too expensive. This is a common problem that needs to be addressed.
At its most basic level, the cause of this crisis stems from inventory shortages. There are several factors leading to this shortage: rapid urbanization, rising cost of materials and labor due to inflation, labor shortages due to lack of backfilling the tradesmen, more stringent energy code increases the cost to build, restrictive permitting and bureaucratic city processes, scarcity of land, and the list continues.
These problems must be addressed. This article examines why it is difficult to afford homes and what we can do about it.
What is the Housing Supply Issue?
Let's explore some of the reasons why there are housing affordability issues. One problem is the rules of where and how to build housing. These rules are called zoning regulations. They often limit how many houses should be built in one area, which means fewer houses are built in one location, especially where many people want to live.
Another problem is that there is not enough land for construction in those same areas. This makes it hard and costly to build new homes, and finding enough workers can be difficult, too.
All these factors make it difficult to build homes quickly and affordably.
Barriers to Building Cost-Effective Housing
The barriers to building cost-effective housing can include:
Rising Construction Costs
Materials Costs
Prices for construction materials like lumber, steel, and concrete have been increasing due to factors such as supply chain disruptions and tariffs. An indirect cause is the turmoil in the OPEC+ restrictive behavior on global oil supply. This impacts everything
Oil Prices
An indirect cause is the turmoil in the OPEC+ restrictive behavior on global oil supply. This impacts everything with the prime cause being the cost of shipping materials.
Labor Costs
Skilled labor wages continue to rise in line with inflation. This is directly passed to the GC and ultimately the homeowner.
Labor Shortages
Skilled labor shortages in the construction industry can increase wages, contributing to higher construction costs. What’s causing this shortage? Millennials and Gen Z are focusing on white collar type of work, not vocational jobs.
Regulatory Compliance Costs
Meeting building codes and regulations can require additional safety features and environmental compliance expenses. Cities are requiring longer review periods for inclusion and diversity purposes.
Energy Code Requirements
Many cities are adopting more stringent energy codes as a way to move towards sustainable energy consumption. While this is a righteous motive, the costs are being passed to homeowners and landlords.
Lack of Funding and Incentives
Affordable Housing Subsidies
Government funding for affordable housing projects may need to increase to meet the demand. However, one must consider where these subsidies will come from. Higher taxes on the entire population? Fees to the developers? Historically, developers, since they are taking the full financial risk, will pass fees down the chain.
Tax Incentives
Tax breaks and incentives for developers to build affordable housing are often needed to offset the high costs of construction. In cities like Seattle, multifamily tax exemptions are provided if the developer allocates 20% of the units towards affordable, defined as a percentage below the Area’s Median Income (AMI), housing and in turn is exempt from property taxes for an extended period of time.
Challenges in Implementing Cost-Saving Techniques
Resistance to Innovation
Due to familiarity, traditional construction methods continue to be the mainstream adoption, leading to a reluctance to adopt newer, potentially more cost-effective techniques.
Scale and Adoption
Cost-saving methods such as modular construction or alternative building materials require significant upfront investment, face regulatory hurdles, and contractor pushback due to lack of education.
Market Forces and Speculation
Speculative Investment
Real estate speculation can increase land prices, making land for affordable housing projects more expensive. The CoVid pandemic spiked many market home prices as people began to rapidly shift out of the urban cores.
Market Demand
High demand for housing in certain areas can lead to increased competition among developers, driving up land and construction costs.
Financial Viability Concerns
Return on Investment
Developers may prioritize higher-end housing projects with more significant profit margins over affordable housing. Yields are generally higher on luxury properties, better spreading out the cost of land relative to lower priced homes.
Risk Aversion
Lenders and investors may be cautious about financing affordable housing projects due to perceived risks or lower returns.
Strategies for Increasing Housing Supply
Here are some of the strategies to improve housing affordability issues:
Change Zoning Laws
Changing zoning laws is essential for getting more homes built. When rules allow for more homes in one area and make it easier to get permission, it helps solve the housing shortage. By adjusting these rules, especially in places with a high demand for housing, communities can make it easier to build homes that people can afford. The State of WA passed a bill, HB 1337, that opens up nearly all cities statewide to at least 4, and in dense areas up to 6, units per lot regardless of zoning.
Use Empty Spaces
Using empty spaces is a smart way to create more homes. By finding unused land and building homes, communities can use available space better. Offering rewards, like tax breaks, to builders who use these spaces encourages them to invest in new housing projects. This way, more homes can be built where they're needed most.
Improve Infrastructure
Improving infrastructure is critical for supporting new housing developments. Upgrading roads, water systems, and electricity in growing areas ensures new homes have the necessary amenities. By improving infrastructure where more homes are needed, communities can prepare for future growth and make living there more convenient for residents.
Reuse Old Buildings
Reusing old buildings is an excellent way to create new homes while preserving history. Converting empty buildings, into apartments or houses breathes new life into neighborhoods. Offering incentives or simplifying rules for builders who do this encourages them to transform old buildings into homes. This way, communities can add more housing options without taking up extra space.
Work with Businesses
Working with businesses can speed up the process of building more homes. By teaming up with companies to build affordable housing and supporting them, communities can make progress faster. This collaboration helps bring innovation and efficiency to housing projects, which benefits everyone.
By working together, communities can tackle housing challenges effectively and create more homes for residents.
Encourage Affordable Housing
Encouraging affordable housing is essential for ensuring everyone has a place to live. Requiring developers to include affordable homes in their projects and giving them incentives helps make housing more accessible. By prioritizing affordability, communities can ensure that people with lower incomes can find homes they can afford.
Support Accessory Dwelling Units (ADU)
Supporting small additions to existing homes is a simple way to create more housing options. Making it easier for homeowners to add extra units, like guest houses or basement apartments, helps increase the housing supply. Communities can better use existing resources by empowering homeowners to create additional living spaces.
Try New Building Methods
Exploring new building methods can make building homes faster and cheaper. By trying new techniques, like using pre-made parts or eco-friendly materials, communities can speed up construction and save money.
Approaches to Lowering Construction Costs
Finding Cheaper Materials
Finding cheaper materials is essential. It involves looking for materials that cost less but are still safe and reliable. Buying materials in bulk can also help get discounts and save money, making construction more affordable.
Reducing Labor Costs
Another critical strategy is reducing labor costs. This means finding ways to make construction work more efficient so it takes less time and money. Training workers to be more skilled can also help them finish projects faster, saving on labor expenses.
Cutting Regulatory Costs
Cutting regulatory costs is crucial for lowering construction expenses. Simplifying rules and regulations can reduce paperwork and fees. Making it easier for builders to get permits and approvals quickly can also save time and money during construction.
Using Cost-Saving Techniques
Using cost-saving techniques is essential. Exploring modern construction methods that are cheaper and faster can significantly reduce construction costs. Investing in technology to improve productivity and minimize waste can also help save money in the long run.
Seeking Financial Support
Seeking financial support is essential for funding construction projects. This involves looking for government grants or loans to cover construction costs. Partnering with investors or non-profit organizations can provide additional funding for affordable housing projects.
Encouraging Competition
Encouraging competition among builders can drive down construction costs. Inviting multiple builders to bid on projects ensures getting the best price for construction. Promoting fair competition helps lower costs and make building homes more affordable.
Conclusion
Solving housing affordability means tackling supply and cost issues. More homes can be built by changing zoning laws, using empty spaces, and improving infrastructure. Finding cheaper materials, cutting labor costs, and simplifying rules help make construction affordable.
Seeking financial support and encouraging competition also drive down costs. Altogether, these steps create more affordable housing options for everyone, making communities inclusive and thriving.
Who is Gold MF?
Are you looking to address housing affordability issues? Connect with Gold MF, experts in multifamily real estate development and construction. We focus on efficiently building and managing multifamily properties, which aligns with tackling the challenges of not building enough homes and not building them cheaply.
Schedule a call with Gold MF to explore how we can help you improve housing affordability.
