Rethinking the Affordable Housing Equation


Rethinking the Affordable Housing Equation

The U.S. added 225,000 jobs in January and the unemployment rate remains near a half-century low. But wage growth has failed to keep pace with rising rents and home prices. That trend, along with several others, has created a significant affordable housing shortage, with an estimated shortfall of 1.6 million housing units. Demand is surpassing supply by 250,000 units each year and homelessness is rising, with a troubling increase among the elderly on fixed incomes. What factors are driving the affordable housing crisis? 

Here are five:

  1. Land, building material and construction costs are all rising. Demand tends to be most acute in urban areas where land costs are highest.
  2. The recent boom in multifamily construction has created a shortage of construction workers, particularly skilled labor.
  3. Zoning restrictions, onerous building code requirements, permitting roadblocks, development fees and ever-longer local approval timelines all drive up the cost. Meanwhile, municipal tax incentives and abatements to subsidize affordable housing are falling out of political favor.
  4. Homeowners fight any expansion of even market-rate multifamily housing. For example, in January, California once again rejected legislation that would have eliminated zoning restrictions near transportation and job centers to enable the construction of small apartment buildings in single-family neighborhoods.
  5. More state and local governments are implementing rent control measures as a band-aid solution. Extensive studies have shown these measures ultimately reduce the supply of rental housing, drive up overall housing costs, choke off new construction and discourage owners from investing in their properties.
Housing development is a difficult and risky proposition, to begin with, and these factors add significantly to cost and complexity. As a result, we see the newest development migrating toward luxury, Class A apartment deals because higher rents are required to achieve a return on investment.

Rethinking the affordable housing equation will require vigorous effort from both the public and private sectors.

There are some hopeful trends. Fannie Mae and Freddie Mac have declared their intention to focus on mission-driven, affordable housing investment and cede the higher-end of the market to private investors. Technology is another bright spot. Modular construction, in which apartments are pre-built in a factory then shipped to a site and assembled like a puzzle, enables developers to deliver projects at a lower cost in less time with less skilled labor. 

Another idea is to fund the 750 Housing Trust Funds (HTF) that have been set up by states since 2016. By statute, HTFs must use their resources to provide rental housing for residents with incomes below half the local median. The Center on Budget and Policy Priorities suggests HTFs can be funded without new costs to taxpayers by maintaining a 0.1 percent fee that Fannie Mae and Freddie Mac currently charge to homeowners who have one of their mortgages. The fee, set to expire next year, generates $5 billion in annual revenue that could be funneled to HTFs to support affordable housing efforts.