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If You Want Affordable Housing, You Need Affordable Construction
An introduction to the housing crisis and how we can solve it
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Los Angeles has an affordable housing crisis, and a growing number of American cities are joining LA with average rents that are increasingly unaffordable to individuals and families that make average incomes. This crisis is incredibly urgent, and if not solved will have cascading effects throughout society and the economy. Side effects of the housing crisis include a homelessness epidemic, increasing poverty, wider racial disparities, less economic mobility, lower rates of family formation, and general all around destitution.
This is one of the most pressing problems facing America, yet it is not widely understood how housing crises form and what can be done to fix them. In this article, I’m going to present a simplified but accurate model for how the housing system works, explain what’s wrong with it, and provide a novel framework for looking at how to fix it.
In order to reach the widest possible audience and keep this post to a reasonable length1, I’m going to leave some things out that are not necessary to understand how the housing market works but are still really important. These include (but are not limited to) tenant protections and rent control, the history and racism of the American housing system, and the effects of financialization (often called “commodification”) on this model. I promise to cover these topics in future posts.
In this article, I’m going to introduce the concept of affordable construction and show how many American cities, including Los Angeles, essentially make it illegal to build affordable housing. Before I get there, I first need to discuss how housing shortages cause housing crises, how segments of the housing market interact with each other through a concept called “filtering,” the role that developers play in the housing market, and the multiple definitions of “affordable housing.” Without further ado, let’s dive in:
You may have heard the statistic that there are 17 million vacant homes in America. This is one of those facts that, while technically true, is useless once you dive into what it actually represents. Over the past fifty years or so, America’s population has shifted away from small towns and manufacturing-centric “rust belt” small cities into a handful of metropolitan areas. Although the cores of some of the most beautiful rust belt cities have seen revivals over the past decade and resort towns are having their moment with the rise of remote work2, most of these vacant homes are located in towns and cities where people don’t really want to live.
While their populations have boomed, cities like New York, Los Angeles, Denver, and Austin have not built enough housing to keep up with this growth. This fact feels wrong to a lot of people who have seen their cities dramatically transform in recent decades. I suspect the reason behind this is because recent zoning rules and development trends have resulted in construction getting centralized along commercial corridors with large-scale buildings often replacing long-standing businesses. As a result, housing construction has shifted from being something that happens in far-off suburbs that most people don’t notice to being something that’s in your face every day. The numbers don’t lie, however. Population growth has outpaced housing growth in most American cities.
The result is a housing shortage, and a housing shortage is the cause of almost all housing crises. Although this article is focused on a capitalist housing system because that is what we have in America, it’s worth mentioning that this concept [housing shortage = housing crisis] applies to command socialist housing systems too. We know this because the Soviet Union faced a housing crisis caused by a housing shortage in the aftermath of WWII, and they solved it by building more homes.
Let’s look at a vastly simplified example to see how a housing shortage results in a housing crisis:
Due to an uptick in good behavior, Santa hired five new elves this year to ramp up toy production in the lead in to Christmas. There are four elf families that have an extra room available in their cabins, and North Pole law only allows one elf per room. Normally, the rent for a room on the North Pole is $100 a month, but one of the new elves, knowing that there is a housing shortage and wanting to make sure that he is prepared, offers $120 a month to secure a room during the summer. This now becomes the standard rental rate, and the next two rooms are grabbed at this price. Now it’s October, and there are two elves looking for rooms but only one room available. There are two possible outcomes here. First, the two elves could get into a bidding war. In the end, one elf ends up paying $180 a month in rent and the other has to turn down the job and return to the Keebler sweatshop because he doesn’t have a place to live. Alternatively, the two elves make an agreement with the landlord to each pay $100 to illegally split the room. Now they both have a place to live, but they’re living in unsafe, overcrowded conditions. Either way, the North Poll housing shortage results in every newly hired elf being worse-off.
But wait! I expect many of you to be thinking: that example assumes that all housing is the same and everybody is looking for the same type of home. The real world doesn’t work that way.
You’re correct. In the real world, the housing market is not one single market, but rather an indefinable number of interconnected markets. These markets are segmented by things like price, location, and home size. For example, price-segment-wise you have people shopping for luxury amenity-filled apartments with grand views and minimum wage workers that will take any room they can afford so they don’t become homeless. Location-segment-wise you have Westwood and DTLA, and also Anaheim and Pomona and Phoenix.
Many Angelenos believe that Los Angeles does not have a housing shortage, only an affordable housing shortage. In other words, if you’re in the market for apartments with gold-plated bathtubs overlooking the Hollywood Hills, you have plenty of choices, but if you’re trying to find a room you can afford on a minimum wage salary, good luck with that. Although this is correct, it doesn’t explain how segments of the housing market interact with each other, and this is important to understand in order to solve the crisis.
The missing piece here is that both people and available homes often move between adjacent segments of the housing market depending on changes in things like price, traffic, and neighborhood safety. When there’s a housing shortage, landlords can move units into higher-priced segments and still rent them, but when there’s a surplus of housing they will need to lower rents to find tenants. When someone looking for an apartment can’t find one available in their budget, they either have to look in a higher priced segment or look in other location segments. This concept is called “filtering.”
Let’s look at some examples:
Paula has spent months looking for a studio apartment in DTLA under her budget of $2000. Nearing the end of her previous lease and unable to find adequate options, she expands her budget to $2500 and also starts looking at Koreatown. Now Paula is competing in two additional housing market segments
The Smith family’s top priority is to rent a house with a yard for their three-year-old to play in. Although they have a large budget, every house has a bidding war and they keep loosing. Despite not wanting to be gentrifiers, they decide to start looking in Inglewood where they are more likely to have a winning bid
A small landlord’s 20-year rent controlled tenant moves out of state. The landlord puts the unit on the market for double the rent the prior tenant was paying and in the first day gets over 500 applicants. Realizing that she underestimated neighborhood demand, she relists the unit for much higher rent.
A developer built a new apartment building and prices it near the top of the market. Six months after opening, most of the units haven’t rented, and he has to start paying back his loans. At this point, he decides to lower the rent, moving the building down a price segment.
It is true that developers of new buildings are often willing to leave those buildings partially empty for a number of months rather than lowering rent right away, but this typically only applies to brand-new buildings. When a neighborhood has an influx of new luxury construction, those buildings tend to draw tenants away from similarly priced older buildings nearby, and those buildings have to drop their rents as a response. Because of the filtering effect, this reverberates throughout the entire housing market.
Another way of looking at this is that when there’s a housing shortage, landlords can price open units in higher cost segments, so a lot of people are renting homes in a lower quality segment than they would normally be. Upper-middle class people are renting middle-class apartments, middle-class people are renting working class apartments, working class people are renting lower class apartments, lower class people are renting poverty apartments, and people in poverty end up homeless. Substantial research has shown that when there is a significant increase in supply on the high end that is not at the expense of lower-end apartments, the effects really do filter through the segments.
I want to be clear that the concept of filtering has nothing to do with “trickle down economics.” Trickle down economics is a disproven pseudoscientific economic theory from the 80’s that said if you give rich people money it will strengthen the economy because rich people are job creators. In reality, rich people tend to hoard their money and the best way to stimulate the economy is by alleviating poverty. Unlike cash, you can’t hoard empty apartment buildings because they cost money for taxes and upkeep. In virtually every situation, it makes better financial sense to lower the rent of an empty apartment rather than leave it empty.
So far, the model that I’ve built has mostly resembled the “YIMBY” supply and demand model, but now I’ll begin to diverge. In the strawman YIMBY model, thanks to filtering, the segmented housing market can be condensed to be viewed as one market, and the housing crisis can be solved by upzoning the entire city and building a bunch of luxury apartments.
Of course, in the real world this doesn’t work. That’s because this model doesn’t consider the economic incentives of the developers building those luxury apartments. Developers do not exist to solve housing crises, they exist to make profits. Typically, they make those profits by selling finished buildings to institutional landlords consisting of pensions, investment funds, and wealthy families. Those landlords use the buildings as a stable store of money designed to outpace inflation. If those buildings drop in value because an influx of new construction lowers rents, institutional landlords will stop buying buildings in that market. With few buyers, developers will stop building new buildings. This wall gets hit pretty quickly because the segment of most cities’ populations that can afford luxury apartments is pretty small.
Building housing is primarily a game of managing risks. When a developer is deciding whether or not to build a new building, they need to consider 1) the cost to build each apartment 2) the rent they will get for each apartment and 3) The resulting profitability of the project given the cost and the rent. They then consider risks factors such as the likelihood that rents will decrease, the chance that the city will deny them permission to build the building after they’ve invested a lot of money into the project, or cost overruns caused by i.e. lumber shortages. The risker the project is, the higher profits need to be to be worth pursuing. When there’s a high chance that rents will decrease in the future, a developer will only build a building if the profits are large enough that the project will still make money with lower rents.
When thinking about the lack of affordable housing in neighborhoods, people often point to the “greedy developer” who builds luxury buildings with sky-high rents in order to maximize their profits. Putting aside truly unscrupulous players such as flippers and developers who knock down rent controlled apartments3, I think the concept of the “greedy developer” somewhat misunderstands the role that developers play. Developers work for investors, and their job is to maximize returns and minimize risk. They must price their apartments at the point that maximizes profits and minimizes risks, or else investors will will withdraw their money and give it to another developer that will. In most cases, the price point that is set to maximize profits already exists in a neighborhood, because expecting rents higher than anyone currently pays significantly increases the risk of a project4.
If what I said seems to be a catch-22, you’re right, it is. Developers need to maximize their profits and minimize their risks, which typically necessitates charging the highest rent people are willing to pay in the neighborhood. At the same time, higher-rent apartments are generally more risky to build, because there’s a much smaller number of people willing to pay those rents, so it’s more likely an oversupply in that market segment will result in having to lower rents. What are we missing here?
The answer is a factor that I glossed over earlier: the cost to build each apartment. For any given cost to build an apartment, there is a corresponding rent at which developing the building will be profitable. If the top market rent in a neighborhood is above that point, the apartment will get built. If not, it won’t get built. If the build cost in a neighborhood is low relative to the top rent in a neighborhood, investors will give developers a lot of money to build a lot of apartments in that neighborhood. Those new apartments will mostly take up the upper price range of the market, and older apartments will generally reduce in rent to target lower segments of the market due to the filtering effect. By contrast, if the build cost in a neighborhood is high relative to the top rent in a neighborhood, investors won’t give money to developers to build new apartments. Instead, if the top market rent in that neighborhood is high compared to average rents, the investors may direct their money to renovate and “reposition” existing buildings that are “below replacement cost, ” aka gentrify the neighborhood.
It’s worth noting that a developer maximizing returns and minimizing risk does not necessarily mean always mean building buildings at the top price segment of the market. If there is already a surplus of housing in that segment, building more expensive housing is a risky proposition. However, if build costs are low enough that it is possible to make a profit at lower rents in a lower segment, and there is more demand or less supply in that segment, developers will choose to build lower rent housing. However, this is predicated on low-enough build costs. Before getting more into that, I need to touch on affordable housing.
What is affordable housing?
This seems like so obvious of a question that it doesn’t need to be answered, but when people talk about affordable housing, they’re referring to a lot of different things. The first follow-up question is housing affordable to whom? On one hand, you have affordable housing meaning housing for the poorest of poor, perhaps an individual who is unable to work or a single-parent household. On the other hand, you have affordable housing meaning housing that’s affordable to roughly the average person or family. In a city that’s experiencing a housing crisis, middle class families or individuals with jobs such as teachers, firefighters, or social workers often have no place they can reasonably afford to live. Both of these are valid definitions of “affordable housing.”
The next follow-up question is: open-market housing or deed-restricted/subsidized housing? Open market affordable housing means housing that anybody is able to rent. It is usually built and owned by private landlords. There may be income minimums or credit checks to get approved to rent, but there aren’t income restrictions. By contrast, deed-restricted or subsidized housing typically has a requirement that tenants make within a range of incomes, and rent is typically set at 30% of the tenant’s income. Deed-restricted/subsidized housing is either A) built by the government B) built by a non-profit (or occasionally for-profit) affordable housing developer utilizing a combination of government tax credits and grants or C) built by a for-profit developer as part of a larger project in exchange for getting city permission to build the project. Traditionally, most affordable housing, especially middle-income affordable housing, has been open-market housing.
The cost to build housing has a direct effect on all the types of affordable housing. For deed-restricted housing built with tax credits and grants, the government is subsidizing the build-cost difference between the actual build cost and the break-even build cost at the discounted rent the tenants will be paying. Given that there is a fixed total amount of funding governments provide to subsidize projects each year, the lower the actual build costs per apartment, the less subsidy each apartment needs, the the more affordable housing gets built.
For open-market affordable housing, there are both direct and indirect effects of building costs. Directly, no housing gets built where the build cost is above the rent, so if the build cost is above the point where rent would be affordable to the average person, no naturally-affordable housing gets built. Indirectly, the less market-rate housing that gets built, the less older housing filters down to more-affordable segments of the market.
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Virtually every politician in any liberal city says that they support affordable housing and want more affordable housing. Many politicians call themselves affordable housing advocates and can probably point to multi-million dollar affordable housing bond measures they’ve passed or pressure they’ve put on developers to include affordable units in their projects. Although some politicians use liberal language to hide their true reactionary intentions, I believe that most are sincere about their desire to lower rents.
Yet when you look at the trajectory of housing costs in these cities, it’s obvious that these politicians have failed. This is because these politicians do not realize that their cities have banned affordable construction and have thus de facto banned building more affordable housing. Affordable construction is a prerequisite for both open-market middle income affordable housing and deed-restricted subsidized affordable housing. If cities made the necessary law changes to legalize affordable construction, rents would begin to fall within a few years and overall housing would be significantly more affordable within a decade.
Affordable construction is a term that I’ve coined, and it does not mean the same thing as “construction costs.” Construction costs, known as “hard costs” to people in the construction industry, are the costs of the physical items and labor that go into building a home. Hard costs are one aspect of the total amount of money that goes into building housing, but there are not the focus of the factors that make up affordable construction.
The best way for me to explain affordable construction and how American cities ban it is by walking through a hypothetical example. In this walkthrough, I will point out each instance where laws drive up the total cost to build a home. Two things to keep in mind: First: this is a generalized example pointing out laws most cities have, but it isn’t designed to be representative of a specific city. Second: although a given law may drive up the cost to build housing, that doesn’t necessarily mean the law is bad or shouldn’t exist. For example, fire sprinklers add $3k-$5k to the cost of building an apartment, but in my opinion they’re worth every penny because of the lives they save.
Let’s dive in and look at the costs that go into building an apartment building:
If you want to build an apartment building, the first thing you’ll need is land. If you’re a suburban developer building into the countryside, land costs are pretty low, but we want to build our building in a built-up city. There are a number of different factors that affect the price of land.
When you’re buying land in a built-up city, you’re not just buying the land itself. You also have to pay for the previous building on the land, which cost money to build and probably brings in revenue. Therefor, the project you want to build needs produce enough value to overcome the value of this previous use.
City zoning also plays a huge factor in the cost of land, with two seemingly contradictory forces. In a vacuum, the denser a city allows building on a piece of land, the more valuable that land becomes. In other words, if you have a piece of land that is zoned to allow two homes, and the city re-zones the land to allow ten homes, the land will become more expensive. At the same time, the more amount of land in a city that the city allows development on, the less of an effect that development capacity will have on the price of each piece of land. When a city only allows apartments on a small percentage of its land, there is a shortage of land developers can buy, which drives up the cost of that land. However if the city allows development on any land, developable land ceases to be a hot commodity.
As this is not an article primarily on zoning, I will fight my instincts and refrain from writing an additional 20 paragraphs on the different ways zoning can affect land costs. For this example, let’s say that the city only allows development on 20% of land, which increases the value of developable land by 50% over what it would cost if they allowed development on all land. We’re thus paying $1.5 million for 1/3 acre rather than $1 million.
Now that we bought the land, let’s figure out how many homes we can build on that land. This is important for affordable construction because the total land cost gets divided among each unit, meaning that the more units we can build, the less that the land cost contributes to each home. We have 14,500 sq ft of land. Assuming 80% floorplate efficiency and 1,000 sq ft average unit size, we can build 11 units per floor. If the city had a 7-story height restriction but no other design limits, we could build 73 units (using 4,000 sq ft for the entrance and common areas).
However, the city does have additional design limits, most notably a 3:1 floor area ratio. This means that the total buildable area of the building can’t be more than 3x the land area. We thus can’t build more than 43,500 sq ft. Removing the 4,000 sq ft for common areas, we are left with the ability to build 30 units.
But that’s not all! The city also requires two parking spaces per unit. We could choose to build this parking underground, but deep excavation work would greatly increase our construction costs, so we’ll build the garage on the ground floor, which eats into our buildable area5. With 60 required parking spaces taking up 325 sq ft each, we’d need to use up almost half of our buildable area on parking! Now, because we’re reducing the number of units to accommodate the parking and thus reducing our parking requirements, what we actually end up with is 21 units of housing and 42 parking spaces.
With our initial estimate of 73 units, the land cost per-unit would have been about $20.5k. After design regulations are applied and we end up with 21 units, the land cost per-unit is now $71.4k. That’s an increase in cost of over $50k per home, and now 52 fewer families can move into this neighborhood.
In construction speak, soft costs are all of the costs that go into a building that aren’t part of the physical building process. This is the area where city laws and processes tend to drive up costs the most. Soft Costs include (but are not limited to) architecture fees, impact fees, permitting fees, lawyer fees, and financing costs.
To start, we’re going to estimate architecture fees at $20k per unit. Architecture fee structures vary a lot and they’re not too important for this discussion, so I’m not going to go into further details.
In Los Angeles, San Francisco, and many other American cities, most development activity is “discretionary” rather than “by right.” In a traditional by right system, the city sets the rules, and if a developer wants to build housing they submit plans “over the counter” to the building department, the building department confirms that the plans follow the rules, and the development can begin construction. By contrast, in a discretionary system, the city council and/or planning department votes on individual projects. With discretionary approval, a city can block a project that follows all of the rules or give an exemption to a project allowing it to break rules.
In theory, a discretionary process is supposed to provide greater democratic oversight of development and allow citizens to have a hand in shaping their community. In reality, discretionary processes drive up the cost to build housing and provide a massive avenue for bribery and corruption. I would not be surprised if most local corruption scandals would not have occurred if the cities had by right approval processes.
Let’s look at the many ways in which discretionary approval drives up the soft costs in a development project. In California, one of the top culprits is the environmental review process called CEQA. Now, I believe that environmental review is a good thing. The way the law is written, cities are supposed to conduct a CEQA review for any public project and when setting zoning to ensure that they consider the environmental impacts when deciding what can be built where. CEQA studies are not supposed to be necessary for individual infill development, because the city has already determined that building there is not harmful for the environment.
Unfortunately, CEQA was written based on the assumption that most development is by-right and the only times discretionary processes would be used is on massive landscape-alternating projects. For cities that utilize a discretionary process for most development, every individual building that gets built needs to go through the same environmental review process designed for megaprojects. In the 1990’s, the Sherman Oaks Homeowners Association realized that they could use CEQA to block affordable housing and other apartment projects that brought “undesirables” into their exclusive neighborhood by suing the city of Los Angeles alleging that they did not adequately conduct Environmental Impact Reviews (EIRs) of the projects. The purpose of CEQA lawsuits is to drive up costs through lawyer fees and delayed approvals to try and get the developer to either drop the project or negotiate to reduce density. Without a lawsuit, CEQA adds $100k-$200k per project. If a lawsuit is filed, CEQA may cost the development upwards of $1M.
In total, discretionary approval can add $500k-$2M to the cost of a project6. In addition to CEQA, other costs include holding public meetings to get community feedback on projects, hiring consultants to help navigate the approval process, design reworks if there is community pushback, and the financing costs of holding on to the land while waiting a year or two or three for approval. With a $1M cost to get through discretionary approval, the additional per-unit cost is $47.6k.
Another soft cost that I want to touch on is impact fees. Also called park fees, impact fees are the fees that cities charge per each new housing unit to cover the costs of things like sewage treatment plants, roads, parks, schools, and other infrastructure. Impact fees have been prevalent since the 1980s, but their amount has skyrocketed in recent years. They vary greatly by city, but for this example we’ll use the Los Angeles average of $14,000 per unit.
Two years after you bought the land the project has been approved, and now it’s time to build. Let’s look at the physical building costs.
First, we’ll look at a cost we already mentioned, required parking. In addition to the cost that the parking adds by taking away units, there’s also the direct cost to build the parking spaces, which is $15k per space or $30k per unit. If we had chosen to use underground parking and build more units, the cost per-space would have been 2 or 3 times as much.
Next, let’s talk about building codes. Building codes both keep us safer and also make it significantly more expensive to build housing. It’s really hard to do a cost-benefit analysis on safety, especially because there’s not a lot of data on which code changes save a lot of lives and which ones are mostly a waste. According to the National Association of Home Builders, a very biased source, changes in the building code since 2010 have increased the cost to build each home by $24k. Because I have no way to judge the merit of this number, I’m not going to include it in my calculations.
One element of the building code that I think should be reconsidered is the prohibition of single-staircase apartment buildings over three floors. Traditionally, a huge percentage of the open-market affordable housing built were in small 12-20 unit single-stair buildings owned by mom-and-pop landlords. Now that this typology is banned, the developers and landlords that used to provide this affordable housing have been replaced by larger, costlier buildings owned by institutions. All of Europe and Seattle allow single-staircase small buildings, and I think it would be smart to find ways to allow them through the US.
How much does the construction itself cost? Hard costs have gone through the roof in recent years as a labor shortage and supply chain problems have come to head with a boom in remodeling. Added to this is a massive drop in immigration over the past five years, as construction has long been a field that has relied heavily on immigrant labor. The housing shortage itself further contributes to increased hard costs, as skilled labor increasingly lives far away from job sites and have fewer working hours due to the need to commute. As a result, it’s hard to give an accurate number for hard costs at the moment, but let’s go with $300 psf, leading to to a cost-per-unit of $300,000.
Another cost to consider during construction is financing costs. For simplicity sake, let’s say that you take out a loan to cover just the hard costs ($330,000 per unit and parking). If the project takes two years to build, at 7% interest you’re paying $49.5k per unit in interest.
If the project takes longer to finish than expected, we end up paying more interest. One major city-caused source of delay are permits and inspections. Building permits and inspections are one of the longest-serving and most important functions of local governments. However, the quality and responsiveness of building departments vary greatly by city. In San Francisco, the building department is notoriously corrupt, and it’s a well-accepted fact that you need to hire a “navigator” to even receive permits for a minor home renovation, one of the most brazen instances of institutionalized bribing in the US. In Los Angeles the building department is less corrupt, however they’re understaffed and slow to respond. According to one builder I’ve talked to, delays resulting from waiting for permits and inspections delays construction an average of six months. This delay adds $13.5k to the cost.
When it’s all said and done, we end up taking 4.5 years to build 21 homes for $546k each. If it wasn’t for the city restrictions, we would have been able to build 73 homes in ~2.5 years for $379k. In other words, the city caused a 44% increase in cost, two years in delay, and 52 fewer families getting new homes.
I gave this walkthrough not to argue that any specific city regulation should be repealed, but rather to show how holistically they drive up the cost of housing. It is completely reasonable to think 73 homes is too dense for a 1/3 acre lot or that parking should be required to prevent the overcrowding of street parking. However, it’s important to acknowledge that these choices come at the tradeoff of reducing housing that gets built and reducing housing affordability.
It is important to contextualize the effect that a 44% increase in cost, 52 fewer units getting built, two-year longer time frame, and an overall prohibition on affordable construction has on the broader housing market. These policies result in significantly fewer homes getting built throughout the city for many different reasons. In addition to the direct unit decrease in the individual project, unaffordable construction results in fewer homes through:
Time Value of Money: When investors put money into real estate development, one of the key metrics they’re looking at is the “Internal Rate of Return” (IRR), which is essentially “how much money will this project make me per year?” If a project takes twice as long to build, its IRR will be significantly lower. Investors will therefore need higher rents that increase the sale price of the building to make the investment worth it.
Small Developers get Priced Out of the Market: As I’ve mentioned before, much of the open-market affordable housing has traditionally been built by small “mom and pop” developers who sell their buildings to small “mom and pop” landlords. These developers are able to make their money building lower-renting apartments by taking advantage of lower-priced lots that are too small to be worth larger developers’ time along with better price efficiency by knowing a community well. However, these developers often aren’t able to operate in a city with unaffordable construction. First, if only a small percentage of lots are zoned to allow apartments, the smaller lots that mom and pop developers work off of don’t exist. Second, the individual risk per-project to small developers is much higher, and the long timelines and fees of the discretionary process makes the risk too high.
Lower Priced Projects Aren’t Profitable: In the “Hitting A Wall” section above, I talked about how developers will build housing up until the point where the risk-adjusted return of the top rent in a market segment is no longer profitable. There is a huge segment of the market where homes that cost $379k to build will be profitable, but homes that cost $546k to build will not be.
More Subsidies Are Needed Per Deed-Restricted Affordable Unit: Governments at the city, county, state, and federal government level allocate a certain amount of money each year to subsidize deed-restricted affordable housing. If the break-even point for the rental rate of a subsidized apartment would be $200k, an apartment that costs $379k to build would require $179k in subsidies, whereas if it costs $546k to build, it requires $346k in subsidies. Unaffordable construction cuts the number of subsidized affordable homes that can be built a year almost in half!
As I’ve written almost 6k words already, I’m going to keep this section short and sweet. I’ll go over some of the high level and common sense reforms that can enable more affordable construction, and I can expand on these policies in future posts.
Top Priority: Affordable Construction for Subsidized Affordable Housing: American governments spend billions of dollars subsidizing affordable housing, yet potentially half of that money is wasted on city-imposed costs. Whereas the other reforms will be more controversial and require trade-offs, any politician who says they support affordable housing should support changing policies to allow twice as many affordable units to be built with the money they’ve already allocated. A simple way to achieve this would be by passing a city-wide Affordable Housing Overlay, applying only to 100% affordable projects that:
Allows all 100% affordable projects to be built by-right
Removes parking requirements within walking distance to frequent transit stops and requires only one parking space per unit everywhere else
Simplifies zoning to base limits on height and open space, removing FAR, density, and complex design limits
Allow 100% affordable projects up to three stories high on any residential or commercial-zoned lot
Rethink Parking: As we saw in the walkthrough, one of the major cost drivers was parking requirements. Many people reasonably oppose reducing parking requirements because they believe that doing so will increase traffic and make it impossible to find street parking. However, the effect is often less pronounced in reality because developers will still choose to build parking to meet demand when necessary, and tenants who choose to live in parking-free buildings are typically those that don’t drive. That being said, there are ways of enacting reforms to ensure that reducing parking requirements don’t result in a cartastrophe
Unbundle Parking: Los Angeles has 1.5 parking spaces for every man, woman, enby, and child in the city. Part of the problem is that most of these spaces are tied up to the buildings they’re located in, and office-building parking sits empty at night while apartment parking sits empty during the day. Unbundling parking means allowing buildings to meet their parking requirements by sharing unused parking in nearby buildings.
Forced Unbundling: Forced unbundling is a radical policy that would require all buildings open up their parking to the public market. People who currently have parking included in their rent would get a corresponding rent reduction, and if they want a parking space they could purchase it anywhere one is available. Because all parking spaces would need to be registered with the city, cities could identify which neighborhoods have a surplus or shortage of parking and adjust parking requirements accordingly.
Prohibit Street Parking for Residents Without Parking: This is a simple approach that is being used by the car-free Culdesac development in Tempe, AZ. Any resident who moves into the community needs to sign an affidavit with the city agreeing that they will not keep a car or use street parking within two miles of their home. This could be extended to apply to anyone who moves into a reduced-parking building who doesn’t purchase a parking space.
Make Residential Development By-Right: The biggest changes that can enable affordable construction are ones that allow development across a large percentage of lots and ones that make development by-right rather than discretionary. For cities that are worried that these policies are too dramatic of a shift, a tailored policy can encourage smaller, more-affordable buildings without allowing more institutional luxury projects by applying only to projects with 20 or fewer units. Any upzoning should also be tied to tenant protections that prohibit displacement and ensure that anybody who lives in a rental units replaced with new housing has the right to return at the same rent.
Housing Audits: Many cities incorrectly believe that they have adequate zoned capacity to support needed development based on a simple count of the number of units allowed without any consideration to the feasibility of building that housing. If cities were required to perform city-wide audits on both their current housing and their zoned capacity, this could provide the data needed to show that their zoning works against the production of affordable housing. Particularly, many cities have zoning that allows for just a few additional units on lots that already have apartment buildings, and demolishing those buildings to build at maximum capacity would both greatly increase the cost to rent in those building while also reducing the profits of the landlords. In order for these audits to be successful, it’s important that they use real-world cost and time data from recent developments.
Footnotes:
1 6,000+ words later… at least I tried!
2 Remote work won’t be much help to housing imbalance because the people who need affordable housing are not typically the people who can work remotely. It’s unlikely that a major working-class job base will return any time soon to Flint, Michigan, and it’s unlikely that well-paid remote software developers will want to move to Gary, Indiana.
3 The topic of a future post
4 Typically, gentrification starts with single-family homes or unique properties that can attract bohemian tenants (such as turning warehouses into artists lofts), where the initial capital risked is much lower. New construction leading gentrification does sometimes happen, but it’s rare. I’ll write a future article covering gentrification in-depth.
5 Note: not every city counts parking against FAR
6 The discretionary process tends to be significantly more costly for subsidized affordable housing projects built by non-profits, because their grant and tax credit funding is typically costly to apply to and is only valid for a short amount of time. Funding often expires before a project is approved, so the non-profit has to start from scratch to apply for funding again.