America’s Affordable Housing Nightmare and Pragmatic Solutions to Solve It
The affordable housing crisis is one of the most acute problems that exists in America today. Only 37 affordable rental units exist for every 100 extremely low-income renter households. Quality affordable housing is a direct impediment for people to achieve economic prosperity, holds back the whole economy, and directly threatens the premise that full-time working people should always be able to have an adequate quality of life for themselves and their families.
The housing crisis in the United States has developed over decades, and while complex, is the direct result of a few key variables:
1) Rising housing costs, while low and middle income wages have remained relatively stagnant over the past four to five decades.
2) Most housing developments being built for the upper-middle class or the upper-class segments of society.
3) More recently, inflationary construction costs that do not allow the financing on affordable housing projects to make economic sense.
4) Restrictive zoning laws that have historically discouraged the development of affordable housing in areas where it is needed the most.
It is believed that the shortage of affordable housing costs the American economy $2 trillion a year via lower earnings and a loss in productivity. Without access to quality housing, people are not given the proper platform to increase their income. The growth in GDP between 1964 and 2009 would have been 13.5% higher if there was more access to affordable housing. This would have led to wage increases of $8,775 per worker over that period.
Fixing the problem of housing insecurity that exists for tens of millions of Americans should be a top priority for real estate executives throughout the country. Not only is it good business, but more importantly it is a societal good.
Some broader approaches to solve this issue include:
1) Doing a better job of preserving the current stock of affordable housing units.
In the 10 years prior to the 2007 housing market downturn, more than 1.2 million affordable units were lost either due to rising rents, condo conversions, or the abandonment and demolition of existing buildings. By working with the proper private, beyond the 4% Low Income Housing Tax Credit, to provide beneficial financing terms to developers and operators to preserve the current housing stock, the federal and state governments can play a key role in spearheading the preservation of affordable housing units.
2) Experimenting with new construction technology
One of the main drivers of the affordable housing crisis is that many affordable housing developments are not profitable to developers, even with the proper federal and state subsidies to make them pencil out. This is because developers are not compensated for high building costs with market-rate rents. A way to fight against this is to lower the cost of constructing new housing. Modular housing, a relatively new type of construction, can speed up the timeline of a project by as much as 50% and reduce costs by as much as 20%. This does not consider the amount of money that is also saved from having to pay less interest on a construction loan since the loan will be outstanding for a shorter period. While still not widely accepted, modular construction is starting to be seen as a potential strong tool to help produce more middle and lower income housing units around the country.
3) Getting rid of the stigma of affordable housing
Many experienced real estate professionals do not want to transact on affordable housing deals due to how the industry was perceived for many decades. Everyone knows the prototype of the typical slum lord who doesn’t make the proper repairs to his property and disregards the basic needs of his tenants to make a quick buck. That is not what the modern affordable housing industry is. The industry today is made up primarily of professionals whose first priority is to create a safe and welcoming environment for their tenants. Operators and developers of affordable housing today oftentimes pay out of pocket to offer supportive social services to their tenants. The affordable housing industry has matured beyond what it was years ago and is even starting to attract a significant amount of institutional capital. Getting more developers and operators into the space and encouraging them to work on projects will help to bring more much needed supply into the market.
Affordable housing will continue to be one of the main societal challenges facing America over the coming decades. Our ability as a country to solve the affordable housing crisis with high-quality solutions that create homes that people want to live in will lead to greater economic
growth, less social upheaval, and most importantly a chance for lower and middle income people to have a high quality of life no matter their vocation.
While federal and state governments can propose many programs to help solve the affordable housing crisis, I believe 80%-85% of the solutions for affordable housing will come from the private sector. Whether it is novel construction technologies, creative financing mechanisms, or property management software that can lower Operating Expenses to support lower rents, entrepreneurial innovation will be at the forefront of solving this crisis.