Affordable housing demand is greater than ever and the pandemic exacerbated a problem that is already approaching crisis levels.
By Matthew Davies
President Harmony Communities
The affordable housing industry is in dire straits. Record-high costs for construction materials coupled with labor shortages have hampered the development of new affordable housing communities. Yet the demand for affordable homes is greater than ever. According to the National Low Income Housing Coalition, the U.S. has a shortage of 7.2 million affordable and available rental homes.
In existing communities, eviction moratoriums put in place during the COVID-19 pandemic mean that many landlords and owners and operators of affordable housing communities must maintain their operations without the major source of their income – rent. At the same time, families are struggling while housing costs rise faster than incomes; Harvard University’s Joint Center for Housing Studies estimates that nearly half of renter households spend more than 30 percent of their income on rent.
In many ways, the pandemic exacerbated a problem that is already approaching crisis levels; missed work due to illness, joblessness, and wage reductions during the pandemic could drive an estimated 250,000 new people into homelessness, according to a Columbia University study.
In the state of California, the need for affordable housing expands past lower and middle-income families. With an average median home price upwards of $600,000, California housing is among the most expensive in the country. According to a study from the California Department of Housing and Community Development, in every major metropolitan area and its surrounding counties, between 30 and 60 percent of residents cannot afford market rent.
It’s no longer just cities that are seeing a demand for more affordable housing either. With fewer people required to physically report to work in cities, many have fled urban areas in search of a more affordable solution.
In California, multiple attempts to solve the affordable housing demand problem at the government level have been either proposed or implemented. But a state law passed in 2020 to cap the amount by which landlords raise rent and eighteen other bills aimed at increasing housing production, the problem remains, demonstrating that other solutions are needed. In this article, I’ll discuss four alternative solutions to increase the supply of affordable homes where they are needed and help those who truly need assistance.
Solution #1: Reduce regulatory barriers to affordable housing
In many areas, zoning laws prohibit affordable housing development.
For example, in most U.S. cities, it is illegal to build anything other than single-family detached homes on three-quarters of an acre of land. When multifamily housing is allowed, zoning rules including building height caps can limit the profitability of these developments. To increase the affordable housing supply in areas where it is needed most requires reducing the regulatory hurdles that developers need to go through in order to build more affordable homes.
Solution #2: Maximize land space with greater densities
With zoning regulations relaxed, developers can utilize density to maximize the available land and provide housing for more people. Two creative ways to do this are through tiny homes or by going vertical, an approach known as upzoning.
A typical subdivision with site-built, single-family homes requires on average about an acre for every 4-5 homes. By contrast, a community of tiny homes holds up to 25 or even 30 residences per acre. Tiny homes are economical, practical, and can go a long way toward solving many of our nation’s housing concerns.
Likewise, high-rise buildings can house more people per acre than their single-family home counterparts. A typical high-rise building provides about 100 housing units on an acre of land. If each unit houses three people, a single acre can provide housing for 300 people.
Solution #3: Incentivize density with tax incentives
When paired with relaxed zoning restrictions, putting higher taxes on expensive, but underused, land can also incentivize affordable housing development.
Unlike property taxes, which charge a similar rate for buildings and land, land value taxes charge a higher tax rate on the land and a lower rate on the structures themselves. In other words, the land tax rate is the same whether the land owner uses it for commercial space, apartments, or any other use. Tax abatement programs are available in some cities to offset the cost of providing affordable housing.
Solution #4: Grant rent subsidies – not rent control – to ensure help is given where it’s needed most
Rental subsidies provide financial assistance to households who need it. By contrast, rent control caps the frequency and amount by which landlords and property owners can increase the rent in residential units across the board. On the surface, rent control may appear to be a viable solution to making rent more affordable, but upon closer inspection it becomes apparent that the opposite is true.
When a state, city, or county government adopts rent control, the regulation is applied to everyone, regardless of need. As a result, in rent-controlled communities, everyone — even those who can easily afford market rent — receives a subsidy that is paid for by the government, the property owner, or some combination of the two.
Rent control can make it difficult for property owners to maintain their business. When owns and operators of affordable housing communities find themselves unable to maintain their businesses, they may seek out a more lucrative option, displacing people from their homes and lessening the affordable housing supply, ultimately driving up prices for homes in the area and making them the polar opposite of affordable.
Unlike rent control, rental assistance programs target people based on need. Instead of imposing a ceiling mandate on rent prices, governments provide rental assistance only to people who meet certain income criteria. These programs offer a more targeted approach to helping those in need while requiring those who can afford the rent to pay market rates, thereby taking some of the burden off the property owners.
Conclusion: A Multifaceted Plan
Conquering a complex problem like affordable housing demand requires a multifaceted solution that addresses both housing supply and assists those truly in need.
The greatest way that government can help solve the affordable crisis in our country is to use a twofold approach that involves (1) reducing the number of regulatory and legal hurdles that developers have to face (which spurs development and works to increase the housing supply, therefore keeping prices down) and (2) providing help where it’s needed, to ensure tenants get the assistance they need while ensuring landlords and property managers continue to receive the income they need to ensure their communities thrive and their businesses stay operative.
A final note: when considering solutions like land value tax reform and upzoning, caution must be taken to prevent displacement of existing renters, especially in high-demand real estate markets, where newer, larger buildings could have broad appeal and subsequently drive rent prices up. In these instances, housing vouchers can help.
About the Author:
Matthew Davies is the founder of Stockton, CA-based Harmony Communities, which currently owns and operates thirty-three manufactured housing communities in the western United States. An investor and community development professional working for affordable housing solutions, Davies’ goal is to help bring the opportunity for homeownership to people in his home state who otherwise could not afford to buy a home.