The Housing Affordability Crisis: How builders can address the problem

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The sharp increase in home prices has made it difficult for median income workers to buy homes, threatening the markets that builders serve. But builders have found ways to work with cities and states to build affordable homes without losing their shirts.

January 01, 2008
How they did it: The Franciscus Co.
How they did it: The Village at Delray
How they did it: Hannah Real Estate Developers
How they did it: Spring Arts Point

Hannah real estate developers' Adams Mill River House and Mill River House (above) luxury condominium complexes include a percentage of for-sale affordable units within an integrated housing model as part of an inclusionary housing ordinance in Stamford, Conn.

Affordable housing is in crisis, and it looks like there's no end in sight. Even as sales have slowed and home prices have come down, home ownership is still out of reach for many. So-called workforce housing — for city workers and public servants such as police officers and teachers — is scarce in urban areas, forcing many to purchase homes in the suburbs and exurbs and face long commutes. And as the subprime lending crisis has shown, many folks were able to qualify for loans that will come back to bite them as their rates adjust upward and they can no longer afford their monthly mortgage payment.

Where does the home builder fit into this picture? What can and should home builders, who are facing their own crisis, do to help buyers afford their own home? A combination of creative business solutions in collusion with state, local and federal government incentives can make a difference and create a win/win/win situation for builders, potential home buyers and society at large. Though it sounds like an unlikely alliance, there are builders of affordable home projects that have done it and are willing to share their secrets of success.

The root of the problem

Several factors contribute to the lack of affordable homes. During the housing boom, there was high demand for homes and lack of available land on which to build.

"We all remember Levittown [New York] after World War II," says Conrad Egan, president and CEO of the National Housing Conference, an affordable housing advocacy organization. "Mr. Leavitt went out to the potato fields of Long Island and built acre after acre of small but attractive homes. ... We don't have those kinds potatoes fields anymore."

The dearth of land has driven up home costs, and available land can be difficult to acquire through permitting processes that are often slow and complex — or land is zoned for commercial and industrial use or low densities that make it a poor candidate for building affordable homes.

While the cost of the average home has increased significantly over the last few years, incomes have not. Harvard University's Joint Center for Housing Studies' 2007 State of the Nation's Housing Report says five years of stagnating or declining incomes have added to housing affordability problems. In spite of meager gains in 2005, the median real income for all households fell 2.7 percent between 2000 and 2005.

Financial experts say expenses for housing should not exceed a third of income. But today many people spend 40 to 50 percent of their income on housing. According to "Housing for Working Families," a report published by The Center for Housing Policy, some five million working families spent half or more of their monthly incomes on the costs of owning or renting a home in 2003 — an increase of 60 percent since 1997.

So it's not just those on welfare, the underemployed and undereducated who are in need of affordable housing. Moderate income, college-educated professionals are feeling the pinch and often can't afford to live in the urban areas where they work.

Why you should care

The problem of affordable housing is understandable and unfortunate, but builders have businesses to run. Is it builders' responsibility to provide solutions to America's social ills?

Not necessarily, but in the long run it's in your best interest. There is a connection to the availability of affordable housing and the economic viability of the cities in which builders build.

Major employers don't want to relocate to and invest in communities where potential employees can't afford to live. These places won't be able to attract jobs, and fewer jobs mean fewer people who can spend money on goods and services and pay taxes —or buy homes.

"You have places like Phoenix that, at one time, was very attractive to employers, and it experienced a significant economic boom as a result," says Egan. "Now the people the city is trying to attract ... are beginning to have second thoughts. And those who relocated their companies or part of their operations there find that their employees are having a real hard time."

Government and the private sector share a vested interest in providing affordable housing in their communities. Ironically, their best bet at getting them built is in partnership with each other. The public sector needs the expertise of professional builders to produce quality homes. And as builders know, the public sector has a lot of say over what, where and when builders can build.

The public sector has to make it worthwhile for builders. Without incentives, Mike Fink, president of Leewood Real Estate Group in New Jersey, says it's close to impossible for a market-rate builder to build and sell affordable homes.

"When we build a three-bedroom, two-bathroom town home in an inner city in New Jersey where the land is cheap, it's going to cost us probably about $235,000 to $250,000 per townhouse," Fink says. "We're going to sell that for about $140,000 or less in order to reach into this demographic. So you can see that unless there are some government incentives involved to close that capital gap of about $80,000 to $100,000 a unit, there's no possible way to do it."

Incentives and challenges

There are almost as many grants, loans and programs to address the production of affordable homes as there are municipalities in which such homes can be built. There are mandated and voluntary inclusionary zoning ordinances. Some of these ordinances include density bonuses; if builders agree to set aside a specific amount of units in a project for affordable buyers, they are allowed to build more units on the land. There are financial incentives, housing funds and subsidies, Low Income Housing Tax Credits (geared toward rental units) and the like.

Many local and state governments will specify what buyers qualify for discounted housing. To qualify for workforce housing in New Jersey, Fink says your income must be between 35 and 120 percent of median income for the area.

"It ranges from about $45,000 a year up to about $80,000 a year," says Fink. "It depends upon the year, too. It can go as high as $95,000 a year. That's the median. For low income, it would be up to 50 percent of that. And for moderate income it's up to 80 percent of that."

The more builders know about what programs are available locally — and the pros and cons of each - the better position they are in to combine them to come up with a development deal that makes local government get on board.

And you'll need to win over communities with folks who may agree in principle that it's a good thing - just not in their backyard. Builders should be prepared to make the case to these groups about the mix of people in need of affordable housing: working families, elderly couples on fixed incomes, singles beginning their careers - even children or parents of people currently living in a community may need affordable housing so that they can continue to live there.

Developments with a mix of market-rate and discounted units are often better-received by communities and municipalities than projects that propose all affordable homes.

"We as developers have been separating people by income since World War II," says Cito Beguiristain, vice president of Auburn Development Group. "In order to create sustainable communities - sustainable socially, historically, culturally, and socially - a mixed-income approach is the proper approach. When you isolate people by income, especially in the lower ranges, kids grow up without financial role models — the business owner, the young lawyer. At the lower income ranges they don't even have the school teacher or police officer living next to them."


How they did it



Frank Spadea, CEO of The Franciscus Co. in Virginia Beach, Va., has built workforce housing within his market-rate developments in both Olive White and Virginia Beach, Va., under each municipalities' affordable housing program. His developments set aside a certain percentage of homes for sale at discounted prices for qualified workforce/affordable home buyers who earn between 80 and 120 percent of the area median income of $64,100.

Spadea says his endeavors aren't just the right thing to do; it's good for business. His ten-plex attached home design is one of the highest profit structure developments he builds.

"Our ratios of construction costs to sale price and land to sale price are good enough to give us the higher margins we need," he says.

The program gives builders density bonuses when they allot a certain number of their units to affordable or workforce housing. In Virginia Beach, for example, the density allotted increases 30 percent if you set aside 17 percent of your units for workforce housing. If you're planning a 100-unit project you could up it to 130 units, and if 17 percent of those units were set aside for workforce housing, that project could move forward.

"When you ... reduce the price by 25 percent on 17 percent of those houses, overall we've only reduced the sales volume by 4 percent in the project," Spadea says.

The discount on the workforce units is taken as a second mortgage on the home and is held by

the city. So when the buyer eventually sells the house, that second mortgage gets paid off by the purchaser. This way, the affordable housing program becomes a revenue generator for the city. The second mortgage keeps the appraisal value of the discounted homes at the same level of the market rate homes.

"It's a win for the builder in that he gets higher density," Spadea says. "It's a win for the city in that they get affordable housing. And it's a win for the buyer in that he gets a market-rate house at a lower price."

How they did it



The Auburn Development Group has been building affordable homes in Florida for the past 19 years.

"We are a for-profit company, but we have a social mission to provide affordable workforce housing," says Cito Beguiristain, vice president of Auburn Development Group. Auburn's latest foray into this arena is The Village of Delray in Delray Beach, Fla. The development's 1,000 new homes will be built on 60 acres — 400 of them sold as workforce units — and will rank as Florida's largest workforce housing project. The $200 million project was partly funded by the state's Community Workforce Housing Innovation Pilot Program.

"The city of Delray is extremely innovative in its approach," says Beguiristain. "They created a workforce housing ordinance, and within this ordinance they created overlay districts on behalf of various developments. If you create workforce housing, you're able to get density increases in these districts. The ordinance also allowed for some variance in terms of setbacks that made this density buildable while maintaining the scale of the community."

The CWHIP program specifies partnerships that involve at least one public sector entity and one private sector for-profit or nonprofit entity. Auburn is working with the Delray Beach Housing Authority, which is contributing land it owns to this project. Beguiristain says there is a culture and protocol in public versus private sectors, and each needs to understand and communicate its differences to best work together.

"A lot of that can be resolved through effective communication between the parties and through a cooperative approach — each group focused on what they do best," he says. "You need trust. You need honest partners who do what they say they are going to do. The cities and private developers that figure that out are going to win in the end."

How they did it



A few years ago, Stamford, Conn., created an inclusionary housing ordinance that required all developers within the city to do one of three things. They could include a certain percentage of affordable units in their projects; they could buy out of the program entirely by making a contribution to a not-for-profit organization that would build affordable units; or they could build affordable units off-site in another location relative to the development under discussion.

"The brilliance of Stamford's program is that you have to do it."
— Seth Weinstein, developer

Seth Weinstein of Hannah Real Estate Developers says he chose what he describes as the most challenging option: including the affordable units within his projects.

"I just think it's a better way to go," says Weinstein. "It's more community-oriented. I also think it helps us in our relationships with our zoning boards and continues our standing in the community as good corporate citizens of Stamford.

"And philosophically I believe it's important to have integrated economic housing," he adds. "Having grown up in New York I now see the effects of so-called project-style housing; it has a very negative impact on lifestyle in terms of people in economically, not to mention racially segregated housing. Mixing affordable units with high-end units is good. There's benefit for both to live in proximity to each other."

Whatever option builders choose, they are making a contribution to the cost of building affordable homes in Stamford.

"The brilliance of Stamford's program is that you have to do it," says Weinstein. "You have to use one of those three options to get the approval. From my perspective, it's a development cost just like environmental cleanup or buying the land."

How they did it



Spring Arts Point is an urban neighborhood of town homes priced in the $300,000s. The first 16 units of this 60-unit project are complete, and the second phase has begun.

"We're very proximate to Chinatown in Philadelphia," says developer New Urban Ventures' President Lawrence Rust. "It's a very mixed neighborhood: Hispanic, black, Asian and white.

"The permitting process was not as difficult as the land assembly process," Rust says. "When you acquire property through any of the agencies in the city of Philadelphia, you can be approved by the agency, but you cannot acquire the property without a resolution in city council. You have to appeal to and work closely with the political interests to get it done."

And the politicos steer you back to the NIMBYs to garner favor. There was a 4-year process from concept to acquisition of the land, during which there were approximately 24 meetings with the neighbors' organization.

"We initially went to the neighbors with the idea that we would subsidize 10 percent of the units that we build out-of-pocket to make the units affordable for people making 80 percent or more of median income," says Rust. "At this point, we are subsidizing six town homes to the tune of $150,000 per house."

Lawrence Rust, President, New Urban Ventures

He could afford to do so because when the deal was originally made, the price of the land was low relative to a then-rising market.

Rust would like to see the city of Philadelphia develop master plans for affordable housing on the land that it owns. The city could do the advance work of getting the political and neighborhood approvals for zoning and coming up with a cohesive plan that works economically for everyone.

"I'd like to see that property offered for sale to builders with pre-approvals," says Rust, "and with the understanding that the price would be reduced, the densities increased or some quid pro quo so that the market-rate builder can then afford to do subsidies like we're doing now.

"As a builder I need significant amounts of property to make this work in order to generate subsidies. I can't build onesies and twosies in various locations."

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