This is part 3 of a series on the interaction between the rental housing market and rents. Read part 1, “How I Set Apartment Rents,” and part 2, “Housing Markets? Humbug!“
I’ve dedicated the last 15 years of my life working on affordable housing policy. Mostly, I’ve worked where some sort of subsidy helps make it (more) affordable.
In this post, informed by what I’ve learned about the scope of our problem and the inadequacy of existing subsidy programs, I’ll share actions and policies that I think could ameliorate our affordable housing problems.
It’s common knowledge we have an affordable housing problem. It might be surprising to learn just how bad the problem is. I had a lengthy conversation with Leigh Rosenberg of Minnesota Housing Partnership trying to find a sourced number of people needing affordable housing, and learned why it’s hard. She offered a short-cut. In the Twin Cities,
“Over 91,000 renter households and 72,000 owner households now pay more than half of their income for housing in the Metro area. The burden falls especially heavily on lower-income area residents.”
Using HUD’s 30% of income definition of affordable, 71% of renter households with incomes below $50,000 a year are “rent burdened.”
And, here you can see where those people paying so much of their income in rent live.
Affordable Housing 101
I want to figure out how we actually solve this huge gap, and I’ve learned that we can’t do it with subsidy. (Maybe I should say, “won’t” as there isn’t the budget or political will to spend the ballpark $7 billion it would take subsidize construction of homes to assist those 91,000 renter households paying more than half their income for housing in the Twin Cities Metro).
When it comes to subsidizing apartment construction, last year had unusually high funding levels, and we funded 3,500 units. To reinforce how inadequate that is, that number includes new construction and rehabilitation of existing housing — across the entire state! In part 2 of this series, I argued we need 2,210 units in Minneapolis alone (at any price point) to get to a more tenant-friendly market.
We also offer subsidy through rental assistance. Funding here is equally inadequate. In February, the Met Council opened up their waiting list for Section 8 vouchers for the first time in EIGHT years. 36,000 people applied, and only 2,000 of them will get on the WAITING list. They’re likely to be waiting for up to three years. The Minneapolis list still has 9,000 people on it, and it was last opened in 2008.
Yikes. I hope you don’t need that assistance.
Who gets the subsidy?
We are not going to subsidize our way out of this problem, and it seems to me there might be better ways to serve moderate-income people who currently struggle to afford adequate, safe housing. Personally, I’d like to reserve the subsidy for people need it most.
With some changes, I think it’s possible for the market to serve individuals and couples making $30,000 – $35,000 (50% AMI) or more, and hopefully most households at 60% of AMI. I recommend three steps to get there.
Implementing any one of these will help, and if we do all three, we’ve got a response that might even match the scale of our current housing cost burden problems. (Remember, this is in addition to the subsidized housing we are already building.)
- Change policies to remove barriers to development and to lower the cost of building new homes. (I recommend focusing on apartments, whether owned or rented, as fixed costs like land and predevelopment can be lowered more when shared between multiple units.)
- Build a ton of housing. A lot. Tens of thousands of units every year regionally. MHP’s December 2014 2×4 report reports over 14,000 building permits (single family and multifamily) issued through September 2014. I’m talking about twice that. Or more.
- Raise the minimum wage. Adjusted for inflation, minimum wage is worth $2.69 less than it was in 1968. It simply doesn’t cover the cost of building and maintaining even modest, safe housing.
Add enough supply, and the calculus for landlords changes. Lower the cost of supplying apartments, and the calculus for developers changes. Add income, and fewer people need a subsidy-boost.
How Does it Work?
Lowering development costs and building much more housing addresses two things.
- Allowing more and lower-cost new housing opens new markets to developers that are currently not financially viable. To take one simple cost-reducing measure related to parking. It costs around $25,000 to construct a single structured parking space. If a developer can reduce construction costs by $25,000/unit because parking is not required, a developer can make equal profits on lower-cost housing. There are a host of possible cost-reducing policies.
- Building a ton of housing brings down the cost of housing by increasing competition for renters.
Raising minimum wage helps reduce the number of very-low-income people — putting more people in the ranks of those who can afford housing. Note that if we raise minimum wage but don’t build more housing, the most likely outcome is that people bid up rents on existing housing. The only winners in that scenario are the owners who get larger profits.
All three together frees up the subsidy we’re currently spending to help professional families buy first homes and moderate income people to rent $1200/month apartments. Then, we can offer it to people who the market really cannot serve.
The Policy Prescription
The minimum wage change is fairly straightforward, given political will.
Building the housing will have to be done by the private sector. Removing barriers (for example, lack of developable parcels) and allowing lower-cost units (for example, smaller unit sizes, faster approvals process) encourages the private sector to create more housing. Both approaches simplify project financing by lowering risk of a project being derailed, the market changing before the project is complete and occupied, and simply by shrinking loans.
So what policies could remove barriers and allow for lower-cost housing to be built? It’s a list of policies that have gotten more and less play on streets.mn.
- Allow lower-cost housing:
- Eliminate parking requirements (and allow for properly priced parking).
- Reduce minimum unit sizes.
- Shorten the development approvals timeline (to reduce holding costs).
- Remove barriers:
- Allow greater density.
- Reduce minimum lot sizes. (Here’s one example of an approach.)
- Zone for higher densities. (At a minimum, allow for densities in traditional Minneapolis and St. Paul neighborhoods.)
- Discourage land speculation, making it expensive to hold surface parking lots or vacant buildings indefinitely and increasing access to developable land.
- Reduce risk
- Make the approvals process more predictable.
- Design a clear, single-adjudication/expedited approvals process for controversial projects. (See this extreme example, or this one.)
- Design a coordinated, predictable review process.
- Reform zoning to minimize the need for zoning variances or conditional use permits. (Here’s one idea.)
- Make the approvals process more predictable.
I’m sure this isn’t a complete list. Help me out in the comments. What an you add?
*Minnesota Housing coordinates an annual Consolidated Request for Proposals, where most Minnesota agencies and organizations that award subsidy jointly review proposals and application processes. They jointly funded 3,650 units in 2014, 1630 units in 2013, and 3100 units 2012.
A few other thoughts:
– Zone for more mixing of uses along with residential upzoning, not just along commercial corridors. Germany has a ‘daily use’ test for what commercial uses can go in neighborhood cores. Yes, a form-based code would do this in practice, but we may need the intermediate step to show it can work for non-hog-farm uses.
– Minneapolis/St Paul can’t shoulder all the burden in a market-oriented world, nor should it from a public subsidy perspective (see Orfield’s work). We need these policies to take hold more broadly in suburbs, and better all-day transit service (small local routes & connections to both downtowns) to allow parking-lite/free development to be possible.
– Shift state & federal housing tax expenditures (capital gains exclusion, mortgage interest deduction, property tax relief/deduction) to public housing/subsidy programs. At least the expenditures on families well above the AMI.
I’d vote for you.
But, will you donate to my campaign?
Depends. What’s in it for me? 😉
Show me the subsidies!
While we do need to increase our current development in some areas of the city another solution would use some of the 550 vacant homes in the city. To restore many of these properties takes less investment that to demo and construct new developments.
A community land trust (CLT) is an alternative model that separates the ownership of property from the ownership of the land on which that property is built. In effect, organized citizens remove land from the private, speculative market where its value is difficult to control.
The Value of Land: How Community Land Trusts Maintain Housing Affordability
“The CLT model’s flexibility and adaptability to local conditions make it an appealing solution to a range of problems affecting communities across the country including disinvestment, gentrification and displacement, foreclosure, loss of affordability due to expiring public subsidy, housing discrimination, and decreasing social capital.”
If reducing speculation is a goal, wouldn’t a land-value tax coupled with some sort of zoning reform that allows 50% (**or some number**) greater floor area ratio than the average of the parcels around it do the trick? Land taxes would be high enough to keep people from holding onto under-utilized parcels (vacant land, surface parking, vacant homes), but the cap on new development intensity would keep vacant parcel owners from holding out for the huge payment from a high-rise buyout.
I think there are issues with this approach ( http://danielkayhertz.com/2014/11/05/height-restrictions-hmm/ https://pedestrianobservations.wordpress.com/2014/11/21/height-limits-still-a-bad-idea/ ), but it could work in some cases.
I’m not sure how a CLT is any different/better than a public or non-profit housing agency in practice, beyond the property ownership model. People who buy property & lease the land get all the costs of maintenance but a below-market price appreciation on the home. Plus none of the supply increases if the property owners aren’t allowed to improve the parcel. Maybe I’m missing something, but it seems like a non-profit owner/operator of a larger multi-family complex could accomplish affordability/displacement goals while also increasing supply since it owns both the land and the buildings.
CLTs are dependent on subsidy. I like the model. I also ask, what is the best use of the very inadequate subsidy? And what can we do that doesn’t require subsidy?
Great article. To what extent do you think resident opposition adds to the cost of development?
It’s amazing how much free-floating opposition there is (see Nye’s) that goes something like this: (1) “Why do we need to build more rentals? Don’t ‘real’ people want to own detached homes?” (2) “OK, maybe we need more affordable housing, but this isn’t the answer because these units will all rent for $X!” (Forgetting that more supply of anything should reduce the cost.) (3) “They’ll ruin the ‘character’ of our neighborhood.” (4) “They’re ugly — too modern!”
It would be nice if there were some sort of information campaign to address this.
Paul, I’ve been wondering how much each of these could help, and to be honest I don’t know. I’ve been wondering what follow-up posts might be useful, and because I share your question, I’ve been thinking about whether I’m able to contact a couple of developers who have worked on especially contentious proposals and ask them how much of the cost was due to holding costs and fighting project opposition.
This subject definitely needs more exploration. In Saint Paul, for example, it is interesting for me to hear people champion “affordable housing” as long as it is happening elsewhere other than their neighborhood. However, as soon as students want to rent next door or upper levels of garages are proposed to be converted to ADUs or teardown and rebuilds are being discussed, residents in neighborhoods like Mac-Groveland and the Merriam Park neighbors in grids south of I94 cry foul and start talking about protection of their property values.
As a property owner myself, I get that no one wants development that is going to decrease property values. But, I can’t see that development that is following the market would be all that harmful to current property values in neighborhoods like that, especially if they are living in an already popular area where people want to live.
I have found documents citing that regulation of this sort- restriction student housing, ADUs, and more dense development in those types of neighborhoods- is responsible for driving up housing costs/property values, but I’m sure there is evidence that allowing a market-based approach would not harm current housing values as much as people might believe. I look forward to further exploration and follow-up posts on this topic!
Actually an information campaign is a really good idea. The mayor and city council are ostensibly committed to increasing the population (and by extension the density) of Minneapolis, but there is a huge amount of ill-informed NIMBYism (I don’t care if that term is non grata, it’s still very much appropriate for a large portion of the opposition to new development). Maybe the city itself could run some kind of informational ad campaign to explain how new development is beneficial and dispel the most commonly used opposition tactics with actual information.
If this unchecked (and mostly uninformed) ‘community’ opposition keeps up Minneapolis will become ever less attractive to developers and we’ll end up with the same three big developers stamping down cookie cutter cut-rate garbage on only the safest of bets instead of getting anything bold, interesting, or even slightly risky. Plus you have to wonder if the vehement opposition to development will make new projects extra unattractive to developers if the market cools down even a little.
Janne thank you for working on this series. All three parts have been accessible and well written.
It’s really good to hear that! I’m wondering what else could be added — is there anything else you are wondering about?
I’m behind on my reading — here’s a fantastic piece on affordable housing by streetsmn’s own Bill Lindeke from MinnPost. It’s an excellent compliment to this.