Reduce Affordable Housing Need in Three Steps

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.”

Source: Minnesota Housing Partnership

And, here you can see where those people paying so much of their income in rent live.

Rental Burden (paying more than 30% of income in rent)
Map credit: Elliot Altbaum

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?

Twin Cities Metro Area Median Income Chart, Showing Annual Income Levels by AMI
Source: OwnaHomeMN.org

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.

Three Recommendations

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.)

1. 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.)
2. 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.
3. 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.

1. 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.
2. 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.)

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.