Tuesday, April 15, 2014

Living in Your Mom's Basement

If you knew a deadly disease was slowly and unstoppably moving toward you, country to country, city to city, neighborhood to neighborhood, you and your community would try to do something to slow or stop its spread. Quarantines, walls with gates to control outsiders, a push, if possible to immunize, triage teams and hospital beds would be prepared. Some would even man the gates with weapons to protect its citizens from this dystopian scenario.

In many respects that is exactly what is happening within the current housing market in the United States. Everyone knows there is a problem, they know there is a massive imbalance, and they do not have a clue as to how to fix it, and many are manning the political barricades to fight it.

The Problem
Rents are now approaching 40% of income in many of the major cities. Historically it had been nominally pegged at 30%. This number varies from city to city and region to region. In Chicago the percentage has risen from 21% to 31%, and in New Orleans it doubled from 14% to 35%. The reasons are as varied as the communities themselves. But in every case from San Francisco to Miami, the increase is putting a profound impact on the region's ability to grow. If more is put into rent there is less for savings, food, transportation, medical care, and even entertainment. The region's soft economic underbelly is threatened.

The percent of income dedicated to housing continues to rise. Vacancies continue to drop to new lows in many regions and the pressure on rents continues to rise at rates much higher than inflation, as much as 4% this year (some cities such as San Francisco are double that). But then again who really believes that inflation is running just a tic above 1%; really, who believes that?

This is forcing many, especially in the middle and lower middle class, to stay home, double up, or find serious alternative housing (micro-apartments). These higher rents are pushing these classes out of the inner urban core to the community's periphery and then pay for transportation to get to their jobs. For the recent college graduate many are stuck where they grew up, in their old room, living like a teenager. Not what they had in mind when they went off to college, this right of passage and their dreams of independence are dashed. The social repercussions are many and worth studies in their own right.

Home ownership is surprisingly more affordable in many of these same communities but the banks are requiring higher down payments, less debt (i.e student loans, etc.), and more stringent financial qualifications. Even with parent's help, home ownership is still a dream for most people under thirty.

Build more housing both rental and ownership. Simple right? But there's a problem with the model. Because land and construction costs are rising across the board the soft costs to bring a unit to market are also rising and rising faster than incomes can keep up the builders are going upscale. And adding the long-drawn-out time to get approvals from municipalities (and their incredible high fees per unit) hasn't helped either. Many builders quickly jumped on the luxury rental market (the cost percentages of improvements and fees were more easily justified). This shift has actually forced rents down in these markets – but what average Joe or Josephine can afford $7,000 per month for an 1,200 s.f. apartment.

And the government isn't there anymore to subsidize housing. Go figure, at some point they will run out of money – and many municipalities have. And subsidized housing is dead-end housing. Once in the tenants never leave, why would you?

Here are some ideas:
  • Increase the land available for residential development in cities.
  • Change the zoning regulations to allow for more mixed-use developments
  • Develop a fee structure that targets middle class and lower middle class with lower development fees and extractions
  • Increase fees based on projected rents
  • Reduce the approval and entitlement timelines
  • Eliminate voter approvals of projects – support the work of city planning staffs and municipal agencies
  • Focus and expand on support for urban families – make three and four bedroom apartments affordable, support with schools and services.
  • As much as I hate to say it, densify, densify, densify.
None of this is new. We went through much of the same thing in the post World War II years from 1945 to 1955. Significant changes in where we build, how we build, and how we financed housing evolved out of this post-war decade. But these changes came out of the development community not the politicized, cover-my-butt government agencies and their reports and findings. My biggest fear is that the development industry itself can no longer step up to the plate and even bat for average.

Stay Tuned . . . . . . . . .

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