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By Tom Peterson
Since World War II, the federal government has had its hand in promoting and supporting affordable housing through GI Bills and low-interest financing. These policies and subsidies were very effective in helping returning GIs and other first-time homebuyers get into their first homes. But with rapid economic growth and the Baby Boom, traditional federal subsidies alone have not been able to keep up with the growing affordability gap. Families need safe and decent places to live. Communities need an adequate supply of housing, at all price levels, and businesses need housing that is affordable for their workforce.
Affordable to Buy
The federal government defines housing affordability as housing costs that do not exceed 30 percent of household income. Housing costs are defined as rent or principle, interest, taxes and insurance combined (PITI). If we assume you’re making the 2002 median income of $43,318 (U.S. Census), you would be spending no more than $1,083 per month on housing costs. Now, if we also assume that you are purchasing a home at the 2002 median price of $158,300 (National Association of Realtors), you would need to come up with a down payment of $28,890 to purchase that home and still meet the definition of “affordable.” Of course, there are other factors that influence this deal including mortgage rate, term (length) of the loan, points, and closing costs. Change any of these factors and your down payment or monthly payments could go up or down. And when you factor in points and closing costs, your total cash outlay at closing would be over $33,000! By the government definition, this home may be affordable to own, but with this much cash required up front, would it be affordable for you to purchase?
Affordable to Build
One major factor in affordability is the cost to produce housing. Builder groups often claim — and government statistics support these claims — that home building traditionally leads the nation out of recession. It’s no wonder when you consider that home building benefits not only the trades but also manufacturing, professional services, and even transportation. But the demand for new housing can cause shortages in labor and materials. Delays due to weather or permit issues also add to costs and these costs get passed on to the buyer. Builders of new homes typically operate on fairly narrow net profit margins of 5 percent to 10 percent, so even a small spike in costs can cut drastically into a builder’s profit and increase housing costs to buyers.
An experienced builder can help the homebuyer keeps costs down through careful design and material selection. This process is called “value-engineering” and, as a buyer, it is in your best interest to find a builder who thoroughly understands it. But while the building industry certainly benefits from innovations in materials and methods, the independent builder is generally not able to have much of an impact on overall housing affordability. Think of it this way: A $750,000 mansion, at its core, is built with essentially the same materials as a $125,000, three-bedroom ranch. It’s not just the finishes that make for the inflated price tag.
Bringing Housing Costs Down
One of the key ways to achieve affordability is to increase housing density. Land use regulations at the federal, state, and local levels can have a tremendous impact on housing affordability. Wetlands regulations, for example, take large tracts of land out of the housing market, reducing supply. Local zoning rules that require five-acre plots for each single-family home also add pressure to land supply. There are certain fixed costs to developing any parcel of land, including site planning and permits, roads, power, sewer, and water. All of these costs have to be included in the selling price of the housing that is built on the parcel. If zoning or other regulations limit the parcel to the construction of one house, all of those development costs will have to be borne by that single home, making the price go higher. If zoning regulations allow a higher density of housing—more houses per parcel—the builder can spread the land development costs over all of the housing units, so the same house would actually cost less to build and buy.
Housing Policy for Affordability
Local governments usually jump in when a shortage of affordable housing starts to harm the vitality of the community. In many areas of the country, essential workers such as police, firefighters, medical workers, and teachers cannot afford to live in the communities where they work. Some municipalities are now offering subsidies and other incentives to close the affordability gap and lure workers closer to their jobs. Other measures employed by local and state governments include housing affordability mandates and inclusionary zoning ordinances.
In Massachusetts, for example, Act 40B is a state statute that requires every municipality in the state to have a housing policy with the goal of having at least 10 percent of its housing stock affordable to people earning 80 percent or less of the area median income (AMI). Such measures may require that developers increase housing density to more efficiently use available land. Some rules require developers to make a certain percentage of the homes they build affordable. Act 40B was one of the first such statutes in the country and has been partially responsible for the creation of approximately 18,000 units of housing that meet this level of affordability. Maine followed suit with a similar law. Today there is a growing list of states, in every area of the country, with existing or pending legislation that promotes and/or mandates housing affordability.
There are also a number of nonprofit organizations and programs that specifically address housing affordability. Community land trusts (CLTs), for example, are usually private, nonprofit entities that secure grants and donations to purchase land and housing for long-term affordability. Most CLTs sell the houses but hold the land “in trust” through long-term land leases to the house owner. Most CLT leases require some sort of equity limitation so that when the house is sold, it will remain affordable to the next buyer. Other organizations include Habitat for Humanity, NeighborWorks, state housing finance agencies, and local housing authorities. One relatively new federal program, administered through local housing authorities, allows eligible renters to use their Section 8 housing vouchers to purchase a home. Local banks and mortgage lenders often have the latest information on loan programs for first-time buyers.
Case Study: Community Land Trusts Save Housing
The city of Burlington, a town of about 40,000, is Vermont’s largest city. Despite its stable economy and small-town charm, Burlington has its share of big-city problems: high rents, absentee landlords, aging housing stock, and wages that lag behind rising housing costs. In 1984 city leaders and housing advocates established the Burlington Community Land Trust (BCLT), the first municipally funded CLT. Today it is the largest CLT in the U.S. with over 2,500 members.
A CLT is a democratically controlled community organization that acquires land and buildings and holds the land in trust for the good of the greater community. In terms of affordable housing, this model removes the cost of the land from the housing-cost equation, thereby making the house much more affordable. Additionally, the land trust provides a long-term (usually 99 years), renewable lease to the homeowner. In exchange, homebuyers agree to limit the price of the home if and when they decide to sell it. In many cases, the CLT gets the first option to buy back the house at a formula-determined price. The homeowners get less equity out of the sale, but this limitation ensures that the house will be affordable for the next buyer.
On average a first-time BCLT home is affordable to people at 62 percent of the area median income. On resale, the average BCLT home is affordable to people earning 57 percent of AMI, but the sale brings owners a net equity gain of over $6,000.
Limiting equity may have been a radical idea 20 years ago, but the model has gone mainstream. When the Burlington Community Land Trust was established in 1984 there were only a handful of CLTs. Today there are over 160 in 34 states and others in Canada and the U.K.