Housing Affordability . . .
We hear a lot about housing affordability; rents are too high, home prices are unfordable, young people cannot afford their first home. While all these statements may be true, we need to understand the underlying issues before we can address solutions. Let’s explore the elements behind the costs before making a judgement as to who is to blame and if there are workable solutions.
- Housing: The value of housing, like any commodity, is based on supply and demand. When there is a shortage, the price goes up, when there is an overabundance, the price goes down. Whether single family or multi-family, can the available inventory meet the demand? If not, prices will continue to rise.
The population in Michigan has been decreasing for quite time; however, housing needs don’t meet current demand. Why is this? Costs? Risks? Government Regulations? The Cost and Availability of Labor, or the Cost and Availability of Land?
Thinking back to 2004, developers, builders, and trade professionals were plentiful; banks were eager to lend. By 2008 the bottom had fallen out of our economy. Companies were leaving Michigan in large numbers; people were losing their jobs and their homes. The real estate market was struggling with an overabundance of foreclosures, driving prices down. Builders, Trade Professionals, and Developers lost millions and in some cases their businesses. Trades people could not find work and retired or left the state. New construction came to a halt leaving banks holding bad loans along with vacant parcels peppered throughout our communities in various stages of development.
It took time and additional personal investment before banks would lend on new construction and development. Developers and builders alike were reluctant to take further risks due to previous losses and young people were not entering the trades. Yet people needed homes, the demand was still growing, but the inventory was not.
Just when it appeared there was a light beginning to shine at the end of the tunnel, COVID shut things down again. Products were not being produced, inflation hit 9% and regulations imposed by government made it harder for people to produce goods and services, including homes. The demand for housing was still there, but available inventory continued to decline, driving values higher than we had ever seen. You cannot have ten people bidding for the same property and think the price is not going to be inflated.
As we review the process of building and development, remember where we started, 9% inflation, lack of available labor and inventory, and multiple risk factors.
- Land Costs: There is only so much land available for development and even less is buildable. Not all parcels are equal due to wetlands, flood plains, easements, and the availability of utilities. The lack of available land causes values to increase.
- Land Development: Once land has been selected, the possibility of development begins with zoning, surveying, soil testing, and site plans. This process is lengthy, labor intensive, very expensive and paid for by the developer.
- Utilities: In most areas, local governments require the developer to install and fund all the roads and utilities in a new development. These costs are added to the price of the land and ultimately the home. If the developer can connect to main sewer or waterlines within close proximity of the proposed development, it is more cost effective than trying to connect to the main line a mile or more away. The availability of utilities can be a deterrent if too costly.
- Permits: There are several permits throughout the proceeds. Permits can be costly both in time and money.
- Phase 1 Costs: The costs attributed to Phase 1 of any development can run into millions of dollars and are incurred by the developer before a single home has been started or sold. As an added note, these costs are usually covered by borrowed money, so we need to add the interest costs to the equation.
- Home Construction: Many people feel the increased cost of building is due to materials and the fact is, materials are not the main expenditure of most developments. Labor and regulations are usually the largest costs. From pouring the basement to setting the trusses, labor is costly and, in some areas, hard to find. Construction labor, electricians, plumbers, HVAC technicians, and many more. When adding the labor costs to the land, multiple layers of permits, utility connections, insurance, and financing costs, the price just keeps climbing.
- Landscaping: Most new developments also have landscaping requirements. Another very labor-intensive element.
- Multi-family: Whether a single-family home, a 2-unit duplex, or an apartment building. The development process is the same. As with any property, the costs to build, hold, maintain, and repair is costly.
- Who is at fault for today’s housing affordability: If you were to track the costs from the day a purchase offer is written for a parcel of land, to the sale of a finished product, you will find labor, government regulations, and interest on the debt are the largest contributors to the increase in pricing. This is not to say the costs of materials and transportation have not increased, but these too have labor and government regulation components.
It is easy to dwell on the term “affordability,” but what is the answer? Lower wages and benefits (Please remember labor costs include wages, benefits, workman’s comp insurance, unemployment insurance, as a starter)? Reduction in government regulations? Lower interest rates linked to construction development? Government subsidies?
In conclusion, perhaps the next time a new government regulation is proposed, or a new development is considered, one should consider the long-term benefits and/or consequences. Will the regulation help protect you, your family, and community or will it add to the cost of living with no realizable benefit? If your community is experiencing a shortage of housing and it is due to the lack of investment, is it in your best interest to fight every proposal offered? You may want to consider the advantages of offering public-private partnerships for utilities or tax incentives to encourage optimal development or at a minimum be supportive if it will be a benefit to your community.
This article is not to say all government regulation is bad or all development is good; I am simply trying to shed a little light on aspects of affordability by sharing the challenges of development and hope people will understand the risks and costs incurred and be more open to the possibilities and/or consequences of their decisions when it comes to regulation and development.
Loretta Spinrad
