You don’t have to be an economist to know that family income for the last three decades has accelerated at a much slower pace than the cost of housing, compounding the difficulty low- and moderate-income people face in seeking affordable housing.
The situation means that people with low and moderate incomes must spend an ever greater portion of household income on rent. Don’t expect the problem to reverse anytime soon because many of the economic and political factors that made land and housing affordable no longer exist.
Since the 1970s, housing affordability has taken a double whammy, best understood by visualizing two curves. The first curve shows the total, inflation-adjusted cost of developing an affordable housing unit over time. The second curve shows low and moderate household income over time. As you probably can guess, the construction cost curve has risen much more steeply than the relatively flat income curve.
To illustrate, during the early 1970s, the direct construction cost — excluding land and indirect development costs such as construction loan interest, insurance, general overhead — for a non-custom dwelling was $20 to $30 per square foot, depending on housing type, materials and quality of finishes. By decade’s end, the cost of labor and materials was $30 to $40 per square foot.
Today, dwellings of similar quality and type in this region cost $120 to $200 per square foot to construct. In other words, over the course of three decades, housing construction costs have multiplied up to six-fold.
There is a third factor affecting the supply of affordable housing: the greatly reduced availability and size of public subsidies to directly bridge the steadily widening gap between what housing costs and what many people can afford to pay.
Prior to the 1980s, America as a matter of policy was able to muster substantial economic resources to subsidize and sustain affordable housing. Projects often were built using land with its value written down or written off. Federal programs provided insured, low-interest, long-term loans that covered most project costs and required little equity investment by project sponsors and investors, who also benefited from favorable tax treatment. And there were direct grants as well. Although demand exceeded supply even then, affordable housing production was nevertheless much greater than in recent decades.
As an example, in the late 1970s, my firm designed rental housing for the elderly built in compact clusters at six sites on Maryland’s Eastern Shore. The six projects encompassed 130 one-bedroom apartments, each 575 square feet in area. They were financed by a single $3.75 million “Section 202” loan from the U.S. Department of Housing and Urban Development that covered most costs. Prospective tenants also would receive Section 8 rental assistance. The Eastern Shore jurisdictions where the clusters were built donated the housing sites.
Thus, each unit’s total development cost — direct construction plus design fees, building permits, administrative and indirect expenses — was about $30,000. This was achieved thanks to significant subsidies: free land, 40-year low-interest financing and a sponsor foregoing profit. Today, even with free land, the project probably would cost $120,000 to $150,000 per unit to develop, four or five times what it cost a little more than 30 years ago.
Nowadays, publicly owned, developable land that can be contributed at little or no cost is scarce, and most jurisdictions are unwilling or unable to donate valuable land for free. This is especially true for urban and suburban real estate with access to transit, employment, shopping and public schools, all indispensable for families with low and moderate incomes.
One-stop, below-market-rate project financing, such as that provided by HUD’s Section 202 loan program, is a thing of the past. That program, along with many other federal subsidy programs, came to an abrupt end with the 1981 arrival of the Reagan administration, which sought to shut down HUD and housing assistance.
To fund affordable units today, housing sponsors must seek multiple sources of equity and debt financing. This entails cobbling together an array of below-market-rate loans using limited numbers of federal, state, county and municipal programs. It also means attracting wealthy individuals seeking to take advantage of low-income housing investment tax credits.
Unfortunately, these cobbling efforts require extensive time, energy and expertise, adding measurably to a project’s overhead costs. Because the financing process for affordable housing has become so onerous, it in fact is a disincentive for many housing developers who might otherwise undertake affordable housing construction.
Clearly, given America’s current economic conditions and political attitudes, affordable housing remains near the bottom of the problem-solving priority agenda. Hoping for a return to pre-1980 affordable housing policies and practices is wishful thinking, even though building housing for needier citizens could create tens of thousands of jobs.
Regrettably, in the foreseeable future, the affordable housing situation in the United States will at best stay the same, and at worst become considerably more dire.
Roger K. Lewis is a practicing architect and a professor emeritus of architecture at the University of Maryland.