Housing is Broken (and how to fix it)

Fun fact: 1 in 4 Americans spends more than 50% of their income on either rent or mortgage. It’s much more than that in many cities, and lower income brackets can often spend 70-80% of their pre-tax earnings on rent alone. That means if you make $30k/year, you have about $500-700 to spend on your life after rent/mortgage. If you have kids, that money is gone and you haven’t even bought food yet. 

This is the effect of the housing crisis we’re currently in, and there are currently no real signs of meaningful change. Sure, there are some affordable housing developments going up through the tax credit program, but we’re a few hundred thousand homes short, and who knows how long funding will last for government programs? As a result, the homeless population has skyrocketed, and people like nurses, teachers, and firefighters in many cities can’t afford to live where they work, commuting hours every day. 

Here are a few reasons why this has happened:

1. Labor shortages - developers in every major city, as well as in most growing secondary and tertiary cities, are fighting for skilled labor. There are fewer framers, for example, than the market requires. The shortage causes prices to go up, and timelines to extend - both of which increase the cost to build. You’d imagine the law of supply and demand to kick in here and bring more skilled labor as demand increases…but the boom/bust nature of the market and lack of training infrastructure prevent this from happening at sufficient scale
2. Urban land is expensive - Most new jobs are created in cities. Most young people want to live in cities. There has been a large migration away from the suburbs, and into cities. And even as cities (slowly) allow more density, land values also rise along with higher density zoning. For example, if a lot zoned to allow 20 housing units is worth $1 million, that same lot could be worth > $2 million if the zoning allows 50 units. Thoughtfully increasing density is necessary, but it won’t bring land values down.
3. The economics for developers - The only way to make money as a developer (without subsidies) is to build for the high end of the market. Contractors are in high demand and would rather work for higher-paying luxury developers. The cost of materials has steadily increased, and as we know, land is expensive. The only way to profitably build affordable/attainable units is to navigate a very complicated tax credit program, which can take years and comes with no guarantees. For most, its much safer to build another high-end apartment building.
4. NIMBY - Not In My Backyard. People who own homes like for their homes to increase in value. Opposing new development helps to keep supply low, and prices high. Its a natural desire, and growth should not happen at all costs, but this is a dangerous attitude in the face of a crisis.

The discouraging part to all of this is that I don’t see a way to drastically change most of these dynamics. We can do a few things to help, like invest into training programs to produce more supply of skilled labor, building smarter cities with updated zoning and building codes, embrace new methods of modular construction, and work through new incentive programs like Opportunity Zones. These all hold plenty of promise, but it is unlikely these improvements would truly change the economics for developers in the near term. They’ll keep building what they can make money on. 

What we need now are new business models that navigate these existing conditions.

Speaking of which, here’s one I’m working on. I call it The Ecosystem.

There is no getting around the fact that affordable housing must be subsidized in some way. Without it, you just can’t build cheap enough to make anything that still provides dignity to its inhabitants. But relying on fickle public funds or complicated, inefficient processes is not a sustainable solution. We must find a new source of subsidy.

Let’s consider a mixed use development made up of retail, commercial, and residential space. Does it have to be done like it’s always been done? Why do we have to build a space, and hope businesses will lease that space for a few years until we do it all over again? 

Why not curate the people, services, and businesses that occupy the space, by hiring those people and creating those businesses? Think of it as an incubator village that seeds, funds, and mentors its members for the sake of the community. The developer takes on more, but in turn gains control of both the experience and new sources of income. In turn, new options are available.

With this strategic position as owner of not only the real estate, but of the businesses that inhabit the real estate, we are able to adapt swiftly in providing what the residents and employees need to thrive. We can subsidize housing costs through profits of other businesses if we need to. We can feed each other, like communities are meant to do, in more ways than one. The village functions as an ecosystem, like a living thing, rather than series of disconnected pieces.

This is one idea, and it might not work. We need dozens more. We need people with the courage to try new things. We need to stop fighting forces that we can’t change, but instead come alongside them and start dancing. That's how real change will begin, which needs to happen now.

#housing #realestate #affordablehousing