Part 1: How Did We Get Here?
According to the National Low Income Housing Coalition there is a deficit of some 7 million affordable housing rental units in the United States. In many states, including Colorado, there are 30 units or less of income based housing units available for every 100 very low-income families who need such housing. The pace of new supply has clearly failed to keep up with demand – and this is for housing at all points on the affordability spectrum.
In a society of short attention spans, it is extremely challenging to achieve a common and reasonably accurate understanding of the problem. Our inability to come to terms with complex policy challenges such as immigration, gun control and climate change are clear evidence of the problem: public policy motivated primarily by political considerations is generally not effective because it is based more on political expediency and sound bites than the usually messy and complex underlying story.
In its way, the affordable housing crisis is as complicated as any policy crisis we face today as a nation. It’s a multi-dimensional problem, one that involves federal, state and local policies, and it has developed over many years. The solution therefore will not likely be quick or one-dimensional. Tax law, minimum wage limits, and housing and development policies have all played a role in bringing upon today’s crisis. All therefore must be included in a solution. Addressing the problem will require federal, state and local government solutions. And it will take years to solve.
Many of us who work in the affordable housing sector are weary of reading about facile and doomed-from-the-start “ideas” such as, “Local regulations need to be made more favorable to housing,” or “We have to promote greater economic development, because that will benefit everyone…” These bromides may sound nice and helpful, but they are worse than useless, because they might convey the idea that they could make a difference in closing the gap between the supply of and demand for affordable housing. Taken in isolation, they are unlikely to make even a small dent in the problem.
Supply: How to More Efficiently Deliver Housing Units?
The supply side of the affordable housing crisis is where most of the media attention is focused. Why can’t we build enough housing to meet the demand? It’s complicated. Local challenges include restrictive local zoning ordinances that make it difficult to develop any multifamily housing by imposing complex and costly building standards; political opposition fueled by NIMBYism (Not In My Backyard) which is often animated by fear, discrimination and misguided concerns about affordable housing’s impact on real estate values; and, growth cap ordinances, which restrict how much of any type of housing can be added to a community. On top of these political and bureaucratic, or administrative, challenges, there is the issue of cost. Simply put, in most American submarkets, it is virtually impossible to deliver housing units at an affordable price point.
To illustrate the cost challenge, let me describe Archway Community’s new 67-unit project in Lakewood. This project is comprised of 59 1-bedroom units, and 8 2-bedroom units. The average unit size is 603 sq ft. Total development cost of this project was $24M, or $343,283 per unit. Without the subsidies provided by the federal low-income housing tax credit and state and local “soft funds,” rents would need to be approximately $2,000/month to cover costs, versus what we are offering, which are rents that are closer to $1,100/month. These more affordable rents are possible because the subsidies brought into the project versus what would otherwise be commercial debt that would have to be paid back to lenders. Unfortunately, the federal tax credits and other subsidies are not available on an unlimited (or even, on an as-needed) basis. They are allocated according to a formula that has more to do with state population than actual demand for affordable housing units. There are simply not enough of these resources to support the development of all the units that would be needed to bring supply in line with demand.
Another factor impacting the supply side of the housing crisis is the loss of existing inventory to short-term rentals and second home buyers. These problems are especially acute in resort communities.
Demand: Prospective home buyers and renters need more income!
But what about demand? Why are there so many people who cannot afford housing at the price it is being offered in the market? The wealth and income gap has much to do with that. Since 1980, due to a variety of forces, including technology, globalization and federal tax policy, the income and wealth gaps have widened considerably in the U.S. Wealth has migrated upward, and the minimum wage has not risen adequately to ensure that folks who are working full time in minimum wage jobs can afford a decent place to live. The result is that many individuals and families who work for the minimum wage simply do not have enough money to pay for housing, and even if they do, they are one health emergency or car problem away from being underwater.
In 1975, the minimum wage was $2.10, meaning a full-time employee working for an average of 2,000 hours/year would earn $4,200/year, or $350/month in pre-tax income. At the time, average rent was $156/month. Thus, the ratio of average rent to average pre-tax income was 44.5%. If we adjust gross income down by 25% for taxes, that would leave our theoretical renter earning $263/month, and the rent to after tax income ratio would have been 59%.
In 2023, a Colorado resident earning the state’s minimum wage of $13.65/hour would make $27,300/year, or $2,275/month. The average rent for a one-bedroom apartment in Lakewood, is $1,881. Thus, for a person living in Lakewood and earning Colorado’s minimum wage, the rent to income ratio is 82%. If we adjust gross income down by 25% for taxes, the actual income would be $1,706/month, and the rent to actual income ratio at 110%, leaving the “average” minimum wage renter short of income by $175, just for rent, much less having anything for transportation, food, education, health care/insurance, etc. In other states, where rents are comparably high to Colorado, but the minimum wage is lower, the problem is, of course, worse.
Thus, to sustainably address our country’s affordable housing crisis, policy makers must address both the supply and demand sides of the problem. Yes, we need to find ways to accelerate and lower the costs of production of units at all price points, particularly at the lower cost end of the spectrum. We must also tend to demand and find ways to ensure that full-time workers have enough income to pay for housing and other essential goods and services. Tax policy, minimum wage laws and ideas which will be labeled as “radical” such as Universal Basic Income should be explored. Yes, this is a lot to digest, but the problem is multidimensional and pretending it is not will ensure that things will get worse before they get better.
Sebastian Corradino, chief executive officer, brings years of experience and roles associated with affordable housing and tax credits. Prior to joining Archway, he served as president of Riverside Capital, an affordable housing tax credit investment firm. He also served as founder of a group focused on providing insurance policies for renewable energy and affordable housing tax equity funds, Managing Director of a team overseeing $2B in low-income housing tax credit investments, and founder of a D.C. based development firm that led over $150 million in affordable housing projects which ultimately produced 1,500 units to the D.C. area. He has a Juris Doctor from George Mason University Law School in Arlington, Virginia, as well as a master’s in public administration from Columbia University in New York City and a B.A. in International Relations from St. Joseph’s University in Philadelphia, PA.
