When it comes down to it, housing affordability's 'guy behind the tree' is you and me

When talking about taxes and tax policy, the venerable Louisiana Senator, Russell B. Long, is quoted saying: “Don’t tax you; don’t tax me; tax the guy behind the tree.”

The ubiquitous “other guy” would be the one who bore the brunt of the burden and you and I would go scot-free.

Of course the man behind the tree is often the common man or woman who’s political leverage and knowledge is minimal and ends up being the worse off for it.

Returning from a week at PCBC in San Diego, my head spins with both the issues and opportunities ahead for those whose mission and passion is to provide shelter: the simple roof over one’s head. Some of the issues are short-term and some are longer term.

I would like to focus on one of the longer-term issues: affordability.

Whether it is not enough rental apartments or homes priced to meet the incomes of those who want or need to rent, or not enough single family homes priced for those who want to purchase, the disparity between what shelter costs and what incomes can afford was in nearly every conversation in San Diego

.

The reasons were many:

• Stagnant incomes.
• Student debt.
• Tight credit and mortgage qualifications.
• Land costs rising faster than incomes.
• Production costs rising faster than incomes.
• Additional health and safety requirements driving up costs.
• Not enough skilled labor driving labor costs up.
• Excessive time and costs to gain entitlements.
• Not enough land for housing in the places people want to live or can find work.
• And many more.

A rising spread between those who have and those who don’t: income inequality also gets into the conversation.

It should be no surprise that we are in a bind.

For the past five decades since the start of the 1960’s, the country has produced, on average, about 1.6 million new single family homes, multifamily homes, and manufactured homes per year. Some years were higher and some lower, but there has been a relatively consistent level of performance over the extended period. However, the past half-decade has seen the worst shuttering of the industry in the past half-century.

Although production is slowly getting better, it is nowhere near the level needed to accommodate the housing need deficit that the downturn created.

As the chart shows, over the past half-decade we created a deficit of nearly 4.7 million housing units compared to the average production from 1960 to 2009. To give a sense of the magnitude of the hole, the industry would have to produce at a level 2.5 times the level it did in 2014 in order to get back to being an average decade in terms of housing production.

That’s a pretty tall order.

But it also explains part of the reason why we are in an affordability crisis.

As millennials come both of household formation age and back into the workforce the supply-demand imbalance is now having its economic effect: rising prices. The impact is most pronounced in areas that are currently “built out” and where there are good paying jobs and millennials want to live: mostly the coastal cities. But, the impact is showing up in other areas also. It is surely not a coastal cities issue alone.

A hand survey at the Leader to Leader session of PCBC, which included the CEOs of many of the public and private national and regional builders and developers, there was near unanimous agreement that getting to a production level of 1.5 mm units in the next couple of years was going to be a difficult stretch.

2.7 million homes per year would have merited the famous “laughing box” for its disconnection to reality.

First, the labor requirements for builders, developers, trades, and municipalities are massive and that is not an easy issue to address overnight.

Second, the lack of land, including entitled land, to support that level of production in the places that production was most likely needed, was a major constraint. Again, that is not an issue solved overnight.

Of the two core issues, labor and land, labor will be the easiest to solve, although at the cost of even higher labor costs and thus higher end prices for homes, whether they be rental or for-sale.

The land issue, though, brings us back to the “guy behind the tree” analogy.

The desired locations where the high-pay jobs reside tend to also be the places that are “built out” and with somewhat older housing stock.

The logical approach to the issue is to redevelop existing land in areas that are at relatively low density to much higher densities in terms of dwelling units per acre and most likely with smaller average unit sizes to compensate for the higher construction costs per square foot.

From an architecture and production and engineering standpoint, all of this is doable right now.

However, the local political will to change the density from what it is currently to what it will need to be to accommodate the growing generational tidal wave is questionable. Each governmental unit, whether it be a town, city, or county gets locked into its own form of NIMBYism and zoning contests that make the local change arduous, expensive, and highly risky.

It keeps the locals happy, though.

But these individual and local desires to inhibit change for them and forcing the problem of housing a growing population to the other town (the “guy behind the tree”) has the cumulative social effect of lack of affordability for those same people when they have to move, or their children or parents have to find an affordable place to live that is near them or near where work is.

The “guy behind the tree” is suddenly you and your family.

It is pretty obvious to me that we are not going to be producing shelter at the level we must to tip the supply-demand balance in favor of affordability soon and the affordability issue will most likely get worse for a while.

At the Federal level, there is little that can be done to impact individual governmental unit zoning changes.

The conversation in DC will most likely be about some form of income redistribution to help benefit low, moderate, and middle-income folks to “afford” housing. It will most likely come in the form of rental vouchers and be paid for by elimination of the mortgage interest and real estate tax deduction.

Most likely the “guy behind the tree” will be you and me.

But it will not address the true root cause: the need to increase supply so that it exceeds demand. Part of the solution is the need to get denser than we are right now in the places where jobs are: San Francisco, Los Angeles, Seattle, Chicago, Denver, New York, Boston, DC, South Florida, Dallas, and Houston and many more.

Places where there are single-family and row homes will have to come back with single family and multifamily densities sometimes at 5-10 times what is there right now.

Richard Green, the Economist and Professor at USC, showed an interesting graphic at the Leader-to-Leader conference.

London, one of the most desirable world-class cities, has a population of 13 million. Los Angeles, taken from the San Fernando Valley to Irvine and the ocean to San Bernardino has 13 million people also. But London is just a fraction of the square miles that greater LA is.

London wasn’t always that dense. It happened over time. The scattered farms evolved to mid-rises, high-rises, and other dense urban housing forms.

Los Angeles is considered “built out” and it is at a relatively low density. Granted that water and utilities are of a particular concern for LA, but the point is that physically LA could be redeveloped at a much higher density if there was a political will to do so.

The same can be said of Boston, New York and the other job-magnet cities.

So, I think that it is time to start the conversation about the root cause and solution to the affordability crisis that this country is facing. If the nation does not truly understand the issue, the discussion of the solutions will be limited.

We have to understand how our local decisions are actually part of the problem and it will only change when we either decide that we will stop having kids, embracing immigrants who help this country be what it is, or decide to die sooner to help out the affordability cause.

Or, we could confront the fact that we need enough housing in the places where we want to live and work to meet the demand.

For we and our children and our grandchildren are all the “guy behind the tree”.