The Answer To The Housing Crisis Is More Housing. Here’s Why - Sun and Planets Spirituality AYINRIN
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After a long stretch of increases, in May 2023 rent prices dropped for the first time since Covid, according to the June 2023 rent report by Rent.com. However, the U.S. housing market is still short 6.5 million homes, as reported by CNN. Data from Freddie Mac shows that not enough homes are being built to keep up with the number of new households that are forming.
If
rents have been rising until recently, and there is a dramatic housing
shortfall, the question is: why are developers not building more
housing? The answer is multi-faceted and must address both affordability
and development factors.
Among Americans, 61% say they cannot afford a home, as reported in A Dime Saved.
Moreover, one in five believe they’ll never be able to secure a house
for themselves. At the same time, developers often pursue housing
projects when they can see clear opportunities. In places where
conditions are favorable for building and there is a demand for housing,
contractors may be more likely to create and sell properties. Simply
put, building more homes could resolve shortages and even drive down
rents.
The
following points can help shed light on why more housing is not being
built, along with ways to create more opportunities for Americans to
find homes at prices they can afford.
Land And Building Conditions
After
years of development projects, it can be difficult for contractors to
find a place to build in certain regions. Some municipalities might not
have a large supply of land available for development. In other
communities, there can be a case of NIMBY (“Not in My Backyard”), which
reflects a sentiment among residents who oppose new structures. Cities
may have density caps in place too. A floor-area ratio (FAR) cap exists
in New York which allows residential buildings to be up to 12 times the size of their lot.
Developers
typically ask questions regarding regulations before moving forward
with a project. While zoning may be necessary in some places, if it is
less constrictive, it could be an incentive for new projects. For
instance, investors might find places like Houston, Texas, to have fewer restrictions on height and density.
Financing Factors
Historically,
development has always been viewed as one of the most speculative types
of financing. Today, with the recent bank failures and the resulting
increased pressure on lenders, issuing loans for construction could
carry even more risk. Lenders may prefer to grant financing options to
existing apartment buildings, especially those that are already cash
flowing.
Higher
interest rates can play a role too. Developers who are interested in
projects such as building rental housing and selling the finished
product will be calculating the sale price that they’ll be able to get
on the market. With rising interest rates and cap rates, along with
investors seeking higher returns, the value of the completed project is
being pushed down. Until there’s a reduction in land prices, it could be
difficult to justify building, especially if developers feel there’s
not enough of a margin to complete the project and resell it.
Tax Incentives
Developers may shy away from projects if there are not favorable tax advantages offered. In New York, for instance, there was a 421-a tax abatement
which expired in 2022. This program gave developers a 35-year tax
abatement in exchange for providing 25% to 30% of the units at
affordable rents. After the program expired, developers were less likely
to take the risk and build projects knowing that upon completion,
they’ll be fully taxed.
In June 2023, a senate bill in Florida
was signed by Governor Ron DeSantis which provides ample opportunities
for developers in the state. The bill invests $711 million for housing
projects and programs throughout Florida. It provides multifamily
developers and owners with access to property tax exemptions and tax
credits.
Incentives
like this tend to drive up construction. If developers are able to
include tax relief in their business plan, it can spur them on to create
housing options for a community’s residents. Thus, local governments
that provide tax abatements and incentives could attract a new stream of
construction projects.
Rent Regulations
In
some states like New York, California, Oregon, and Minnesota, there are
limits in place regarding how much rent can be raised on a property. If
rates are capped, there can be downward pressure on the pricing of the
finished product. When developers believe they won’t be able to create
units that accommodate market rate increases, it can chill their
appetite to build.
However,
when rent regulation is removed, it can help level the playing field
and lower rents across the board. In Boston, after the rent control was lifted,
the single greatest housing and development boom in the history of the
city occurred. Rather than increase rents as feared, the new
construction actually led to a decline in housing prices.
Transit-Oriented Opportunities
In New York, the Regional Plan Association
is working to promote the construction of new homes near transit
stations, in an effort to ultimately make housing affordable and stable.
The concept includes taking under-utilized parking lots and building
properties that are adjacent to major infrastructure and transportation.
In
areas where more people are using ride share services, walking, biking,
or working remotely, there may be less need for large parking spaces.
These spots could be converted into housing for residents who want to be
near access to amenities and public transportation. Developers could
take advantage of the building projects to provide healthier,
sustainable options for communities.
Without a doubt, in some places a housing crisis is underway. In New York City, for example, Mayor Eric Adams has stated that there is a need for 500,000 new units. Moreover, the Real Estate Board of New York calls for 530,000 units by 2030.
While
there is certainly a demand for affordable options, there is also
interest in market rate housing. As such, the answer to the housing
crisis could be more housing at all different affordability levels. The
more housing you have, the more it can level the playing field and lower
rents across the board.
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