Breaking Down the Barriers to Affordable Housing

With homeownership at its lowest level in decades, the demand for rental housing is high -- and so are the rents.
by | January 2014

Homeownership has been one of the cornerstones of the American dream. But after the massive housing crash, which precipitated the Great Recession, that dream became more of a nightmare for many, prompting millions of former homeowners to become renters. Indeed, the U.S. homeownership rate, according to Deutsche Bank, has dropped to an 18-year low and is only expected to fall further.

These new renters, along with the 78 million-plus millennials that are expected to begin searching for a place of their own in the coming decade, are putting a squeeze on the rental market. Developers have already stepped in to meet the demand, but much of the construction is for high-end properties. In fact, 8.7 percent of low-cost rental housing was converted to higher rents during the recession, driving up demand for and creating a significant shortfall in affordable rental housing.

That shortfall has vexed housing experts and public officials alike. But a new report from the Urban Land Institute (ULI) and Enterprise Community Partners may offer a few ideas on how to bring down the price of rental housing. Bending the Cost Curve on Affordable Rental Development breaks down the financial and regulatory barriers. Lynn Ross, executive director of the ULI’s Terwilliger Center for Housing, says the size and scale of a project, alongwith design issues and construction costs, can all be affected by these factors.

To start, developers face a major hurdle when it comes to financing. While some lending institutions will provide funding for affordable projects, most developers have to turn to investors who have motivations beyond profit. This means structuring the deal around the terms of the funder, rather than the needs of the marketplace. “Any mixed income housing project is like putting together a financial jigsaw puzzle,” says Ross.

Another barrier is the permitting process. While some cities have addressed this problem with one-stop permit shops, most jurisdictions have processes that lack clarity, which adds time and drives up costs. Affordable rental projects must also move through a public input process that is often opaque, says Ross, and, when public opposition is well organized, time consuming.

Zoning restrictions impede affordable housing development as well, according to the report. “There are many communities that zone out rentals, period,” says Ross. For decades, the focus has been on the construction of single-family homes. Now, cities and towns are waking up to the fact that many people are renting. But zoning ordinances are woefully out of date and take time to update. Other government-related cost drivers include social goals set by cities. While laudable, some cities are very specific about the mix of income groups, environmental standards and transit locations for rental housing that can suppress rather than encourage lower-cost rental development.

The days when communities consisted primarily of one type of housing stock are over, says Ross. Cities and towns that thrive are those with a good balance of owners and renters. By addressing the financial and regulatory barriers to affordable housing, cities may be able to reverse the affordable housing shortfall in time for the surge of millennials. “Local leaders need to look at their housing stock,” Ross says, “and think creatively about the kind of community they want to be.”

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