Attainable Housing: Challenges and Solutions

The “missing middle” offers tremendous opportunity for homebuilders

By GREGG LOGAN AND TODD LARUE

The homebuilding industry increasingly struggles with a complex challenge. The market opportunity in serving middle class Americans with for-sale housing is tremendous, but the economic complexity in producing it seems insurmountable. Summarized here is RCLCO’s research around emerging best practices in meeting this market’s demands.

We define the “attainable” segment as for-sale housing that is unsubsidized and affordable to American families with incomes between 80 percent and 120 percent of the Area Median Income. The price points for attainable housing vary by metro area depending on the Area Median Income, with FHA Loan Limits typically hovering around 115 percent of Area Median Income.

According to our builder survey completed in cooperation with the Urban Land Institute, the biggest challenges to bringing more attainable housing to market are cost of capital, lack of building efficiencies, availability of buyer financing, and cost of materials.

An RCLCO consumer preference survey revealed that the majority of buyers, regardless of income, want to be in a convenient location near a mix of housing, shops, and businesses, and have expectations regarding amenities and finishes. This is the dilemma – how can we provide the housing people want and can afford in a location that appeals to them?

RCLCO believes there are four “levers,” each of which help “move the needle” in solving the attainability challenge without losing the customer: Small Homes, Value Housing, Missing Middle Attached, and High-Density Detached.

Small Homes: Many builders define a home as “small” if it is less than 1,800 square feet. But those leading this category are pushing the definition of a small home to less than 1,400 square feet. Homebuilders, initially looking to target the emerging millennial demographic through reduced footage and lower price points, have discovered that other generations are also interested in smaller homes.

The “Value Brand” Housing Solution: For the purpose of RCLCO research, value housing involves simplicity, in terms of both option packages and structural choices, which enables the homebuilder to deliver product more efficiently and ultimately more cost-effectively.

A value brand should provide every homeowner with a stylish home and a sense of dignity and pride of ownership.

“Missing Middle” Attached: Historically, multifamily for-sale product has served as an attainable price point for homebuyers. In a departure from past recovery cycles, since the Great Recession, multifamily permits shifted dramatically from product intended for sale to product intended for rent. Multifamily for-sale housing historically represented about 20 to 25 percent of total multifamily permits, but it has represented six to seven percent in the past eight years (since the recovery began).

Coming out of the downturn, boomers drove housing market demand for larger, luxury homes while delayed homeownership by millennials created rental demand. As a result, there has been a significant lack of supply
in missing middle attached housing options during the last 10 years.

Missing-middle housing, a term coined by Opticos Design, is defined as housing typologies at densities between those of single-family homes and mid-rise communities whose scale would be compatible with single-family homes. This includes duplexes, triplexes, fourplexes, courtyard buildings, bungalow courts, townhouses, and multiplexes.

High-Density Detached: In many areas of the country, detached living is the preferred housing type for potential homebuyers. According to RCLCO’s consumer research, over 55 percent of households, regardless of age, would prefer a single-family detached home to other housing types. Detached cluster homes allow higher density than traditional single-family homes but create the traditional feel that many homebuyers are looking for. The design of motor court, green court, and alley loaded configurations yield densities in the eight to 15 units per acre range with smaller house footprints yielding up to 20 units per acre depending on the site’s efficiencies, meaning builders in some suburban markets can compete for multifamily sites and still have projects of scale.

Product Strategies: While understanding product categories that can meet the demand for attainable housing, successful attainable housing developers and builders offer further insight beyond the basics:

  1. Attainable housing can yield similar margins to higher priced homes due to faster turnover and more rapid price appreciation.
  2. Segment beyond density, size, and price.
  3. Design within, between, and around homes.
  4. Design and message attainable housing to appeal to a market beyond price-driven buyers.
  5. The industry needs to commit to entitling and designing attainable housing. To start the process, look for entitlement deals in older, desirable walkable neighborhoods; revisit cur- rent assets and retrofit the product offering for increasing demand and new solutions.

Gregg Logan is a Managing Director at RCLCO real estate advisors, leading the Orlando, Florida office. For more information, please visit www.rclco.com.

Todd LaRue is a Managing Director at RCLCO real estate advisors, leading the Austin, Texas office. For more information, please visit www.rclco.com.

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