Land as a Function of Housing Costs

Providing affordable housing is made more difficult by costs, regulations and reluctant neighbors

By MANUEL LAZEROV

Housing affordability has become a hot political issue. Unsustainable housing costs are making home ownership increasingly difficult. Rent costs are increasing faster than the rate of inflation, which is a fact of life throughout the United States. A great deal of the rental housing stock which was built with government subsidies is now being rented at market rates, as developers’ contracts with the government expire, and they are not being replaced by new housing units.

Simultaneously, the senior population is growing. Seniors and lower income families are the most impacted, as are moderate-income families. The fact is that the shortage of affordable housing is going to intensify as the minority and elderly populations increase.

Building affordable housing is dependent upon a combination of substantial government subsidies to cover the actual costs of developing rental housing. One of the costs is land. Many jurisdictions limit the amount of land for multifamily development, meaning that scarcity alone drives up the price of rental units. The reason for this type of exclusionary zoning is to limit the amount of low-income people who might move into a community, who tend to need more services than they pay in taxes. They need more schools, have more children, and need more social services. Many existing residents do not want their taxes to go up as a consequence of housing people less fortunate than themselves.

Many jurisdictions do not want to receive low-income housing tax credits; this is to avoid having that type of housing built in their communities. The federal government has not increased their availability to match the need.

Here is how land may factor into the equation. First, a great deal of housing scarcity is created by zoning. Then, there are land development costs, which include grading, the cost of sewer and water, and a profit for assuming the risk of development.

One solution suggested is for local government to provide land for affordable housing. Under this scenario, government would have to buy or condemn suitable land, which costs money, or provide surplus land, which, generally, is not in a good area with desirable amenities.

Acquiring and developing land is the riskiest part of development. Building costs are very predictable. The long lead time for securing approvals, the uncertainty of what government may extract in terms of concessions for approving a subdivision, and especially time lost in overcoming the resistance of neighbors are all factors that tend to drive the finished cost of land through the roof.

It is not uncommon for a subdivision to be approved, just as the housing market turns down and money for building becomes scarce; or for overbuilding to make a project unfeasible, or for any low income housing tax credits to have been scooped up by a competitor, which could delay one’s own development by years.

The time lag for securing approvals can easily take five years in many jurisdictions. To those costs, there are water and sewer hookup fees and, in many areas, there are other fees just for being able to build there. And those fees can be pretty steep, charged by jurisdictions to mitigate the impact of a new development on the surrounding community.

The relationship between the cost of finished land and the cost of the total housing package must also be considered. For instance, consider the ironclad rule that, if the land is 30 percent of the apartment or home price in an area, then if the “lot” costs $30,000, including profit, then the finished housing unit will sell or be rented at a price to reflect an investment of about $120,000, which is a multiple of the finished land costs. But, $30,000 in most areas is a number from the 1960’s!

Generally, in many desirable areas, a builder cannot deliver a unit for less than $350,000, which really highlights why subsidies are so essential, and why even hardworking, moderate- income earners find it so difficult to come up with a down payment on a home.

Is there any way to reduce land development costs? Yes, jurisdictions can lower the costs of fees for securing approvals. But, who bears the costs of government employees who do the reviews, including environmental approvals?

A jurisdiction can reduce some development standards but this can lead to complaints that one would then be able to see that the area is a low-income development. There is always a reason why it cannot be done, which often boils down to not wanting it in the first place.

Regardless of the need, and public officials advocating for it, the political will for generating affordable housing is a low priority among other communal needs. Only a very small part of federal housing subsidies is dedicated to supporting rental housing. Land use permitting and numerous regulatory impediments continue to drive up housing costs at an accelerating rate. In fact, most existing laws favor individuals with higher incomes, who benefit from subsidies of their own, such as mortgage interest deductions, deductions for property taxes, and the exclusion of capital gains on the sale of one’s principles residence.

The lack of affordable housing is a problem, but the underlying problems are community resistance and a lack of political will. That is what has to change to get more of what people claim that they want.

Manuel H. Lazerov is President of Infrastructure Financial, Inc. He may be reached at www.infrastructurefinancial.org.

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