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Speaking of the Economy
apartment for rent sign in rural downtown
Speaking of the Economy
Oct. 18, 2023

Housing Affordability in Rural Communities

Audiences: Community Advocates, General Public, Policymakers

Andy Bauer and Danny Twilley discuss the research they are doing to better understand gaps in the housing markets of rural communities and small towns and the unique challenges they face in addressing these gaps. Bauer is vice president and regional executive for the Baltimore branch of the Federal Reserve Bank of Richmond. Twilley is assistant vice president of economic, community and asset development for the Brad and Alys Smith Outdoor Economic Development Collaborative at West Virginia University.


Tim Sablik: Hello, I'm Tim Sablik, a senior economics writer at the Richmond Fed. My guests today are Andy Bauer, vice president and regional executive for the Baltimore branch of the Richmond Fed; and Danny Twilley, assistant vice president of economic, community and asset development for the Brad and Alys Smith Outdoor Economic Development Collaborative at West Virginia University. Andy and Danny, thanks for joining me.

Andy Bauer: Yeah, thanks for having us, Tim.

Danny Twilley: Pleasure to be here.

Sablik: Today, we're going to be talking about housing affordability in rural and small-town markets. Andy, you've been leading a research group focused on housing for the Richmond Fed's [Fifth] District, which includes Maryland, West Virginia, Virginia, and the Carolinas. Can you talk a bit about the Richmond Fed's interest in this topic and the work that your group has been doing?

Bauer: We have a focus on small town and rural communities. We meet with local businesses and local leaders to get a sense of the local economy and issues facing those communities.

About three, four years ago, when we would go visit with communities, the number one topic was almost consistently broadband: "We don't have broadband. Broadband is essential for a thriving community. This is a real problem." It's interesting, you don't hear that as the number one topic [anymore]. I think it's because the funding has been made available [and] plans are being put in place. Seems like for many communities, it's about execution — it's going to happen, it's just a matter of timing.

Now, what you hear is the number one issue is housing. And it's almost like the same sense of urgency: "We don't have the right amount of housing. The housing we have, it's very expensive. And, it's creating problems for existing residents as well as attracting new residents." So, that's how we got on this topic. Our Bank president said we need to be thinking more about this, let's do some research.

Our research had two tracks. One was let's look at the data. What do we know about housing supply? What are some of the things that people try and capture about housing demand? Where are the gaps when it comes to affordability? Why are we seeing these gaps?

On the second side was let's go out and talk to people in our District. So, we've talked with federal and state agencies, national and state not-for-profit organizations, economic development organizations, developers, home builders and bankers to get their perspective: What are the barriers, what are the challenges, where are their opportunities and, in particular, talk to different localities which seem to have come up with something interesting to solve the problem. So, that's what we've been working on.

Sablik: And that ties into, Danny, some of the work that you're doing, which focuses on retaining and attracting talented workers to West Virginia. How does housing factor into what you do?

Twilley: I'm right there with Andy. When I first started here, which was only about four years ago, it was broadband, right, especially as West Virginia started to really lean into this idea of remote and hybrid work that started pre-pandemic and we really accelerated that. It feels much more real now than it ever has been because of the investment in solving that issue, especially in rural America, that last mile challenge. Now it's housing, then probably broadband, and then they talk about labor and talent.

First-time homebuyership has jumped to age 36. It's the highest ever recorded. Almost three quarters of Americans still consider homeownership as the hallmark of the American dream. So, we have to be able to provide that opportunity for not only our current residents who we want to stay here [but] those that we're bringing in.

There was a great survey that was done around remote work. About 32 percent of people would relocate or commute further if they could live where they want to live. Talented individuals have now, more than ever, a choice of where they want to live. We have to give them a reason why they want to live here, and being able to afford a house is really important to that. Seventy nine percent of these individuals prefer a non-metro area. And what I found was interesting [was] 33 percent of 18- to 34-year-olds want to buy a rural home. We have that opportunity here.

Sablik: Yeah, you mentioned the age at which people are buying their first home has gone up. Are you looking at the rental market at all when it comes to thinking about attracting and retaining younger workers who maybe are not able to buy a home yet? Andy, feel free to jump in as well if you've been looking at this question also.

Bauer: Yeah, we're both looking at this. We talked about this recently.

The rental market is the key element of a well-functioning housing market. So, the lack of available quality rental housing in rural areas is a barrier. That's something we hear time and time again.

Within the Fifth District rural areas, for those 25 and under, close to 80 percent rent. If you look at the 25-to-34 bucket, slightly more than 50 percent are renters. Now, as people get older, incomes increase, they're much more likely to purchase a home. But for those just starting on their career or still just looking to find their place in the world, renting is clearly an option that people take.

Given the current supply of housing — both the owner occupied and the rental [markets] — affordability is a challenge. A couple more statistics which I think are important to think about what the supply looks like in the rural part of the Fifth District: 46 percent of renters are housing cost burdened and 25 percent of owners with a mortgage [are cost burdened.] Housing cost burdened — what does that mean? That means they spend more than 30 percent of their income on housing expenses.

When you see large percentages of the population housing cost burdened, that's a strong indicator that your supply doesn't meet the current level of demand. When housing costs take up this large of a share of a household's budget, they've got less income to cover other expenses like transportation and childcare. These can serve as barriers to employment as well as economic mobility. And the high rates of housing cost burden can contribute to local labor shortages. This is something that we hear in rural areas — transportation and childcare are big issues.

Twilley: Yeah, I'm going to follow up on that just a little bit. What you're finding is in rural communities that are desirable — oftentimes, these are amenity rich; these are places where people are willing to move to — these individuals who can buy into the market are buying sight unseen. They're buying with cash so they don't have to deal with the banks. So now you take an already strained supply and you have people come in and they pay full price or overpay for it. Then, all of a sudden, that has this downstream effect. Market-rate housing becomes more expensive, then that shifts individuals ultimately into potentially lower quality housing. Renters ended up paying more for lower quality housing and it starts straining that market, especially if you don't have the ability to grow or expand that market due to some other variables we can talk about. That ultimately creates a more expensive housing market.

Sablik: Yeah, you've both been talking about this mismatch between the supply and demand for housing. What are some of the unique challenges that rural places and small towns face when it comes to expanding their supply of housing, both for rental and owner occupied?

Twilley: There's a great report out there I would encourage you all to go look at. It's from Headwaters Economics and it's about amenity traps. This is one of the issues that they've been trying to address. What they basically talk about is income disparity, limited buildable land, and workforce limitations. Then you have that public debate about people moving into their areas as well. When you combine all that, that makes housing a really interesting conversation.

If you flatten West Virginia, it would be the size of Texas. That's great for a mountainous state: beautiful viewsheds, great recreation. But what that means is we're limiting the availability of buildable land. And where we have land, oftentimes we already have housing. Also, it costs a lot more because of our topography. Everything's just much more expensive to build on. So, you're taking a state like West Virginia that already has limited buildable land and then you're exacerbating that with some of the other compounding issues.

The final thing I'll add is that, oftentimes, the way that loans and money for supporting the development of housing is done by larger banks who are looking at kind of more national trends. You'll find in some areas that a small municipality or town is growing in its population, but the county data or regional data is not. So then someone's gonna say, "Well, hold on, where's the demand?" Lack of housing doesn't necessarily equate to demand. So I think some of the data that we're using to help support and fund these developers and these banks doesn't necessarily align with what's happening on the ground.

Bauer: Danny, I was just gonna say, I think you're exactly right. Talking with folks, it becomes key that land is an issue. You would think that, well, it's rural so there's lots of available land. Why is there a land challenge? It's really about whether or not it's buildable land. And, in order for it to be buildable, you need key infrastructure and infrastructure costs for small towns are a really big deal.

Water and sewer [infrastructure] is just huge. How does the small town come up with that upfront capital for water and sewer? Is the developer going to do it? Well, developers need certain price points on the homes to make everything work, but the area income doesn't support that. If you could provide the financing for the water and sewer, that would be really helpful.

The other thing which I think is huge, this is true in a lot of small towns: their Main Street was decimated. As everything went online, everything was sold on Main Street. This is why a lot of the first steps for a lot of small towns in West Virginia and across our district is to reimagine and redevelop Main Street. That's costly. So again, as Danny pointed out, finding the cost to do that kind of work, if you could, that's valuable land that could be perfect for multifamily, for either owner occupied or rental.

There's just less developers and builders in many parts of rural areas and attracting them is difficult. And then also regulatory. I think Danny is right on that as well. They're building some cabins in southern West Virginia and some regulations regarding streams then made it difficult for this particular project to get off the ground. There are a number of regulatory issues which can compound the problem of just trying to get projects off the ground.

Sablik: Do you have some examples of how rural communities in West Virginia or elsewhere in our district are trying to overcome these various challenges?

Twilley: The governor, along with the secretary of commerce and tourism, created something called Build West Virginia, which is tax credits. You can get a sales [tax] exemption for building materials. You can get a 10-year property value adjustment, refundable tax credit, and a potential municipal B&O [building and occupancy tax] exemption as well. The projects have a minimum cost of $3 million or include at least six residential units or houses in a certified district.

We are seeing more and more communities do housing studies. I think there is a lot of opportunity for our communities to think differently about zoning. When a house gets torn down, can we reestablish some zoning parameters that would allow for a different type of house that would go on there?

I think, too, builders with means will build towards that luxury end [of the market]. It's a lot easier to add another bedroom, another bathroom and get that approved and make your margins as a builder on this. A portion of income, as Andy was talking about earlier, is going more towards housing as interest rates are high. We're gonna have to figure out a way subsidize that market-rate unit housing.

Bauer: There's a lot of things that Danny said in there that made a lot of sense to me.

We've seen more localities do housing studies, which to me seem really interesting because one of the things that they do is bring all the stakeholders together — economic development financing, builders — so that they're working to solve the problem together. We've been in some areas where some people would like new housing and some people don't. That creates a challenge.

In terms of the Build West Virginia program, I think there's financial incentives for builders. I have heard of others like that. I think that's really important, particularly in those areas which are having a hard time attracting developers.

I think West Virginia has done a lot of really interesting things looking at the abandoned and dilapidated structures issue. West Virginia has an Abandoned Properties Coalition, a statewide network looking at abandoned and dilapidated buildings. We talked to the West Virginia Land Stewardship Corporation and they've got a state land bank and they're issuing grants to small communities to deal with demolition and rehabilitation of problem properties.

Sablik: Andy and Danny, thanks so much for coming on today to talk about this topic.

Bauer: Tim, thanks for having us. I thought this was a great conversation. It was really fun. Thanks.

Twilley: Yeah, I appreciate being part of it. Thanks so much.

Sablik: Listeners can find links to the Richmond Fed's housing research, as well as the other studies we talked about on the show page. And if you enjoyed this episode, please consider leaving us a rating and review on your favorite podcast app.