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Speaking of the Economy
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Speaking of the Economy
March 1, 2023

The Highs and Lows of the Housing Market

Audience: General Public

Greta Harris and Jim Tobin offer their perspectives on the housing market, from the impacts of the COVID-19 pandemic and recent increases in mortgage rates to the continuing challenge of building affordable housing. Harris is president and CEO of the Better Housing Coalition and Tobin is executive vice president and chief lobbyist for the National Association of Home Builders.



Tim Sablik: Hello, I'm Tim Sablik, a senior economics writer at the Richmond Fed. My guests today are Greta Harris and Jim Tobin. Greta is the CEO and president of the Better Housing Coalition in Richmond, the region's largest nonprofit community development corporation. Jim is the head of the government affairs team for the National Association of Home Builders. Both are joining me today ahead of their participation in a District Dialogues event at the Richmond Fed on the topic of housing.

Greta and Jim, thanks for being here.

Jim Tobin: Great to be here, thanks.

Greta Harris: Happy to be here.

Sablik: I want to get both of your perspectives on the state of the housing market, which has experienced some serious swings over the last three years.

Jim, since your organization has more of a national scope, let's start with you. Can you provide a sense of what's been happening in housing across the country over the past year or two, particularly when it comes to construction?

Tobin: Coming out of the COVID pandemic, where housing outperformed almost everybody, no one saw housing's renaissance and home construction coming out of the pandemic in the early part of 2020.

But over the last year, what we've seen is [the market] cool off. As interest rates, supply chain [issues] and inflation have taken over, we saw housing costs go through the roof and we saw the Fed have to react to that. Housing is one of the biggest components to the CPI, so the Fed reacted and raised mortgage rates and that's really cooled the market. In 2022, we saw home production really start to fall off in the latter part of the year.

We think 2023 is going to be a pretty slow year for single-family, certainly for multifamily. We're hopeful that '24 is going to be where we see that pivot and then accelerate into the back half of the decade.

Sablik: Greta, your organization is very focused on affordable housing in the Richmond area. What has that market looked like over the last couple of years?

Harris: There was clarity that everybody needs a safe place to call home when you're going through a global pandemic, racial unrest, political shenanigans, and an economy that promoted a lot of uncertainty.

When the economy shut down and people were told to stay at home, the kids couldn't go to school. They had to be at home. You were trying to work remotely. We found out a lot. People didn't necessarily have Internet access, they didn't have the right configuration of their home or, unfortunately, too big of a section of our society were unhoused completely.

The demand for affordable housing, through good economic times and bad, is always high. We've seen an uptick in demand. But just like Jim was saying, the cost of everything rose. That just makes it very difficult for us to meet the needs of our lower wage households.

Sablik: As you both alluded to, the Fed's policies have definitely had a direct and immediate impact on mortgage rates, which have roughly doubled since 2021. That certainly affects housing affordability. But a lack of affordable housing is a longstanding issue that predates the pandemic, and many people have pointed to insufficient supply as a key factor.

What are some of the main impediments to building more affordable homes? Jim, maybe you can take that first.

Tobin: Sure. From our perspective, we call them the "five Ls." It's lots or land prices, labor supply, lumber and building materials. We then talk about laws and regulations at the national, state and local level. And then we talk about lending — and interest rates, in particular at this time — whether it's mortgage rates or whether it's small businesses or affordable. Developers have to borrow money, too, and with a rise in the cost of lending, that's a factor that are impediments to building.

Harris: All of those Ls impact our end of the market as well.

I would add two other things that slow us down. In order to serve our end of the market, we need equity. We get that through the Low-Income Housing Tax Credit. We get it through public sector grants. We get it through philanthropic grants.

The cost of one of Jim's homes versus one of our homes is identical. The real differential is the capital stack. A market rate development may have 70 to 90 percent debt. We try to keep ours down to 20 to 25 percent. That's how we can offer rents that are 50, 60, 70 percent off the market and serve our end of the spectrum.

It's all of that plus NIMBY — not in my backyard — which I think both of our constituencies face on a regular basis. People are aware that there is a need for quality housing at an affordable price and everyone is for it until it comes into their neighborhood, and then people sort of lose their minds.

Sablik: There's certainly many reasons that people are interested in having more affordable homes. From a macroeconomic perspective, one factor is that not having enough affordable homes limits the ability of individuals to move and seek opportunities in thriving markets. To the extent that problem is widespread, that means the labor market isn't functioning as smoothly as it could be.

What are some policies that you think could help improve affordable housing availability? Greta, why don't you start?

Harris: Sure. There are really innovative things that are going on around the country.

More and more local and state governments are issuing bonds that create that source of financing for the capital stack for the affordable end. We haven't done it that much here in Virginia and so I'm hopeful. We're having more positive conversations with local and, in some cases, state government.

Places like the Twin Cities have done away with single-family lot zoning. If you go into a neighborhood that's traditional single-family homes, you can now, when a lot is available, come in and do a duplex or three or four townhomes in that same spot. You diversify the product of that particular community.

In Philadelphia, the city leaders were willing to reduce their real estate tax revenue by putting a cap for long tenured — probably income-restricted and maybe age-restricted — residents who had been in a neighborhood for a long time and saw their values of their home double and triple, which has some value, there's equity there. But if you're a fixed-income senior, you may lose your home because you can't afford to pay your real estate taxes. So, they put a cap on that for certain residents in order to ensure that they would be an inclusive community and have both newcomers and long-term residents to be able to stay.

Tobin: From the homebuilders' perspective, it starts and ends at the local level of government. The impediments that are put in front of builders and developers are adding to the cost of housing. We have a survey — 25 percent of the cost of a new single-family home is embedded in regulatory burdens at the federal, state and local level, 42 percent for a multifamily unit.

What we would like to see is local governments take ownership of the fact that they are slowing development down. In the development world, time is money. If you have to go to 12 or 14 different stops in City Hall in order to get a permit and a project approved, that is slowing them down.

An example I was given recently: there was a three-townhome infill project in Arlington, Va. The developer or the builder was required to submit a 65-page document about the project. That's not economical. I believe the builder decided it's just not plain worth it, so he just took three units out of production because local government got in the way.

Every government cares about more housing, but they've got to be a partner with the developers. Whether it's affordable or market rate, ownership or rental, it doesn't matter. They've got to walk the walk.

Harris: The only other thing that I would add is that we need the private sector to help us meet the affordable housing demand. Most of that is driven by nonprofits across the country. There are a handful of private sector firms that do affordable housing, but we need more private sector partnerships and alliances in order to meet the demand, because the demand is definitely there.

Sablik: Right. I think you mentioned that oftentimes the costs of building a home are the same depending on if it's a big home or an affordable home. Jim, how do builders address this issue of building more affordable homes?

Tobin: It goes back to those five Ls. You have to reduce the cost of every one of those stops along the way. In a lot of instances, these costs make it hard to build that starter home, that $200,000-250,000 home. If the plot of land costs $200,000 and then you're going to put a $200,000 structure on it, you're at a $400,000 house pretty quickly.

Only about 40 percent of the housing stock in America is affordable to those who make the median income in America, which is $90,000. We have got to solve that problem.

Harris: In the Richmond region. I believe our average home sales [price] is getting close to $400,000. With interest rates where they are, you would need about $70,000 a year to be able to afford that. Our average rent is almost at $1,500, which means that you would need a little over $50,000 to afford that and not pay more than 30 percent of your income. We have a growing number of our citizens that are paying 40, 50, 60, 70 percent of their monthly income for housing. There is a whole segment that just isn't able to participate because the economics don't work. It's too expensive.

Sablik: Greta, you also mentioned the role of NIMBY-ism, or not in my backyard, which is opposition from existing residents to building different types of structures. How do you try to address that in your work?

Harris: I would love to say that we've got it nailed and we have the solution.

We try to share facts. We try to listen intently to the opposition and, again, try to correct some of the erroneous statements that are generally made. We, like most builders, put enough time on the front end to engage with community and elected officials and administrators. There's an education process that goes along with that. Sometimes, it's rolling up your sleeves and we push it through.

People will admit that there's a need in their community — just put it over there [or] just put it over there [they'll say]. And there's no good place to put it. I've been doing this work for about 30 years now. The sniff test for me was in the quality of rental housing or either homeownership and the location of where it's going and all of the amenities that would be associated with it. Would I want my mom to live there? We've had people that say, Oh, you can develop it over here by an electrical substation or by a trash dump or something like that. They wouldn't want to live there. And no one else wants to live there either.

Tobin: Greta said it. I think it's about doing that due diligence upfront and engaging with the community in showing local officials that housing pays for itself, whether it's tax base [or] whether it's property values. Housing is essential, and it takes courage from politicians to look its constituents in the eye and say housing is good for our community.

Harris: Usually the NIMBYs are small in number but mighty in voice.

Sablik: Right.

Harris: We need more people who say that they're supportive of it to come out and counter the naysayers and support and stand with our elected officials.

Sablik: Thinking ahead to the coming year, I know forecasting is a tricky business, but are there any developments that you're optimistic about?

Harris: Well, we have a healthy pipeline of probably about $350 million that we're working on. It is a grind.

I'm seeing some optimistic possibilities with surplus land that local and state governments have and their willingness to give or, at least, sell at a more reasonable rate for affordable housing development. A local jurisdiction here just completed a study of all of their sort of subprime commercial strip shopping centers, which are acres with utilities already there and parking that are ripe for redevelopment and reimagination.

I think we're going to start to get some traction, but those five Ls, which I really am going to steal that, Jim. It's not just one thing. It's trying to look at all of those different things to try to shave off some of the costs so we can serve more families.

Tobin: I think I'm optimistic that everybody is talking about housing. This is the first time in my career where I feel that housing is one of the top national priorities. It's a priority for this White House. It's a priority in Congress. Local governments are starting to understand that if they want to service their citizens, they need to provide more housing supply. It's about putting more supply in the marketplace to drive down prices.

Demand is out there. People want to own. They want that lifestyle. They want to build equity. They want to build a pathway to the middle class.

Harris: And I would also say that linking economic growth, which every region wants, with housing is going to be really, really important. A lot of the times, housing is looked at as maybe the ugly stepchild back in the corner. But it's coming out into the light. If we're tied with an inclusive economic growth, then the whole spectrum of housing need would be included there.

I agree that everybody's talking about it. We have a lot of good policies that, if people are courageous enough to implement them and some process improvements, I think we can do better as a country to address the need.

Sablik: Well, Greta and Jim, I certainly I appreciate you both being here to talk with me about this today.

Tobin: Thanks for having us.

Harris: Yep, we appreciate the opportunity.

Sablik: And for all our listeners, I would also encourage you to register for our next District Dialogues event on climate and the economy, which will be held on May 18. And lastly, if you enjoyed this episode, please consider leaving us a rating and review on your podcast app.

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