NAR economist: “major housing shortage” in the US

The chief economist for the National Association of Realtors suggests there is a major housing shortage:

“A major housing shortage exists in this country,” Yun said in a statement. “It is therefore disappointing to witness in March the continued lackluster performance in new-home building, which was the second lowest activity over the past six months. Home prices have risen by 41 percent and rents have climbed 17 percent over the past five years at a time when the typical worker wage has grown by only 11 percent. To relieve housing costs, there simply needs to be more homes built.”

My first thought on this reading this: builders and developers are still skittish from the 2000s housing bubble. Instead of risking overextending themselves, compared to the past they are now focusing on more expensive homes or rental properties. Oddly though, I have seen little media coverage regarding builders and developers. They may be a secretive bunch generally but why isn’t there more scrutiny of their actions and motivations?

My second thought: if there is indeed a housing shortage, what does this say about the state of the economy? A booming construction sector is often related to a good economy. It doesn’t necessarily have to be this way in the future, particularly if there is a shift away from sprawl and homeownership of detached single-family homes, even if it was true in the post-World War II era.

Finally, who might be held responsible if there is indeed a housing shortage? It is hard to rally potential homebuyers into a cohesive group. Is there a way to prod politicians and business leaders to act and if so, could their actions even effect much change?

More unusual conversions of buildings to housing in Chicago

Here are a few examples in Chicago of converting solid older structures into residences:

Developers have never shied away from turning the remnants of Chicago’s past into residences—see the omnipresent warehouse-turned-loft projects across the city. Conversion treatments are now being found where they are less expected: A former Jewish orphanage in Wicker Park is now a single-family home. The old Sears store on Lawrence Avenue in Lincoln Square? It’s likely to become a 40-unit apartment building. Most impressively, a landmarked church at 2900 West Shakespeare Avenue in Logan Square reemerged in November as a 10-unit condo building. Other similar projects are in the works.

The reason for repurposing instead of demolishing is simple: The quality of old construction often surpasses that of today’s standards. “Most of the brick structures that were built in the postfire era used high-quality materials such as Chicago brick,” says Greg Whelan, a Redfin real estate agent. “Intrinsically, these buildings have high value because they don’t make that brick anymore.” Plus, existing structures bypass height restrictions dictated by modern zoning laws and solve the issue of the lack of vacant land in the most desirable neighborhoods.

These projects fix problems for developers. And the quirks of unconventional buildings appeal to homeowners. In the former church, bell towers allow ceilings, supported by original steel trusses, to soar as high as 30 feet. Slate from the old roof was repurposed as tile in the lobby. (There are plenty of modern features, too, including floating vanities the bathrooms and quartz countertops in the kitchens.) The exterior looks much like it did when the church was built in 1908, with dramatic arched Gothic windows and regal stone detailing around newly built balconies. Three of the 10 units were still available at presstime for between $480,000 and $650,000.

Presumably there are some limits to which older buildings get converted. Although this article doesn’t mention it, I assume a big factor is money: will the conversion provide a sufficient return on investment for the developer? Also, cities won’t necessarily allow anything to be converted to residences. It likely helps if the structure is already in a residential location (common for churches) and is a building that the neighbors like (as opposed to an eyesore or mismatch that even a conversion can’t fix).

I’m still intrigued by the conversion of religious buildings into residences. The architecture of such buildings is often conducive to groups (which would be limited when converted into multiple units) and intended to provide a physica connection with the spiritual realm. How exactly does this architecture fit the tastes of homeowners? Can you easily reduce the spiritual architecture to its component pieces like large windows and high ceilings? See an earlier post about converting Chicago churches into residences.

Do teardown McMansions pit developers against residents?

An op-ed suggests there are two sides in debates over teardowns:

Can we please focus on what neighborhood residents want and not what developers want?

Two quick thoughts on this simplistic breakdown:

  1. It is very easy to make this claim because it suggests there are money-hungry outsiders – developers – and then average residents who don’t have the same resources. However, this is not always the case: what if the home or property was sold to the developer by a resident? Or, a new buyer wants to live in the neighborhood and wants to construct a larger home? There are plenty of cases where teardowns pit neighbors against neighbors and this gets a lot more complicated than just having an evil outsider at work.
  2. Should neighborhood residents always have complete control over what happens near them? Having input into a process is different than being able to control the process. A lot of residents might want to freeze their neighborhoods in time when they purchase their home. After all, the liked the neighborhood the way it was. However, few neighborhoods undergo no changes and urban neighborhoods can undergo significant changes over the decades.

While this op-ed is based on a particular case in Raleigh, all together, the developers-who-want-McMansions vs. residents may be true some of the time but many teardown McMansion situations are different.

Illegal wealth funneled through luxury urban housing?

The higher end of the real estate market is booming in many American cities but it may involve tainted money:

It is the first time the federal government has required real estate companies to disclose names behind cash transactions, and it is likely to send shudders through the real estate industry, which has benefited enormously in recent years from a building boom increasingly dependent on wealthy, secretive buyers.

The initiative is part of a broader federal effort to increase the focus on money laundering in real estate. Treasury and federal law enforcement officials said they were putting greater resources into investigating luxury real estate sales that involve shell companies like limited liability companies, often known as L.L.C.s; partnerships; and other entities…

Officials said the new government efforts were inspired in part by a series last year in The New York Times that examined the rising use of shell companies as foreign buyers increasingly sought safe havens for their money in the United States. The investigation found that real estate professionals, especially in the luxury market, often do not know much about buyers. Until now, none of them have been legally required to.

The use of shell companies in real estate is legal, and L.L.C.s have a range of uses unrelated to secrecy. But a top Treasury official, Jennifer Shasky Calvery, said her agency had seen instances in which multimillion-dollar homes were being used as safe deposit boxes for ill-gotten gains, in transactions made more opaque by the use of anonymous shell companies.

It would be fascinating to hear what local officials, developers, and real estate professionals have to say about this in private. I imagine few would be willing to appear to publicly condone illegal uses of money, yet such a move could threaten status and profits. If there are indeed numerous cases of this, does this taint particular developments or cities? Or is the wave of luxury building simply too strong (and advantageous) to be derailed by a few negative instances?

Calculator suggests developers can profit and build affordable housing

The Inclusionary Calculator suggests developers can typically make 10% profits and build 12-15% affordable housing at the same time:

It can feel like a mantra among private developers: Requirements by municipal governments to include affordable units in market-rate housing developments make those developments unprofitable, even unfeasible. It may be one of the most frequently repeated claims about housing in general. Can it possibly be right?

The Inclusionary Calculator is an effort to settle this question—and to prove that one major assumption about affordable housing is a myth. Developed by the Cornerstone Partnership, the tool allows users to simulate the balance sheets for market-rate developments for any number of scenarios. It accounts for factors such as costs of production, financing, affordability set-asides, and parking requirements…

“In almost every case, we could target a 10 percent profit for the developer and still leave at least 12 to 15 percent of the units to be affordable,” McCarthy says…

So, not only does inclusionary zoning not raise the costs of market-rate construction beyond reason, it also does not raise the price of market-rate units for homeowners. It eats away at developer profits. That makes affordable housing a moral question, not a feasibility issue: Do leaders dare to challenge developers on their profit margins?

The Inclusionary Calculator is available here after watching a training video and registering.

This poses a fascinating question in the housing industry (as well as for other sectors of the American economy): just how much profit is enough? Very few people outside the housing industry would have any idea how much money developers and others make on the construction and sale of housing units. Perhaps the process is deliberately opaque or perhaps it is simply complicated. But, I wonder how the public in many communities would respond if they knew that 10% profits were generally possible while also providing affordable housing.

Of course, this is just one hurdle in the construction of affordable housing. Not allowing developers to claim that they can’t make money would help the process but in many communities, neighbors would still complain. A NIMBY response often takes over; who lives in affordable housing? What does this signal to outsiders? Won’t this lower our property values?

My prediction: courts and SCOTUS would rule in favor of inclusionary zoning

Opponents to inclusionary zoning laws are hoping their case makes it to the Supreme Court:

Developers in California are taking their fight against the state’s inclusionary zoning laws to the U.S. Supreme Court, just as cities across the nation are increasingly committing to similar laws to address affordable housing shortages. The California Building Association opposes the soon-to-kick-in law mandating that developers discount a percentage of units in new housing projects for low-income families. They claim it constitutes an illegal “taking” of private property by the government and hope that SCOTUS justices will agree with them

California’s Supreme Court rejected this argument in June, pointing to an affordable housing crunch of “epic proportions” as the compelling reason for the law. The supply of housing that families of modest income can actually afford is so low that advocates in San Francisco are considering suing the suburbs to intensify density.

But the California developers say that forcing them to build below-market-rate units as a condition of obtaining building permits amounts to extortion. Developers in Chicago are also making this argument, and have similarly filed a lawsuit against the city’s inclusionary zoning laws. In California, the homebuilders are also challenging the idea that there is a connection between new housing construction and affordability. In an interview with CityLab earlier this month, Steve Joung, CEO of Pangea Properties, a company that rehabs old buildings into new moderately priced housing, said there is a connection—but not the one that inclusionary zoning proponents would favor…

If SCOTUS agrees to review the California case, however, it could slow momentum around such plans. And if SCOTUS ends up agreeing with the developers, it could drastically change the current calculus around how to increase the supply of affordable housing.

Though it is hard to know whether this would actually reach the Supreme Court, I predict the developers will lose in court. I anticipate this result due to two reasons:

  1. The United States has few other mechanisms for addressing affordable housing even as it is a pressing issue. The free market clearly does not work. The federal government doesn’t want to provide much housing. Non-profits or community groups can only provide so many units. For decades, there has been little incentive for developers or communities to provide cheaper housing. In contrast, they can make more money with more expensive housing units and promote and/or protect a higher social status.
  2. Prior court cases have determined that developers can be made to provide other things to local governments in order to be able to build. For example, Naperville was a pioneer in the 1950s in having developers pay for some infrastructure (sewers, roads, etc.) and then several decades later asking for donations of land or cash to help build schools. Both decisions were fought in court by developers and the courts ruled in favor of the municipality. Additionally, other decisions have gone against exclusionary zoning practices that try to promote bigger lots and more expensive housing units.

This will be interesting to watch.

Photo essay demonstrating LA’s mansionization

Here is a photo essay that shows the incongruity of a number of teardown McMansions in Los Angeles:

A developer wants to make as much money as he can as quickly as he can, where the only people whose feelings or quality of life he cares about are himself and whoever buys his newly-built mansion. A normal, thinking, feeling person could find many reasons why she would not want to rob her neighbor of privacy or sunlight by building a looming addition onto her house, with perhaps the most powerful reason being that her neighbors would hate her for it. A developer who will never live in a house he has built doesn’t have any relationships with neighbors to preserve. He actually stands to benefit from being indifferent/contemptuous to neighbors’ concerns, especially if it means he is able to build a bigger, more expensive, more obtrusive structure without the impediment of a guilty conscience. And don’t forget the long, noisy, messy, utterly unpleasant experience of living near a house under construction…

And that’s perhaps the biggest danger of mansionization. Regardless of what you think about mansionization and how it should or shouldn’t be regulated, there’s something about it that I’ve found to be consistently true.

When the first mansion goes up on a block of more modestly-sized homes, it sticks out like a garish eyesore. But if a second mansion is built on the same block, that first mansion suddenly doesn’t look nearly as big and out of place as it did before…

2015-07-01-1435742962-2381680-3inaRowGOOD.jpg
Three of a kindAnd at that point, the entire block might as well be mansionized — and chances are it will be. Having one mansion next to you is bad enough, but if the house on the other side of you gets mansionized, blocking sun and privacy from two sides, who would want to stay? Better to take what you can get and sell, leaving the house to a developer or new buyer who would inevitably go big — and another reminder of the now “old” neighborhood will be gone.

The critique of these new homes focuses on three areas:

1. It is often developers, and not neighbors, who go forward with the oversized homes. Neighbors might be more sensitive to the needs of others but developers are simply trying to maximize the property for profit. This may be true though there are plenty of cases where people buy properties with smaller homes and then make the decision to build a huge home. Developers aren’t the only ones to blame here.

2. The architecture and design of these new large homes are lacking. The homes are unnecessarily large and depart from traditional Southern California styles (stucco, clay tile roofs, etc.). These new homes clash with the older, smaller homes.

3. McMansions spread like a contagion: once a neighborhood or block has one, newer ones are soon to follow. The hint is that the teardowns need to be stopped at the start. A number of LA neighborhoods have been pushing for housing restrictions. But, it may be that one of these homes has to be built before neighbors really rally around the cause.