The housing market today is a mixed bag. In 2019, the market saw very low mortgage rates. Unemployment rates are the lowest they’ve been in 50 years. This has created more purchasing power across the country. However, half a million Americans are still homeless. Young singles and Millennial families are struggling to find single-person living accommodations and starter homes. Some of those struggling are not low-income. Moderate-income singles, couples, and families are failing to find affordable housing across the United States, especially in urban areas where many people are migrating for jobs (80% of the US population now live in urban areas).
It turns out, lower interest rates and bringing in more income from being employed doesn’t equal being able to afford housing in the US. Because of low rates, people are staying put longer—they’re just refinancing their mortgage instead of moving. And even though rates are low, this doesn’t necessarily help since housing and rent prices have been steadily increasing. Home prices are inflating faster than income growth is happening. If the overall price of a home is higher, even if interest rates are low, it becomes a bit of a wash with the two elements canceling each other out. While there are many parties responsible for ensuring affordable housing, this article will cover how innovations in construction are contributing to creating the needed amount of affordable housing.
WHY ISN’T THERE ENOUGH AFFORDABLE HOUSING?
Affordable housing is defined by the U.S. Department of Housing and Urban Development as residents paying “no more than 30% of their household income on rent.” High rents and home prices create occupants who are cost-burdened, spending over 50% of their income on rent or mortgage each month. This is often at the expense of paying for food, healthcare, or other insurance. One article reports that 25% of renters and 1 in 10 homeowners are severely cost-burdened, and it’s only getting worse. So what are some of the contributing factors to the affordable housing crisis?
As briefly discussed in the intro, market forces play a huge role. Housing shortages increase demand which inevitably raises prices. While the cost of construction, zoning regulations, and land acquisition are increasingly restricting, developers feel inclined to build market-rate housing. This type of housing allows landlords to charge what they want—they are not restricted by affordable housing laws. Therefore, even though affordable housing is in demand, it’s not being built.
Purchasing land is the first major cost for constructing housing. Building on public land is cheaper but hard to come by for housing projects. Space in urban areas is tight and the social phenomenon Not In My Backyard (NIMBY) opposes developing low-income housing and other projects that proponents feel would decrease the value of their own homes (this includes commercial development projects as well as housing for low-income, minority, or disabled people). This creates complications for developers and can lead them to favor luxury building projects.
Speaking to increased construction costs, building affordable housing is riddled with risks for developers who are fighting over scare government subsidies. They often rely on loans, equity, and other sources to fund building projects. For affordable housing projects, the concern is that revenue generated from rents will not be enough to pay these funders especially because the ability to pay them back rests on the assumption that the gap between building costs and revenue will eventually close which requires the building to run successfully for a long time. The actual cost of construction is variable and dependent on the market. Labor, material, and equipment costs are currently on the rise. There is a labor shortage in construction and the price of lumber, which can account for up to 10% of a project’s cost, has been steadily rising over the past decade. The developer also charges their own fee on top of the actual cost of building. This covers the cost of doing business. It includes costs associated with office work, hiring staff, etc. With all these considerations, it is expensive and complicated to plan, fund, and build affordable housing.
HOW MODERN CONSTRUCTION INNOVATIONS ARE HELPING CREATE AFFORDABLE HOUSING
As you can see, there are political, economic, and social factors that play into the affordable housing crisis. It is a multi-faceted issue that requires collaboration for a sustainable solution. At present, here is what the construction sector and partners are working on to help provide housing that is affordable.
Modular housing
Modular housing takes the building process offsite. Standardized pieces and even entire apartments are built at a separate worksite which reduces the effect of weather conditions on building and help keep a tighter schedule. After building the units, they are trucked into the city to be set up. Since this building technique reduces costs, it is a promising tool for building affordable housing.
At one factory in California, one of the hardest hit states for housing, the assembly line creation of these units takes place in a former submarine plant. It can cost up to $800,000 per unit to build affordable housing the traditional way in the Bay Area, though most of the time this cost will hover around $425,000. Modular developers say they can build units at twice the speed and a drastic price cut of 20% to 50%. While these units are being built in the factory, development of the site can happen simultaneously. Because of these price cuts in development and construction, renters will end up being able to pay less.
The process also addresses the shortage of tradespeople needed to complete housing such as electricians and plumbers. 80% of the building process takes place in factories and can use a leaner workforce. Tech giants like Google and Microsoft are taking interest in funding these projects so they can provide more affordable housing to their employees in Silicon Valley and Seattle respectively. City governments are also taking notice as New York City, another top location for housing difficulties, is requiring modular development for certain projects.
Some of the challenges facing modular developments are acquiring permits and facilitating inspections at both the building site and factory site. While the legal details are being worked out, construction of modular units moves forward.
3D printed houses
While tiny homes have been trending for a few years now, the price tag can be anywhere from $25,000 to $100,000 and beyond. 3D printed homes take the idea of the tiny home and reduce development and construction costs to $4,000. A 600 to 800 square foot 3D printed home can be built in 24 to 48 hours. Larger 2,000 square foot units can cost $20,000 to construct. The whole process produces only about 30% of the waste made by traditional building. One company is ready to sell their printer around the country and also around the world to countries impacted by slums.
The printer creates walls made of cement and is operated by a tablet. The concrete is cost-effective, durable in all weather conditions, and fire-resistant which cuts cost for the eventual owners. 3D printed houses are designed to function in rural conditions. They feature their own power and water supply. The tablet operation means that there is less labor required for overseeing the development which addresses the labor shortage and additionally cuts costs. Another company has created their own version of the technology which they say will create houses they can sell for $100 to $160 per square foot—well below the median price in California of $315 per square foot and within the median national range.
As with modular housing, there is still a lot to figure out regarding regulations and building codes for this new technology. There are also not many specialists out there in the construction world for 3D printing right now. As it continues to pick up steam as an affordable housing alternative, this will probably change. Since this is such a new and revolutionary way to build houses, it will take time to truly test the houses’ durability and endurance.
Micro-apartments
In urban areas, there is a massive shortage of housing for single residents. In past years, only 6% of building included studio apartments while 36 million Americans (and counting) live alone. This has forced single residents to pick up roommates in order to afford 1- and 2-bedroom apartments in cities. Families and couples who would live in these larger apartments are pushed farther into the suburbs, adding time onto their daily commutes and racking up transport costs.
To address this shortage, development of micro-apartments is ramping up in cities around the world. These single resident apartments are designed to maximize space. With efficiency as the driving force, these apartment spaces fit into 200 to 400 square feet. In order to help with the shortage, New York waived it’s 400 square foot minimum for certain locations working on micro-apartment developments. These apartments cater to students and young professionals who are more interested in location than space. Some developments set aside units for homeless veterans and other low-income groups. These handful of units receive thousands of applications.
There are two major concerns associated with micro-apartments as the they stand now. First of all, there’s the space, or lack thereof. The reason minimum space requirements exist in the first place is to prevent squalid living conditions. This being the case, concerned parties may be looking at micro-apartments the wrong way. Only one resident can live in a micro-unit which eliminates the possibility of families being cramped in. These micro complexes also utilize co-living by having common areas like lounges and a gym where tenants can comfortably gather outside of their units. With the technology, design, and other regulations of today, it is highly unlikely micro-apartments will backslide into tenement living.
Another concern is that micro-apartments are not currently addressing affordable housing on a large scale. They could be part of the solution but right now they are mostly being constructed in luxury areas. These micro-apartments could provide the right space for workers who want to live close to work in urban areas but who are alone. As they operate now, micro-apartments cost too much for a single person’s average salary (rent is about $2,500 a month. In order to not be cost-burdened by this, the resident would have to make $100,000 a year) and are too small for any roommates. Hopefully accommodations will be made in coming years so that micro-apartment technology will be able to create affordable housing on a larger scale.
*The opinions expressed in outbound links do not reflect views held by Continental Bank*
