Building more homes, building more affordable homes not always the same

Guest:	Alex Jaquez
Title:	Senior vice president of policy, advocacy and research at the Groundwork Collaborative
Summary:	For years, policymakers have searched for ways to make housing more affordable. One think tank argues the problem isn't simply a shortage of homes, but a shortage of affordable starter homes and a housing system that struggles to build them at scale.

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Interview transcript

Terry Gerton You have an interesting take on the housing crisis. These days when people talk about affordable housing, they’re really talking about affordability. But your recent report focuses specifically on starter homes. What data are you seeing that tells you that starter homes are the real challenge in the market?

Alex Jaquez We have obviously an overall housing shortage in the United States. We have a housing market that in many places is fundamentally broken. But I think if you look at what we colloquially call the “starter home,” we’ve seen a real degradation in the asset that is the purchase for most families, or at least used to be, and is really what people think of when they think of the American dream. And we’ve seen the square footage of houses, the average house on sale, just continue to rise and rise and rise until we got to a point now where the starter homes, or homes under about 1,200 or 1,400 square feet, make up just about one in 10 or one in 20 new homes. And that is pricing way too many early families, in particular, out of the market. Zillow found that starter homes can cost over $1 million in 242 cities, and if you look at just the median existing home right now, upwards of $440,000. That is far, far above what most people can pay. So if you’re a young family or you want to start a family, you are thinking about moving into your first, modest home that you can build on and you can invest in and you can use as a stepping stone to that American dream, you’re really priced out. And so we have a model that we really think can help revitalize the starter home that was a cornerstone of the U.S. experience for so long.

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Terry Gerton A lot of folks in this policy space will say more housing of any kind is the solution. Some people argue for apartments and condos and denser development. Why do you think those approaches are insufficient to solve the problem you just described?

Alex Jaquez We think they are necessary, but not sufficient, and we fully support smart zoning reform. We believe that we need to be financing our housing stack better so that the public and federal and state governments are able to bring down the costs of owning or renting a home in many places. But we understand that it’s not going to fix every problem in the market, and particularly those who are focused on land use are often looking at urban or more densely populated cities where zoning regulation has made it harder to build new homes or to make duplexes or fourplexes into existing lots. However, there are 30%, 40% of the country who lives in areas where land is not the constraint. Land is pretty cheap. If you look at rural areas or some of the de-industrialized cities and suburban areas in the Midwest and in the South, what you’ll find is that the the land is cheap, but it still doesn’t make sense to develop, because the income and the demand isn’t there. And so in those places in particular, we think are particularly well-suited for the type of government-subsidized, single-family home that can build demand and that can provide affordable housing in those areas.

Terry Gerton There are a number of government programs in this space already. You mentioned government subsidies. We have federally subsidized loans. We have zoning permissions. We have housing assistance programs. Why are those not having the necessary market effect that you think they should be?

Alex Jaquez Part of it is the scale. And it’s simply that while we do spend billions of dollars — primarily through the low-income housing tax credits, primarily the way that we build affordable housing in the country — we strongly believe that we need more public funding in the capital stack. A paper that we put out about a year ago looks at how housing is actually financed and because most, if not all, of our housing is added by private developers, their investors need fixed returns. They need 20% returns in many places. Equity investors need to see their investment paying off to be able to take the risk. The federal government coming in and providing low-cost loans or low-cost grants or no-cost grants can reduce that rate of return to the point where these projects can actually pencil. So we believe that that’s a critical tool to be able to build more housing of all kinds. And I think part of the problem is that the low-income tax credit, first of all, not enough of it actually reaches the homes it’s trying to build. Too much of it is kind of siphoned away by middlemen, by securitizers, by syndicators who are financing the building of the housing, but take — we believe — too much off the top to actually get the full value of the credit towards building affordable housing. So part of the answer is the right tools, getting the right tools in place, and then part of it is actually the scale to meet the challenge that we have.

Terry Gerton Alex Jaquez is senior vice president of policy, advocacy and research at the Groundwork Collaborative. Alex, your proposal relies heavily on factory-built housing. We have factory-build housing today. Maybe it’s not always thought of as the place to start with your home ownership adventure. What is it about the private market that hasn’t responded with more factory-built homes to meet the demand that you’re talking about?

Alex Jaquez There’s a couple of issues right now with the factory-built housing market, and these have been decades-long. We are not the first to think that manufactured housing might be a critical part of the solution to the housing crisis. Way back in the ’60s and ’70s and ’80s, they studied different ways to bring manufactured housing to scale. And right now we have the two issues are really the disadvantage that they’re put at from a regulatory perspective. For a long, long time, the building codes were different for factory-built housing, modular versus manufactured, whether it’s sitting on top of what’s called a chassis that can be securely placed or whether it’s mobile. These all created regulatory hurdles to actually building and siting these homes. The chassis rule was actually just changed in the recently passed Road to Housing Act, and the Housing and Urban Development Department is in the process of rulemaking that will hopefully smooth that regulatory hurdle over. But really, we think part of the issue is demand. And when you are building factory-built housing, you need that housing to come out of a factory. And for a factory to be able to be profitable, it needs to get to scale. And houses in the United States are produced and built on an extremely bespoke basis. Even in the subdivisions, sometimes the housing can look completely different, one right next to another, depending on the builder and the developer and who is designing it. But if we think that to be able to get these factories up and running into a scale where we can actually make a difference in new single-family homes, you need an upfront commitment to get the capital invested into these factories to be to meet it. And so that’s why in our proposal, we propose that the government guarantee demand for about 500,000 factory-built homes. And we take them basically into delivery ourselves and sell them to prospective homeowners in a mixed land trust model that has been done in cities and states. And we think that one big, bulk buyer is a way that we can get these factories up to scale and running.

Terry Gerton So you’re describing a very interesting market, both on the supply side and the demand side. So on the supply side, you want a guaranteed order of 500,000 homes over eight years so that manufacturers will actually agree to build them. You need a homeowner demand to actually sell them, even if the government takes ownership in the middle. What about that potential homeowner education process would convince someone that that is exactly the place they want to start their first home?

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Alex Jaquez The affordability is really, I think, where the process starts, and I think the replicability with the way that normal homes are financed. You go to a bank, you get a mortgage … those mortgage documents are quite long, involve many signatures, but it’s basically the same no matter what bank you go to. In the manufactured housing space right now, they have many different bespoke financial products to loan and finance loans to homeowners, because they haven’t been standardized, they’re not securitized, they don’t get bought by the big Fannie and Freddie — Fannie Mae and Freddie Mac — like the regular 30-year home mortgages. So we think, again, this is a scale problem. If you have enough demand in the market, you’re able to process enough mortgages that they can be a reliable and standard product, but then again drives the cost of actually financing the home down. And once you have a replicable product that ordinary loan servicers can understand and they can get out to people — it’s not necessarily you would go to a government building and apply for a mortgage at the DMV, right? But you would work with the financial institutions in a community, partner with the banks that people already know and trust to be able to service these loans.

Terry Gerton You mentioned earlier the Road to Housing Act, which really at the headline level was focused on housing affordability. When you think about your program, your proposal here for 500,000 units of manufactured housing, what is the biggest obstacle — regulatory, legislative, capacity — that you think would have to be resolved in order to make your vision a reality?

Alex Jaquez The Road to Housing Act, like I mentioned, goes much of the way there. It actually legislates the response here, which eliminates the permanent chassis requirement for manufactured homes and establishes HUD as primary authority on standards for manufactured homes. But I would say where that is, still a wait and see here, is the actual implementation of that rulemaking. As you likely know, the federal workforce has been greatly degraded in the capacity for being able to write the regulations, I think 60 or 70 regulations that are going to be required out of the substantive regulations from the Road to Housing Act. It’s really the expertise and the capacity and the actual employees who are going to be the biggest barriers, if there are any, to implementation of the Road to Housing Act. And then of course for something like our proposal, you would need new legislation. You would need — there are things I think that the government could do on its own, particularly trying to anchor buyers using, say, the Defense Production Act. Some senators, including Elissa Slotkin from Michigan, have proposed using the Defense Protection Act for housing production. You could have the military procure manufactured housing for bases or for military housing. Those could all be starts, but I think for the full program that we envision, you would need new legislation to provide that funding for the demand.

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