Affordable Housing Investing
Insights into the US affordable housing market include the shortage of housing units for both buyers and renters, high land costs, high costs for labor and materials, and increased regulation of the housing industry. Investment opportunities are available for those who want to invest in affordable housing construction.
Housing Unit Shortage
- The US housing market needs 2.5 million units of affordable housing to meet current demand, according to research by the Aspen Institute.
- The housing supply in the US Housing remains constrained, which drives home prices and rents up, especially at the bottom of the housing market. "Nearly half of all renters spend more than 30 percent of their income on rent, and even those with the cheapest rents are struggling thanks to growing income inequality. And the worst of it is growing homelessness, especially in high-cost coastal cities."
- High rents keep landlords focused on providing luxury buildings, which deters investors from building affordable housing.
- "One in three US households—nearly 100 million people—struggle with housing costs that jeopardize their financial security. The problem is acute for virtually all low-income families and for the 1 in 4 renters who spend 50% or more of their income on housing—and its effects ripple throughout our communities and economy."
Negative Incentive for Affordable Rental Housing
- During and after the Great Recession, "at least 7 million households lost their homes to foreclosure and entered the rental market, which created fierce competition for avail-able rental properties and pushed up rents."
- Low vacancy rates because of competition for rentals meant landlords could raise rents higher and higher, since demand outpaced supply.
- In 2019, the number of high-income renters increased as it has for eight consecutive years. "Between 2017 and 2018 alone, 311,000 new high-income renters entered the market, the latest in a crowd of 4.6 million such renters since 2010."
- Most new multifamily housing is built to meet the demand of high-income renters, meaning fewer low- and middle-income rentals are created. "In 2018, 29 percent of newly completed multifamily housing units came with rents above $2,050...", far above what most renters can afford.
- Affordable low-cost rentals are often found in older buildings, which investors like to demolish or renovate into higher price tiers. "That’s one of the reasons the supply of low-cost rentals has decreased 17 percent since 2011. Only 9 percent of new apartments in 2018 rent for under $1,050 a month, and less than 4 percent had rents less than $850. Less than 3 percent of new apartments over the last decade have been affordable to a median-income renter."
High Cost of Land, Labor, Materials, and Regulations
- Between 2012 and 2017, "residential land costs increased in 80 percent of U.S. counties." Average land lot costs for a single-family home rose from $159,800 to $203,200--a 27 percent increase just for the land. In the western US, land value per acre jumped in Nevada (up 158 percent), Colorado (96 percent), California (88 percent), Arizona (81 percent), and Utah (81 percent) during the same time period.
- Labor costs have increased. "Since 2011, average weekly earnings in the single-family residential construction industry increased by 36 percent, compared with a 24 percent increase across the private sector. Average weekly earnings of residential specialty contractors increased by 25 percent over the same period." In addition, workers are in short supply due to new, restrictive immigration laws that reduce the number of foreign workers available to the construction industry. "Historically, foreign-born workers have been disproportionately represented in the construction industry. The 2018 Bureau of Labor Statistics numbers indicate that 30.9 percent of workers in construction and extraction are foreign born, versus 17.4 percent of the overall labor force."
- "Labor costs in New York City are 31.3 percent higher than the mean of the top 30 largest cities, 25.6 percent higher in San Francisco, and 16.8 percent higher in Chicago. The recent building boom has also been hampered in many cases by a persistent shortage of workers, which drives up wages and costs. "
- "Rising costs of ... materials mean[s] affordable housing is expensive to build...." "The Bureau of Labor Statistics tracks the price of ... materials with its producer price index, which has risen 23.9 percent since the 2008 financial crisis...."
- Materials cost increases have greatly affected housing prices. The price of lumber alone has fluctuated in the past decade, "at times reaching more than twice its cost in 2008, according to a monthly lumber price index from Random Lengths. Lumber can represent anywhere from 5 to 10 percent of the cost of building a home, and the rise in lumber prices is in part a result of a decades-long trade dispute between the United States and Canada." One-third of the lumber used in US residential construction comes from Canadian forests, "and that supply has been devastated by mountain pine beetles, which can kill a tree within 48 hours, and by wildfires."
- State, local, and federal regulations play an expensive role in affordable housing construction. "Today, policy seems to do more to restrict access to housing than to promote it. Many developers, for example, are eager to meet demand for market-rate housing but are constrained by restrictive zoning laws, inefficient permitting and approval processes, and NIMBYism, all of which raise the cost of new homes, inflate the value of existing homes, and increase rents."
- State and local regulations affect the amounts charged to renters, allowing burdensome lease terms, large first- and last-month security deposits, and sudden evictions. "Between 1990 and 2017, there was a net loss of 4 million low-rent apartments, giving low-income households fewer options and more competition for available homes. In 2017, some 1.3 million renters across the country were forced to move."
Opportunities for Investors
- "There is an opportunity for the private sector, including real estate investors, to help increase the supply of affordable housing while potentially receiving positive tax benefits and risk-adjusted returns."
- Pooled investment funds (including "private equity funds, real estate investment trusts (REITs), [and] crowdfunding investments that focus on building or redeveloping properties") will create profits for investors while helping local communities. The “social impact investment firms” that offer pooled investment funds "find investment opportunities that meet strict underwriting criteria and that provide positive and impactful solutions to the primary needs of the local community, such as affordable housing, education, and healthcare."
- These pooled investment funds include Turner Impact Capital, a private equity firm in Santa Monica, California; Building Opportunity, "a fund that was created from Seattle-based Bellwether Housing and funded through crowdfunding efforts"; AvalonBay Communities Inc. (NYSE: AVB), "adjusting a large percentage of its portfolio to developing and redeveloping Class-B and C multifamily properties"; Reven Housing (NYSE: RVEN), "which owns and operates over 1,000 single-family workforce rentals in the south"; and Sun Communities (NYSE: SUI), "which owns and operates manufactured housing communities offering homeownership and rental opportunities."
- People who want to do socially responsible affordable housing investment can also invest in "Opportunity Zones through an Opportunity Fund. Investors can roll their eligible capital gains into a qualified fund and gain the ability to defer capital gains taxes until Dec. 31, 2026; a reduced tax payment on original capital gains on a step-up basis ranging from 10% to 15%, depending on the length of time the investment is held; and a 0% tax on profits derived from the Opportunity Fund if held for 10 years or more."