Building a Better Understanding of the Dimensions of Housing Supply

By Michael A. Spotts

Conversations about housing affordability (that is, the relative attainability of market-rate housing) and efforts to provide committed affordable housing are often contentious. First, even in progressive areas there is no consensus that affordability is something worth promoting – a debate that is often tied to conceptions of economic status, property values, and most perniciously, prejudice. However, as affordability challenges worsen, there can be sharp disagreement even among those that believe affordability matters and there is a government role for promoting housing choice. These disagreements are varied and it is outside the scope of a single blog post to comprehensively address each. However, one of the main points of debate (at least in the context of hot markets) centers on whether new market-rate development makes things better or worse.

During the research process for the Northern Virginia Affordable Housing Alliance report on Building Northern Virginia’s Future, the Neighborhood Fundamentals research team explored existing literature and analysis on this issue. We found that the answer is “it depends,” particularly as it relates to who benefits from adding housing supply. Development has different impacts for renters vs. homeowners, median-income vs. low-income households, etc. This is not because housing fails to conform to the fundamentals of economics. Rather, it is because there is no singular “housing market.”

In the last week, Shelterforce has published two thoughtful, informative articles that provide more information on the data and economic theory that inform discussions of housing economics. In reality, a housing market is made up of interrelated sub-markets that vary by scale, geography, tenure, building/unit type, and targeting (luxury, middle, affordable), among other aspects (which I often refer to as the various “dimensions of supply”). For more information on those market dynamics and the challenges in predicting the impact of new supply on affordability at the sub-market level, I encourage you to read the full articles featuring Jamaal Green, Miriam Zuk, and Vicki Been and Rick Jacobus.

In recognition of these dynamics, the policy recommendations offered in Building Northern Virginia’s Future were explicitly designed to address the various dimensions of housing supply. Specifically, we argued that the region cannot focus solely on the aggregate number of units that its constituent jurisdictions permit. High-end production has its place, particularly in reducing the pressure that leads to moderate-rent apartments “filtering up,” as investors rehabilitate and reposition existing properties. However, special attention must be paid to eliminating the barriers to housing that will more directly serve low- and moderate-income households.

First and foremost, the production and preservation of subsidized, income-restricted affordable housing serves that goal, both by directly providing housing for low-income households and reducing competition for lower-cost market-rate units. In addition, local governments should review their land use and zoning codes to identify barriers to the development of more naturally affordable housing types. There is strong regional demand for duplexes, triplexes, townhomes, and walk-up apartments. However, we found that these housing types are (generally speaking) more difficult to build from a regulatory perspective than the much criticized “McMansions” that are replacing more modest detached single-family homes throughout many of the region’s neighborhoods. Promoting new construction of more modest housing requires revising land use and zoning rules. In addition, it is necessary to examine the aggregate impact of other associated development requirements related to minimum lot sizes, floor-area ratios, lot coverage ratios, and off-street parking, which can make ostensibly legal housing types impossible to build. As difficult and controversial as achieving such policy change may be, there is precedent from cities such as Grand Rapids, Portland, Minneapolis.

As the aforementioned Shelterforce articles illustrate, both policy design and coalition building efforts to advance reform require a more informed and nuanced conversation about supply-demand dynamics across sub-markets. Otherwise, at best we will advance half-solutions that fail to address the underlying systemic challenges of our housing system. It is to the region’s benefit that we can draw on the lessons from a growing body of housing research and the real-world experiences of policymakers in other jurisdictions to create a better, more equitable development paradigm.

Building Northern Virginia’s Future: Yes, preservation has a role in equitable supply growth

By Michael A. Spotts

Last week, the Northern Virginia Affordable Housing Alliance released: Building Northern Virginia’s Future: Policies to Create a More Affordable, Equitable Housing Supply and a companion Research Justifications report, which were produced by Neighborhood Fundamentals (see full overview). Over the next several weeks, this blog will highlight some of the key findings and recommendations from this research. Today’s post takes a closer look at how supply growth and preservation can be complementary approaches to improving affordability across the income spectrum.

As part of Building Northern Virginia’s Future, the research team reviewed a wide range of literature regarding the impact of supply growth on affordability in high cost, high growth markets. Available evidence confirms the basic economic theory that constraining development contributes to increased housing costs. However, the evidence also suggests that benefits of new development do not accrue evenly. While median costs may fall (or rise less quickly), specific neighborhoods can see significant cost increases and the stock of homes affordable to lower-income households may decline. Therefore, adding housing supply is necessary but not sufficient to meeting the full range of housing needs. Efforts to produce committed affordable housing for low-income households, and preservation in particular, are critically important to ensuring that the most vulnerable households do not bear disproportionately negative impacts.

Market conditions in the Washington, DC and inner-Northern Virginia region demonstrate the need for preservation. Since the end of the Great Recession, new development has lagged compared to historical trends.

The nature of regional population and economic growth also creates challenges. Growth has been disproportionately at the highest and lowest ends of the income spectrum, particularly among renter households. With insufficient new supply to absorb this demand, the cost of existing units has increased. As we highlighted in our June 2018 report on Northern Virginia’s Preservation Challenge, new construction has been focused on higher-end units, leading to some investors shifting their focus to purchasing more modest apartments. These “value-add” investors often conduct light rehabilitation work to reposition the property and raise rents. While this helps fill the housing gap for middle-income households, it often reduces the number of relatively affordable options for lower-income renters.

As we highlighted in Building Northern Virginia’s Future:

• From 2000-2018 the cost to rent a two-bedroom apartment in Alexandria increased by 104 percent (Seau and Jovovic; City of Alexandria). Had Alexandria’s rental housing costs simply increased by the rate of inflation, rental costs for such units would be nearly 43 percent lower than current rates. The City of Alexandria saw an 88 percent reduction from 2000-2018 in market rate units affordable at 60 percent of AMI (from 18,218 to 2,236 units).

• From 2000-2017, Arlington County lost over 14,500 rental units affordable to households earning 60 percent of area median income (AMI) or less, mostly as a result of increases in rent (Arlington County). There were only 2,445 such units left in the County, with approximately 11,000 additional units affordable between 60 and 80 percent AMI.

• A separate analysis found that the inflation adjusted increase in rents from 2011 -2017 was 4.0% in Arlington and 3.9% in Fairfax County. During this period, Loudoun County had the largest rent increase in the Washington, DC region, at 11.3% (Urban Institute).

Therefore, despite being superficially counter-intuitive in nature to discussions of increasing housing supply, preservation of existing housing affordable to low- and moderate-income households is an important component of a comprehensive strategy. From the perspective of “first do no harm,” preservation can reduce short-term displacement and minimize the disruptive impacts of development to a given household. For those who oppose new development on the basis of potential loss of affordability, a robust preservation strategy can provide evidence that the jurisdiction/developers are acting in good faith when adopting development-friendly policies meant to increase overall housing supply. Finally, preservation can also enable future increases in affordable housing supply. Bringing increasingly valuable land under mission-driven control provides the flexibility to participate in a redevelopment strategy later, at current acquisition prices. Future development can utilize increases in density and/or other incentives to replace and potentially expand the number of affordable units.

Northern Virginia’s Preservation Challenge offered a wide range of policies that can support preservation in the region. From the various specific recommendations offered by the report, the four highest-level policy priorities include:

• More effectively using public subsidies to leverage/attract private capital for preservation;

• Building capacity to preserve smaller-scale buildings in high-opportunity neighborhoods;

• Adopting or improving property tax abatement programs to increase utilization by private, market-rate owners;

• Encouraging equitable redevelopment through zoning and land use flexibility.

Efforts to balance supply growth with preservation are even more important in the context of potentially catalytic investments by the public and private sectors. Notably, the arrival of Amazon and a new Virginia Tech campus will create demand pressures, particularly within a short commuting distance of Crystal City/Potomac Yard. Stay tuned to the Neighborhood Fundamentals blog for additional analysis of this subject and other key takeaways from Building Northern Virginia’s Future.

Interested in learning more about addressing housing affordability challenges in your community or region? Email info@neighborhoodfundamentals.com.

New Publication - Building Northern Virginia's Future: Policies to Create a More Affordable, Equitable Housing Supply

By Michael A. Spotts

In recent years, the issue of housing affordability has gained prominence in the national dialogue. Efforts to address the rising costs for safe, decent homes have generated substantial debate about the role of market-rate development, the availability of committed affordable housing, and the causes and impacts of gentrification. Neighborhood Fundamentals is pleased to announce the release of two new publications for the Northern Virginia Affordable Housing Alliance that address these topics: Building Northern Virginia’s Future: Policies to Create a More Affordable, Equitable Housing Supply and a companion Research Justifications report.

This body of research examines the factors that are influencing housing costs in the inner-Northern Virginia region – population and economic growth, demographic change, shifting consumer preferences, among others. It also discusses the factors that have inhibited the growth of an equitable housing supply, including local land use and the regulatory framework. At a high level, this research found that addressing affordability across the income spectrum involves more than simply increasing development. Adding new housing supply may have varying impacts on affordability, particularly for those with the lowest incomes. An equitable approach to development addresses supply needs across multiple dimensions, including tenure, building type, and location/neighborhood characteristics.

This report offers recommendations to advocates, policymakers and practitioners for improving affordability while advancing social equity. The recommendations reflect the notion that the most urgent action should be directed to the areas of greatest need and to the region’s most vulnerable residents. Recommendations are organized into four categories:

• Proactively preserve and expand housing options for the region’s low-income and historically marginalized households;

• Increase market-rate development and diversify the region’s housing stock to accommodate household and job growth;

• Undertake bureaucratic improvements to improve the efficiency of current policies;

• Improve communications and community engagement processes to better facilitate the policy changes necessary to improve affordability.

Each category includes specific recommendations that the region’s elected officials, city/county staff, funders, and developers can support to improve the region’s development climate, improve affordability, and increase access to opportunity for all of the region’s residents.

Interested in learning more about addressing these challenges in your city or region? Email info@neighborhoodfundamentals.com.