A Jump Start for Housing

We desperately need a way to jump-start new housing construction. In select markets, this need can be met through employer-sponsored housing programs in which universities, government entities, corporations, hospitals, and other nonprofit organizations agree to contribute underused land to such programs—primarily for use by their own employees.

Most discussions of the U.S. housing sector have a Catch-22 element of contradictions. Reviving the homebuilding business is a prerequisite for climbing out of the Great Recession; but falling housing demand, high vacancy rates, and epidemic numbers of foreclosures have led homebuilders to put most new construction plans on indefinite hold.

One way to overcome this impasse is to think in local terms. The housing problem is not a national issue, but rather one with different variables and different opportunities in different places.

In select markets, especially promising opportunities lie with affiliated employer/employee housing projects. Most of these will be for-sale projects, but in some cases rental units should be built for homeless veterans or as feeders to the for-sale units.

Successful programs of this sort have been developed for the University of California at Irvine and the California State University at Channel Islands, and can be duplicated even in today’s difficult economy. Replicating these projects can help revitalize the homebuilding industry, enable employers to maintain a stable workforce, and produce long-term returns for sponsoring institutions—all with no new outlays of federal funds.

For employer/employee housing projects to work, the overhang of market-acceptable unsold units for sale in the local market at prices ranging from $100,000 to $300,000 should amount to less than nine months of normal consumption. Moreover, the median price of housing units should be greater than 3.3 times the area’s median income. Alternatively, the price of new housing should be more than three times the area’s median income and the community should be experiencing a potential growth in employment.

In such target markets, including Boston, San Jose, Seattle, and Washington, D.C., there is significant unmet demand for affordable for-sale units, particularly on the part of public employees like teachers, firefighters, and police officers, as well as staff at hospitals, universities, and other nonprofit institutions.

These employees typically earn between 60 and 120 percent of the local area median income—too much to qualify for low-income housing (if it is available at all), but too little to pay market rates for available homes.

For example, there is no way for a nurse in San Jose making about $75,000 to afford the median-priced house costing $545,000, or for a university employee in New York City making $60,000 to afford a median-priced unit costing $375,000. Most foreclosed properties are also out of reach because they are too expensive, involve a long commute, require substantial repairs, or all of the above.

Not surprisingly, the lack of close-in affordable housing also makes it hard for municipal agencies, schools, and nonprofits—especially in neighborhoods with high poverty rates—to hire and retain qualified employees. These difficulties, along with potential future financial gain from underused property, create strong incentives to develop workforce housing.

Our plan turns on the willingness of the sponsoring university, government entity, corporation, hospital, or other nonprofit unit to contribute underused land to a housing program, for a deferred return. This land can be open campus areas, surface parking lots, vacant government- or corporate-owned properties, schools, or playing fields.

Taking advantage of this newly available land, private builders can be hired to put up clusters of 50 to 1,000 attractive, modest-sized, energy-efficient, and green single- and multifamily housing units. Projects of this size can be expected to attract major mortgage lenders that can provide financial benefits to the sponsor and the buyers by offering attractive interest rates and assistance with closing costs.

At the same time, local government entities must be enlisted as partners. Specifically, they need to be prepared to commit some of the additional tax revenue from the new housing—most likely through a form of tax increment financing—to fund the debt service on any necessary infrastructure, plus other exterior improvements, soft costs like architectural fees, construction-period interest, legal costs, and title insurance.

Fannie Mae and Freddie Mac, in conjunction with state housing finance agencies, also have an indispensable role to play by agreeing, as they have in past projects, to fund single-family or multifamily mortgages on long-term leased land. This means that in their calculation of fair market value for the purpose of determining downpayments and the need for mortgage insurance, they must include the value of the land leased from the sponsor.

Both entities must also agree that the fair market value of each unit will include an allowance to take the place of a portion of the excluded infrastructure or land costs that can be applied to a onetime buydown of the purchaser’s mortgage rate. Such buydowns are common and are usually offered by the builder. In addition, because the allowance will not be needed for all buyers, a greater mortgage discount can be offered to those purchasers who have less income than the base offering price will require.

Finally, buyers must agree that for the right to own one of these below-market units, they cannot resell the unit for at least three years, and not for more than the purchase price plus inflation, as shown by increases in the consumer price index. Moreover, they will be expected to share 40 to 50 percent of the price increases with the sponsor and the provider of the tax increment financing, in return for their having provided the project with land and infrastructure at no cost.

In case of a mortgage default, sponsoring institutions should commit to step in and either pay the deficiency directly, or purchase the property, repay the mortgage, and then resell the unit.

What would such homes cost? We estimate that a typical two-bedroom, single-family detached unit measuring 1,200 square feet (112 sq m) would cost about $140,000, where adequate land and infrastructure are available to construct such units without additional charge to the homebuyer. A mid-rise condo unit of comparable size would come to about $250,000, reflecting added costs of construction as well as outlays for hallways, elevators, and common spaces.

Even if we have underestimated the cost of such units in particular locales, the differences are not material. For every $10 per square foot ($110 per sq m) that construction costs increase on a 1,200-square-foot (110 sq m) unit, the homebuyer will owe no more than $600 per year, or $50 per month. This amount can easily be made up by the use of a slightly increased homeowner allowance that, in turn, can be drawn from the homebuyer’s interest-rate buydown allowance.

These estimates assume construction costs, including builder profit and overhead, of $100 per square foot ($1,100 per sq m) for an energy-efficient detached house, and about $165 per gross square foot ($1,776 per gross sq m) for a multifamily condominium. Infrastructure and landscaping costs for both units would be negligible because they will be effectively covered by a reallocation of property taxes. Soft costs would account for about 20 percent of basic construction costs, and an interest-rate buydown allowance would equal about 3 percent of unit costs, or $4,600 for the detached home and $7,500 for the condominium. There would be no mortgage insurance premium, since the mortgage amount, as a percentage of fair market value, would be less than the amount that must be paid for placing the mortgage with Freddie or Fannie. Maintenance charges or condo fees could add about $2,500 for the single-family unit and about $3,600 for the condominium.

Assuming a downpayment plus closing costs of 10 percent of a unit’s price, the buyer’s total annual cost would be no more than $14,000 for the single-family home and $22,300 for the multifamily condominium unit. This would be a bargain for buyers. By living near their workplaces, they would also realize substantial additional savings in gasoline, time, and aggravation.

Using the banking rule of thumb that housing should cost no more than one-third of gross income, the single-family homes produced under this employer/employee model would be affordable for those with annual incomes of about $44,000, and the condos for those making about $64,000. To the extent that rental housing is built, monthly rental charges could be as low as $600 per month.

If cities wish to target particular units to families with even lower incomes, they could do so by using HOME Investment Partnership Act funds or other housing investment programs that are available to provide a temporary three- to five-year interest-rate buydown. The first year’s subsidy would be limited to $3,000, and the required income level would thereby be reduced by about $9,000.

A burst of employer/employee housing along these lines would be a win-win for builders, sponsors, employees, and local governments. It could come about rapidly and would produce housing in considerable volume—precisely what the economy needs now. The federal government, Freddie Mac and Fannie Mae, and public employee unions should endorse this concept and launch an outreach effort to attract and educate potential sponsors.