Hidden barriers for affordable(ish) housing

There are a number of hidden reasons why adding affordable(ish) housing in many places is hard. And I’m not just talking about the price of land or the costs of building materials, but structural barriers and built-in incentives that make many types of new buildings harder and explain, in part, why more and more of the rental market is owned by larger and larger firms and why a variety of alternative building models and housing options are less common in much of the US than, perhaps, they are in other parts of the world (or even in earlier decades here in the US).

I am neither a lawyer nor a politician (or an accountant/tax advisor) so I may have not have all the details correct and suggestions for resources to go in deeper depth about these issues (and/or about any experiments in changing them that people are aware of) are welcome as comments or your own responses.

As my wife and I have been looking at real estate (not primarily as investors but we’re considering a move for personal reasons) we’ve learned a few things that I think most people may be unaware of that, in turn, explain a lot about many American cities and towns and what new construction is being built and has been built in recent years.

The first is that Fannie Mae and Freddie Mac who buy a majority of mortgages (Fannie Mae from large commercial banks, Freddie Mac from smaller lenders) have a rule that they will NOT buy a loan on a property where more than 25% of the development are rental units. So whether it is a townhome, a condo, or even a “single family home” but in an HOA community if the buyers are using a traditional mortgage, one that isn’t considered a “jumbo” mortgage in that market, it means that most buyers can only consider such units in complexes that do not have a high percentage of renters.

This means that getting a mortgage on condos or townhomes is a more complex, more difficult and more expensive proposition for most buyers. Meaning that sellers prefer to sell such properties to all cash buyers. It also shapes what types of complexes the builders of new construction are most likely to build favoring units designed to attract such all cash buyers (empty nesters who may be selling an existing home and then paying cash for a new home, overseas buyers, buyers of second homes).

It likely also favors building single family homes over various other forms of new housing. Local zoning here also matters but the difference in getting a loan for a property that is primarily rental vs a single family home or a unit in larger complex that does not have many rentals is a disincentive for local communities to even experiment with allowing many of the types of buildings that were common across the US in the past. Specifically mixed-use housing with retail or office spaces combined with multiple units of residential housing often in a variety of sizes. Intended to often be owned by someone who both ran a business and lived above it supplementing their income by renting out other apartments.

That is a form of housing and retail space rarely built in much of the US today.

But this impacts even basic housing options like condo complexes with a wide range of unit sizes including ones designed not for families but for groups of adults — i.e. students or graduate students, younger individuals starting out their professional careers etc. This form of housing was common in much of the US decades ago and still remains in some markets but it increasingly rare as newer housing unless built as an entirely for lease property by a larger developer. What is rare is a development where units are sold to individuals but designed in a way that supports many of those units being rented out or used for a variety of purposes (live/work developments that combine units used entirely for commercial purposes with some where people live there — historically this was populat with artists for their studio spaces but such developments could support a wide range of businesses.

But the challenge that many such developments face for buyers to get financing makes it less likely for such complexes to get built (even if they don’t face community backlash from Nimbys or other challenges).

This financing challenge is also present for complexes that are designed for alternative forms of housing — co-housing is one such which I have personal experience with — this is housing where the individual units tend to be smaller, but the community as a whole has larger spaces and frequently a highly engaged community that might include sharing communal meals and more. Such complexes offer a lot of advantages in theory for housing affordability — smaller units without the need to have massive kitchens or entertaining spaces makes the square footage requirements smaller which naturally makes them less expensive in most markets. And the shared communal resources like a large kitchen and spaces for gathering and entertaining often extends to shared resources like tools, workspaces and more.

But these complexes even though they are present all across the country (and the world) also face complex issues getting financed both initially and for buyers who wish to buy a unit in such developments. It isn’t impossible to resolve but neither is it easy as they don’t meet the “conforming” loan requirements for most financial institutions.

(I sublet a space in a co-housing development in Oakland when I first moved to the Bay Area and my landlord who also became a good friend not only owns another unit in a co-housing development in Berkeley where he and his wife live but he and his wife have for decades offered consulting services around co-housing around the globe. His wife has a PhD from U. C. Berkeley and they both have decades of expertise on the issues of setting up and running co-housing communities. When I lived in Berkeley — in a more traditional rental apartment it was just blocks away from my friend’s place and I visited him there.)