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Thread: Economics of housing in small towns

  1. #1
    Cyburbian Hawkeye66's avatar
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    Economics of housing in small towns

    What I am hearing is that a house costs a builder roughly $200,000 to build with all the various inputs and that the minute the house is built its worth like $150,000 because of the cost of housing in the town/area its in. Now you can take what the builders say with a grain of salt of course, but the basic problem of a devalued house come into play. Do local governments step up and just bridge the gap in order to get new housing built? Its a strange problem. We lack decent options at the same time we are taking 2-3 poor old ones down per year. I often wonder what its going to look like and how we should respond. Does the City take out whole blocks including some houses which are still decent to allow for re-development? What even is the proper role of the City here. We have a mid sized city in our state which is flat out giving people who build a new house there $10,000. I have some grave reservations about stuff like that and even using housing TIF, which it seems like is considered de-facto in these cases now. I really do not know the answer. I would think that the cost difference alone would attract building. We are 30 minutes from a city of 200K people and it literally costs 60% of what it costs to live in that city housing wise. I am just not sure where we are headed with all of this. I think cities are really sticking their necks out on some of this stuff and people in 2048 will be wondering what the hell we were thinking.
    Last edited by Hawkeye66; 09 Apr 2018 at 10:38 AM.

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    Cyburbian Doohickie's avatar
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    This is a related, but not quite the same, issue going on in Buffalo, NY: There are federal funds being used to restore homes in blighted neighborhoods. The rehabs often cost 4 or 5 times the eventual sales price of the home. On the one hand, it helps lift up blighted neighborhoods; on the other, it seems like a waste of resources to spend so much on an individual house. A series of articles were posted about it this weekend on the Buffalo News Facebook page.

    Here's a gallery showing some of the homes.
    http://buffalonews.com/2018/04/06/gallery10154/

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    Cyburbian Hawkeye66's avatar
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    Yeah I don't see why they just don't tear down and re-build affordable housing. There was a niche contractor here who had 2 floor models and built small affordable houses. They knew their exact margins. They were similar to Habitat Houses. They decided to focus on large projects and got out of it. I dont think I would pursue funds to rehab some of these. The cost of rehabbing is often worse.

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    Cyburbian Doohickie's avatar
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    I think the idea is that they want to encourage rehabbing the existing homes than tear-down and rebuild to keep the character of the neighborhoods involved. I know Habitat can tailor homes to blend in with neighborhood standards and probably other contractors can as well; I'm not sure what the zoning says about new homes in these neighborhoods though.

    Bottom line I think is that if you just want functional housing at a reasonable price, the rehab makes no sense, but if the goal is renewing neighborhoods with minimal impact on the character of the housing, the rehab makes sense. The latter might encourage gentrification which would increase the tax base.

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    Super Moderator kjel's avatar
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    Quote Originally posted by Doohickie View post
    This is a related, but not quite the same, issue going on in Buffalo, NY: There are federal funds being used to restore homes in blighted neighborhoods. The rehabs often cost 4 or 5 times the eventual sales price of the home. On the one hand, it helps lift up blighted neighborhoods; on the other, it seems like a waste of resources to spend so much on an individual house. A series of articles were posted about it this weekend on the Buffalo News Facebook page.

    Here's a gallery showing some of the homes.
    http://buffalonews.com/2018/04/06/gallery10154/
    Affordable housing isn't affordable to develop. It costs the same as market rate housing and sometimes even more. On the development side, I've built both new construction and significantly rehabbed others. The HOME funds invested in all of them effectively bought down the sales price to the eventual low-moderate income buyer. New construction total development cost runs about $135/sq foot in my area. Most of my new construction project were two units-one for the owner to live in and the other for the owner to rent to a low-moderate income household. Average cost would be $400,000 and I would sell for $200,000. HOME funds would make up the difference the price was determined based on mortgage rates, property taxes, insurance costs, and rental income the owner would earn. Personally, my strategy was 3 or more projects on the same street or the crappiest property on an otherwise decent street to either provide a catalyst or resolve a long standing issue.

    Sometimes it makes sense to demolish a property, other times it makes sense to bring it back to life. A market rate investor would likely not be able to make the numbers work on a decaying property in a declining neighborhood. That's where the
    subsidy comes in to play. Now I administer a HOME program and I work with developers to choose properties to make sense: for the neighborhood, the eventual homeowner, and meaningful use of HOME funds.
    "He defended the cause of the poor and needy, and so all went well. Is that not what it means to know me?" Jeremiah 22:16

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    Cyburbian Doohickie's avatar
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    I haven't read all the articles in the Buffalo News (there were several this weekend), but the general gist is that compared to nearby cities (Rochester, Syracuse), the Buffalo renovations cost more on a per-house basis than the other cities, with discussion as to whether Buffalo is using the federal funding to effect the greatest change per dollar. The slant in the articles is that they are spending too much on each house.... possible scandal? But then they also say that it looks like all the money was required for the houses in question (asbestos abatement, etc.) and that the contractor profits are not excessive. The articles compare Buffalo to the other cities with the implication that Buffalo could spend the money differently to get a better outcome per dollar.

    I think there is a difference though: Buffalo is in a higher tier of cities than Rochester or Syracuse, imo. One thing that sets Buffalo apart from other cities is having affordable older homes with classic/vintage architecture. Maybe there should be some tweaks to the program, but I can see where the current philosophy is justifiable.

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    Cyburbian Hawkeye66's avatar
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    While I think the Buffalo case is related, you really not apples to apples to the small towns. We are not talking about old historic neighborhoods here. These are eclectic with houses built at different times. The scale of Buffalo is a lot lot larger. Our town is only 3000 or so people.

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    Super Moderator kjel's avatar
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    Quote Originally posted by Hawkeye66 View post
    While I think the Buffalo case is related, you really not apples to apples to the small towns. We are not talking about old historic neighborhoods here. These are eclectic with houses built at different times. The scale of Buffalo is a lot lot larger. Our town is only 3000 or so people.
    If the end sales price can't cover the developer's cost to build or the price can't appraise during mortgage underwriting, the project isn't viable unless there's some incentive covering the gap. Developing it as a rental property may be more appropriate if the rents can cover the operating costs.
    "He defended the cause of the poor and needy, and so all went well. Is that not what it means to know me?" Jeremiah 22:16

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    Cyburbian Hawkeye66's avatar
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    Quote Originally posted by kjel View post
    If the end sales price can't cover the developer's cost to build or the price can't appraise during mortgage underwriting, the project isn't viable unless there's some incentive covering the gap. Developing it as a rental property may be more appropriate if the rents can cover the operating costs.
    I get that. What I really would want transparency on is the developer cost. When I hear developers say their costs are this or that I want to see detail. Itemized detail.

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    Super Moderator kjel's avatar
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    Quote Originally posted by Hawkeye66 View post
    I get that. What I really would want transparency on is the developer cost. When I hear developers say their costs are this or that I want to see detail. Itemized detail.
    Unless public funds are being used to build a home you are unlikely to get an itemized cost list. RS Means or Marshall & Swift are good resources for construction estimates. Your state's housing finance agency likely has a construction cost guideline either on a per square foot or per unit basis based on the type of housing being built. Remember too that hard construction costs are only one component of a development budget.
    "He defended the cause of the poor and needy, and so all went well. Is that not what it means to know me?" Jeremiah 22:16

  11. #11
    Cyburbian Doohickie's avatar
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    Quote Originally posted by Hawkeye66 View post
    While I think the Buffalo case is related, you really not apples to apples to the small towns. We are not talking about old historic neighborhoods here. These are eclectic with houses built at different times. The scale of Buffalo is a lot lot larger. Our town is only 3000 or so people.
    Yes, and I apologize for hijacking the thread.

    I think the role of government comes into play here in both cases though. Does a state or federal government have any business propping up development that isn't otherwise viable in a community? Is it a slippery slope to even get involved in development? What about picking winners and losers (this town deserves a housing subsidy; this doesn't)?

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