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Housing in a small town

Hawkeye66

Cyburbian
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402
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13
We have a strange situation. We have absolutely no housing available in the range of $70-120K, which in our area is middle tier. If a house in that range goes on the market, its gone within a week. That said, no one builds anything. We have cleared 15 lots or so in the last 3-4 years and none of them get a new house. So we are building two new streets on the edge of town with the idea that some of the houses will be the affordable basic type that we could keep around $125,000 or so. I am not even sure this is the right thing to do. We are an exurban town and a 4 lane is being completed in the next few years near us and we will be 35 min from a town of 200,000. We have some modest industry and a good retail base for a town of 2,500.

Any thoughts on this? Would be interested to hear opinions.
 
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Hink

OH....IO
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The problem with looking for a specific price of housing is that the market is going to dictate that price. If you are undersupplied, it is really likely that housing price is going to be higher than you want. A new house is difficult to build, even for a Ryan Homes, for under $125k. Generally the older housing stock meets that demand, so you might have a waterfall effect, but that won't let people get into the market until some of the people in the older homes move on up (or out).

I have not worked in specific price controlled areas, so I don't have experience, or even know if it is legal to require a certain price for a home. We have had luck with requirements to get houses to have more quality (made of brick and stone, etc.), but nothing in terms of keeping prices down.
 

Suburb Repairman

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Have you looked at who is actually buying those homes so quickly? I'll bet, at that price and with that demand, that you have investors doing cash purchases and converting to rental. At those prices and coupled with scarcity, I've gotta believe the pro forma on a rental has to be pretty spectacular. That is very hard to combat without really getting into market manipulation.

I'm not a huge fan of building new infrastructure in support of residential development on the edge, but that does generally give you the ability to tag those lots with income qualification restrictions due to the subsidy provided by installing infrastructure. In your scenario, in a small town, I'm less bothered by it and it may really be your only option. What you're describing is usually a larger city phenomenon, so it might be a bit difficult to find a such a program that hasn't been too weighed down with red tape. You might be able to at least borrow deed restriction language from a city like Austin, TX that has been doing this kind of thing for decades. It would still require a builder willing to participate in the program, but it could be a great opportunity for a new builder to get into the business with an almost guaranteed supply of buyers. Plus, the restriction remains in place for a certain time period, which allows you to build up the supply.
 

DVD

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13,223
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The last place I worked was an isolated semi rural county. The city I lived in had only local developers, none of the big guys. Their "affordable" housing started at $225k. They claimed they couldn't build a house for less than $150k which was our middle price housing market that was desperately needed. Then they would ask the city to pay for infrastructure through specials and get it. To put a point on what SR said, my house was in the $150k range. I sold it to an investor who will be renting it out.
 

Dan

Dear Leader
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There's a convergence of forces here that makes it nearly impossible for the market to provide middle-end housing of the same quality as what you'd normally find elsewhere in the US.

The average single family house here costs about $300K, compared to $130K in the Syracuse metro area, or $180K in Buffalo. A median priced house here is more likely to be smaller, older, less likely to be updated, and have more issues with functional obsolescence, than a median priced house in one of the Thruway cities. A LOT of people that move here settle for lower quality housing (double wide-like on-frame modulars, handyman specials, or farmhouses and "folk Victorians" with oddball floor plans), busy streets, or something on a rural frontage lot with no sewer/water/gas, and often no broadband Internet. Moving here on a middle class income is like moving to NYC in a way -- you have to lower your housing expectations a couple of notches.

There's fewer updated houses than in other parts of the country, even in the $200K-$300K range. Construction costs are extremely high --Ithaca is more a city of scholars and bohemians than builders and tradespeople. There's no production homebuilders in Ithaca, or speculative housing aimed at a "townie" market -- non-student housing is mostly custom build or modular. Instead of building houses and waiting for buyers -- with prices moderated from a supply of vacant units and competition between builders -- almost everything is built to order. Construction costs are about $200-$250/square foot for a new build, or $150-$175/square foot for a very basic modular, and that doesn't include land. Local developers and builders are small, and there's a lot of risk to speculative construction of more than a couple of houses.

Also, a fair percentage of permanent residents actually prefer more "rustic" housing, even when they can easily afford something that's more polished and updated. Houses with traditional curb appeal won't sell faster than something more "authentic", and many homeowners fear that updates will just increase their already high assessments.

If you find a site-built house in the $250K-$300K range updated to 1980s/1990s-era builder spec level, with 8' ceilings throughout, in the Ithaca school district and the Charter Spectrum service area, you're doing good. If someone is House Hunters-level picky, they pretty much have to look in the $400K-$500K+ range -- and be very patient -- or build new. Don't forget -- property taxes are 2% to 2.5% of assessed valuation, so a $300K house will have a similar mortgage-plus-escrow payment of a $450K-$500K house in another part of the country.

The barriers to more affordable housing? A short list. Zoning reform can only address a few of them.
  • Shortage and high cost of land with utilities and residential zoning.
  • Shortage and high cost of labor.
  • Lack of large home builders.
  • Larger builders focus on the more profitable student and high-end multifamily rental market.
  • No speculative housing to drive competition or lower vacancy rates.
  • Mom and pop home builders have limited financial resources, and greater exposure to financial risk.
  • Mom and pop home builders have low production capacity and no economies of scale.
  • Large lot residential zoning is the norm outside of the central city -- mismatch of zoning to the market, and little "in between" medium density inner ring suburban environment.
  • High soft costs (engineering, surveying, environmental review, etc).
  • Long development review process, with a lot of uncertainty about the outcome.
  • Very vocal drawbridge/environmental NIMBY crowd.
  • Benefits cliff restricts access to new subsidized housing. The result: the affordability of higher quality housing increases as your income decreases.
 

Dan

Dear Leader
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A couple of relevant articles:. I bookmarked the second one a couple of years ago.

https://www.mprnews.org/story/2018/08/11/npr-rural-america-faces-a-crisis-in-adequate-housing

> Like a lot of the Midwest, western Nebraska slowly emptied out over the years, which is why a lot of locals say the current housing shortage is nothing short of a paradox.

> "It's a tricky situation," says Mary Wilson, director of the local economic development office in Ogallala, population 4,500. For Wilson, the crisis that rural towns face would be more aptly dubbed a shortage of adequate housing.

> "People aren't updating their homes before they throw them on the market," she says. "And people are living in their homes longer here."

> "We had to settle for what was available," Wilson says, driving down a quiet, leafy street of larger homes in the center of town. Many homes here were built for a far different time, before mechanization, when you needed big families to work the farms. Most are outdated. The few that are on the market, Wilson says, often need thousands of dollars worth of upgrades.

> This is the classic "chicken and egg" that has long plagued rural America, but the problem is being magnified now by the housing shortage. Nationally, housing economists lay blame on a number of things, including the high price of lumber due to new tariffs on Canadian wood. There's also a labor shortage — after the 2008 housing collapse, construction workers left the trades in droves.

> The easiest answer for a town like Ogallala is to just build more, right? But small towns like this are still considered risky investments by most outside developers. They can make a lot more money in cities where land and home values are even higher. Ogallala is learning this the hard way. Recently, the town struggled to find capital to redevelop a shuttered middle school into condos and apartments, to help ease the shortage.

> "In rural Nebraska, you don't typically have tons of seed money just lying around waiting for a project to come across its door," says Jacob Hovendick, a local financial adviser and CPA.

> As he sees it, rural America is close to rebounding but is stymied because there are so few places to live. So Hovendick and other business leaders are behind a plan to ask voters this fall to approve a reallocation of local sales tax. The money would be used to build more workforce housing and offer incentives for developers to come here.

http://www.startribune.com/low-rents-in-rural-minnesota-stymie-new-housing/282093191/

> It is a growing conundrum across the Midwest: Prosperous towns like Roseau, Minn., complain that a housing shortage slows economic growth. Developers say it makes no financial sense to build apartments in these towns without subsidies.

> The appraisal confirmed what Darrin Smedsmo already knew about the apartments he’s building in a field south of Roseau. They will be worth less than they cost to build — by about a million dollars. If everything goes right, Smedsmo, his business partner Nick Kvidt and the government will pay $3.2 million for the 30 units and a garage. On the day tenants start moving in next year, the property will be worth an estimated $2.2 million.

> It is a growing conundrum of rural life in Minnesota and across the Midwest. Prosperous towns complain that a housing shortage slows economic growth. Developers say it makes no financial sense to build apartments in these towns without subsidies. “It’s definitely sticking our necks out, and chasing good money after bad,” said Smedsmo, who also owns the AmericInn in Roseau. “I hope we can make it fly financially.”

> “The main problem is the cost of construction and what you can get for rent in these smaller communities,” Saunders said. “Wages aren’t there to support what it costs to build apartments.” The reason for low rents in Roseau, where wages have grown in recent years, is a matter of debate. City officials say the problem is not worker pay, but a complex mix of factors involving the size of the city and the rents people are accustomed to paying. But Rodger Tinjum, the Detroit Lakes appraiser who put a $2.2 million value on Smedsmo’s project, said the problem is low wages. “It’s all economics, and there’s only so much income out there,” Tinjum said. “There’s a certain amount of money that people can afford for their housing.”

> To make an apartment project work, a developer needs a pool of potential tenants with similar incomes and budgets. But Roseau’s size — population 2,600 — means there aren’t a lot of people at any particular income level. That increases the risk of prolonged vacancies, which can wreak havoc for a landlord. Also, construction costs are high because so many contractors folded in the economic downturn and others are drawn to projects in North Dakota, said Todd Peterson, the city of Roseau’s development coordinator. Developers with no subsidy and 20 percent down would need to charge about $1,100 to $1,300 per month to get a worthwhile return in town, Peterson said.

> Median pay in northwest Minnesota, at $15.73 per hour, 26 percent less than the $19.92 median in the Twin Cities. But the city-rural gap in rents people pay is far larger. Average rent in the Twin Cities is $1,090 for a 2-bedroom unit, compared to roughly $600 per month in Roseau or Thief River Falls, an 81 percent gap. For some reason, Roseau renters historically pay a lower percentage of their income toward housing than renters in the Twin Cities, and low rents have been stubborn. Owners are reluctant to raise rents, so the value of new construction is driven downward, said Paul Vitrano, vice president of global government relations for Polaris Industries. “Ultimately, rents will need to increase or new construction will continue to be constrained,” Vitrano said.

> The city of Roseau is trying to do something about this. The city owns 24 townhouses where a two-bedroom unit costs $645 per month and a three-bedroom unit costs $705 per month. Officials plan to raise rents on the units by $50 in January, hoping to drive up prices in the local market to encourage developers like Smedsmo. “We are doing it because we need to move the market to where it needs to be, then see where the actual resistance is,” said Peterson. “When do we lose residents who say ‘We can’t afford that?’ ”

> Until small towns prove that people in them will pay higher rents, bankers won’t touch apartment projects without a huge down payment or government grants. And the problem of low rents makes profits on rural apartment projects so negligible that investors don’t want to get involved, even if they do have the money for a massive down payment. “If you make $10,000 on a $100,000 investment, you’re happy,” said Terry Kriesel, a commercial real estate banker at Bremer Bank in the Twin Cities. “If you make $10,000 on a $500,000 investment, you’re not happy.”

> And developers are wary of towns with one dominant employer, who could have a few rough years and lay people off, or even conceivably leave town. “If Digi-Key moved out tomorrow, everybody’d be hurting as far as occupancy,” said Saunders, who built 48 units in Thief River Falls in the 1970s and still owns them. “When you have a major employer in any of these small towns, it’s a big factor, going to take a risk to build apartments.”
 

Hawkeye66

Cyburbian
Messages
402
Points
13
I was working with a firm a few years ago that was going to build infill on some of the lots we had in the old parts of town. They built basic Habitat for Humanity type homes, and had a real firm grasp on their input costs, including getting the lot for $5,000 or less. We are OK with holding the lot price down. Then they switched to a different niche and that fell apart. I am seeking that sort of developer again. We don't own the land, and the land owner wants to do big lots, however if you go to .75 acre lots, you are not talking affordable housing anymore. You are back at that $300,000 level.

One thing I noticed is that people did build infill houses up through the 90's here. From 2000 on it just stopped. What changed?

To answer from above. When the decent $75-$125K houses do come on the market, the buyer is frequently local as well. Not for rental housing, but perhaps a slight move up or down depending on circumstance. We do have too much low end rental housing for sure. Generally, someone buys one out of tax sale, puts a little money in it, and then rents it. We don't have a rental code of course and our council is in no hurry to adopt one. It was a war when they last tried. There are also some here to do fix up and flip houses. So its a mix of things.

I am leaning towards seeing if we can allow some bigger market rate lots, but keep 30 or so of them in the smaller, affordable range. Even if they are Habitat style single levels on a slab.
 

Hawkeye66

Cyburbian
Messages
402
Points
13
OK. I am working with our COG now. I don't think I have ever done as much naval staring on a topic as I have done on this one. Its a tough problem. There is no way to justify subsidizing large single family lots.
 

Hawkeye66

Cyburbian
Messages
402
Points
13
I have been doing a lot of naval staring over this issue. Lets say it costs $2 million to build the street, storm water, and utilities extensions. For $2 million we could buy up several blocks worth of older housing and knock it down while still leaving the streets, water, sewer and storm sewer in place. In fact for $1 million you could do a lot. This town had infill development up thru the 90's, then in the 2000's it simply stopped. The infill was mostly small ranch houses. I did make contact with a developer who has some interest in affordable housing, so we will see.
 

RandomPlanner

Cyburbian
Messages
1,496
Points
21
I think CNU has coined this category as the missing middle and it's certainly happening in my community as well. Here, we don't have 'affordable' housing purchase options for someone who makes between $30-60k/ year. (Keep in mind, it's a lower income community adjacent to a high income community.)

I, too, am not a fan of building new infrastructure on the edge of town. Here, we've recently created a Land Bank Authority to help work through some of these issues (and heir property issues which is a real problem here). The Land Bank has the authority to do things the municipality couldn't do -- like NOT sell to the highest bidder if the project is one deemed worthy and set time limits on new construction.

I have been doing a lot of naval staring over this issue. Lets say it costs $2 million to build the street, storm water, and utilities extensions. For $2 million we could buy up several blocks worth of older housing and knock it down while still leaving the streets, water, sewer and storm sewer in place. In fact for $1 million you could do a lot. This town had infill development up thru the 90's, then in the 2000's it simply stopped. The infill was mostly small ranch houses. I did make contact with a developer who has some interest in affordable housing, so we will see.
In this scenario, are the houses condemned? Just because it's older housing stock doesn't mean it needs to be torn down. Could you work a similar plan where you upgrade the several blocks of older housing? (The greenest buildings are the ones that are already built.) I would argue that you could do the work for considerably less and have a better end product as a result.
 

Hawkeye66

Cyburbian
Messages
402
Points
13
I think CNU has coined this category as the missing middle and it's certainly happening in my community as well. Here, we don't have 'affordable' housing purchase options for someone who makes between $30-60k/ year. (Keep in mind, it's a lower income community adjacent to a high income community.)

I, too, am not a fan of building new infrastructure on the edge of town. Here, we've recently created a Land Bank Authority to help work through some of these issues (and heir property issues which is a real problem here). The Land Bank has the authority to do things the municipality couldn't do -- like NOT sell to the highest bidder if the project is one deemed worthy and set time limits on new construction.

In this scenario, are the houses condemned? Just because it's older housing stock doesn't mean it needs to be torn down. Could you work a similar plan where you upgrade the several blocks of older housing? (The greenest buildings are the ones that are already built.) I would argue that you could do the work for considerably less and have a better end product as a result.
The devil is in the details. What do you define as "upgrade"? Do you mean literally repairing people's houses? What we have in a lot of situations, and I am sure you see the same thing, is a block that is mixed with some pretty poor houses and some still decent ones. When we have had a decent lot open in town, we have really not been able to get people to build on them.
 
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