home as prize in claw machine game

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Unlocking Inventory

Real estate pros are seeking—and finding—solutions for persistent housing shortages across the nation.

July - August
2019

Your sales volume should be higher. To some extent, the reason it isn’t lies with the persistent housing shortages nationwide—an issue the National Association of REALTORS® and other groups have been talking about for years.

New-home construction levels have failed to keep pace with population growth, shifting demographic preferences, and the aging housing stock. Evidence of the shortage: The deficit of homes for sale is fueling higher home and rental prices. The median existing-home sales price in March was $259,400, which marked 85 consecutive months of year-over-year price gains.

What about increases in rental prices? “We have a growing population, and we need more housing to accommodate it,” says NAR Chief Economist Lawrence Yun. “There is a good probability for solid home sales growth once the supply issue is addressed.”

Additional inventory, he adds, will also help contain rapid home price growth and open up markets around the country to more prospective home buyers who have been priced out.

How Deep Is the Shortage?

The U.S. is about 2.5 million units short based on long-term growth projections, Freddie Mac estimates. Laurie Goodman, vice president of housing finance policy at the Urban Institute, calls the housing shortage a crisis. The Institute has found a shortfall of about 350,000 units per year due to underbuilding since 2009. The result will be “a huge deficit in housing over the next decade,” she says. To be sure, some markets are seeing improved inventory levels. But it’s largely skewed to one segment: upper-end housing. In April, the number of homes listed at or above $750,000—more than double the national median price—rose by 11% year over year; homes priced $200,000 or below dropped 8%.

Lower-priced housing inventories remain tight. As of March, according to NAR, nearly a year’s worth of luxury home supply was for sale compared with barely a three-month supply in the lowest end of the market, homes priced below $100,000.

No Simple Fix for Inventory Shortfalls

But real estate pros are working to make a dent in the housing gap using multiple approaches: teaming with builders to create more inventory, overcoming not-in-my-backyard mindsets, or becoming stronger voices for the zoning and regulatory changes many governments are weighing as a way to increase housing density and affordability.

Partner Up With Builders

Increasing new-home construction sounds like the obvious solution to inventory shortages, but obstacles such as impact fees and regulations that limit new-construction densities are numerous. Builders also face ongoing labor and land shortages and rising building costs. In addition, the bulk of new construction has been in the higher price brackets for years, but that’s changing. In March, the average cost of a new home dropped to $302,700. That’s nearly 10% below one year ago and the lowest average cost since February 2017, the U.S. Commerce Department reported. And more affordable, entry-level housing is coming, said economists at the 2019 NAHB International Builders’ Show. Townhouse starts are up 24% on an annual basis. “If we can find a way to zone greater density in communities, townhouses could be a good way to bridge renters into homeownership,” said Robert Dietz, chief economist of the National Association of Home Builders.

Another possible route: prefabricated housing—homes partially built in factories—that would allow builders to add inventories at lower costs and possibly trim construction time by half. But the public must be able to get beyond the stigma that prefab housing sacrifices quality and style, presenters said at IBS 2019.

Buyers also may need to warm up to “new” as an option. The long wait until move-in day can be off-putting (the average single-family home takes seven months to complete), as can the higher cost compared with comparably sized existing homes. And some find the countless decisions to be made about fixtures and finishes to be daunting. Real estate professionals can help, says Quint Lears, a real estate pro with RE/MAX Classic Real Estate in Las Cruces, N.M. “Builders and real estate professionals need each other—we need more inventory, and builders need more buyers of their new homes,” says Lears, author of Partnering With Brokers to Win More Sales (National Association of Home Builders, 2018). Builders have avoided overbuilding and limited spec building since the Great Recession and are waiting for buyers to come to them first.

Lears urges agents to connect with builders and learn about their floor plans and available inventory and then present options to buyers, even those who initially resisted buying new. Training as a new-home specialist is available through the Real Estate Buyer’s Agent Council.

Real estate pros need to overcome any reluctance they may have about pursuing new-home sales opportunities given the longer timetables and potential concerns about working with the builder’s sales agents. “As brokers, we’re missing a huge opportunity if we dismiss new-home sales, and we miss a competitive edge from showing buyers inventory that isn’t even on the MLS yet,” Lears says. (Read “You’re Even More Vital to New-Home Buyers”).

Turn One Home Into Two

Accessory dwelling units—which are independent units or “granny flats” added to existing homes—are another way to build inventory. Fannie Mae selected ADUs as one of three innovative ideas to tackle housing shortages. The company is funding a pilot program in Denver to add ADUs to low- and middle-income housing and also generate extra income for homeowners. This infill housing helps support multigenerational living and allows aging homeowners to stay put longer, since they can rent the ADU or primary residence to earn extra income and gain help with home maintenance.

Kassidy Benson, owner of Living Room Real Estate in Denver, created an online database showing properties for sale that are zoned as ADUs in her market. She has carved out a niche in ADUs as a way not only to respond to inventory shortages but also to educate clients about zoning and permitting issues and the costs of building ADUs. “I help them learn the ins and outs before they build one or buy a property for an ADU,” she says. “ADUs can be a great solution. We could effectively double the inventory in Denver with them. But as REALTORS®, we need to help our clients figure out if they can even finance one and guide them in understanding the zoning codes so they don’t make bad decisions.”

ADUs can be costly to build, commonly $150,000 to $250,000 in Benson’s market. Prefabricated ADUs could cut costs in half, but homeowners need to know about the limits of what cities allow.

Many cities are adopting ADU ordinances or are considering them. “In places like Austin, Texas; Portland, Ore.; and Denver, we don’t have enough inventory,” Benson says. “But we still need to crack the (zoning) code on them and work out the financing part if they’re going to a viable solution. I believe they can be once we do.” (Read “The Rise of the Accessory Dwelling Unit”).

Find an Opportunity Zone

Some real estate pros are leveraging “opportunity zones”—one of the biggest tax breaks in decades—to show investors how to add housing and revitalize areas that were once cast aside. The opportunity zone program, spawned by the 2017 federal income tax overhaul, offers tax breaks to investors who purchase and improve property in one of about 8,700 areas nationwide. Investors can reduce or postpone taxes on their profits from stocks, businesses, or investment partnerships by reinvesting those funds into these areas. If they make “substantial improvements” and hold the investments for at least 10 years, they may avoid taxes on future profits. Designated zones have been identified by states and certified by the U.S. Treasury Department as ripe for revitalization, with poverty rates averaging more than 30% and an unemployment rate 1.5 times the national average.

Brett Theodos, a senior fellow at the Urban Institute, is studying the potential impact. “The incentive is linked to appreciation, so it’s more likely to be used to build property assets that will appreciate over time,” like bringing in new businesses or multifamily housing, he says. It also could bring in greater housing supply to alleviate low-inventory pressures elsewhere, but most likely will aid middle- to higher-price brackets more than affordable housing, Theodos says.

“We will know within three or four years how much capital communities are accessing” in these zones and whether the program is having an impact on revitalization and stimulating extra housing, he says. (Read “Get Up to Speed on O-Zones”.)

Be a Voice for Change

Taking a long view of the housing pipeline, REALTORS® are playing a critical role in guiding the conversation and offering assistance. NAR’s Community Outreach and Smart Growth grants can be used to fund community or association workshops or conduct studies to pinpoint what’s inhibiting housing production and define solutions.

“REALTORS® are uniquely positioned to be change agents in their communities,” says Hugh Morris, NAR’s manager of smart growth. “Because REALTORS® have connections that are both broad and deep, they have the ability to bring together stakeholders like city officials, the business community, housing nonprofits, and others to have the kinds of conversations that can solve problems,” adds Wendy Penn, manager of NAR's housing opportunity program. (See how associations are doing this at realtorparty.realtor/supply.)

The Maine Association of REALTORS® has used NAR grants to conduct three-day problem-solving workshops known as charrettes in 2017 and 2018. The workshops brought together REALTORS®, city leaders, architects, and residents to address the state’s aging housing stock and its lack of affordable housing.

Leaders at the gatherings took a specific area, drew up plans for revitalization, and then presented the plans to lawmakers. Because of the charrettes, plans for affordable housing and retail are underway to revitalize an abandoned mill area in Sanford, Maine.

“In real estate, we have an obligation to find a home for everyone,” says Greg Gosselin, owner of Gosselin Realty Group in York, Maine, who helped plan the meetings. Gosselin says people should be alarmed if they have to drive 20 or 30 miles outside a city center just to find housing they can afford. “We need to have a balanced, vibrant community that supports all types of income levels, and we need to have housing for those—like firefighters and teachers—who make our cities work,” he says.

Also using Community Outreach grants, the Richmond Association of REALTORS® has made headway on several long-term solutions. It created the Partnership for Housing Affordability, a nonprofit group that works alongside lawmakers and city leaders to develop more affordable housing in the city, from creating long-term city planning documents to raising funds and advocating for zoning changes.

The association also helped create a community land trust, a land bank holding tax-delinquent properties that are turned over to nonprofit organizations to remodel and sell.

The land trust retains ownership of the land parcel. When the properties are sold to income-qualified buyers, to keep costs down, the cost of land isn’t included in the purchase price. When the home is sold years later, the owner keeps half of the equity created by the home’s appreciated value; the other half is returned to the land bank. When the home is sold again to new owners, they pay less than the market’s home value again.

“That keeps the home affordable for years to come,” says Laura Lafayette, CEO of the Richmond Association of REALTORS®, adding they plan to help 871 families meet housing needs with the housing bank alone over the next two decades.

Some real estate professionals also are identifying populations most starved for housing. About four years ago, Navy veteran and real estate pro Mark Solomon, with Keller Williams, Kansas City North, teamed with fellow vets to create a tiny-home village in a once-empty city lot to house homeless vets. About 200 vets sleep on the streets in Kansas City, Mo., on any given night, Solomon says.

The Veterans Community Project will have 49 furnished 240-square-foot homes available to homeless vets by the end of the year. Vets can live in the homes rent-free while also accessing onsite services to address extra needs, such as employment and health, as they transition into permanent housing.

“It was an idea scribbled on a napkin about five years ago. Now it’s turned into a nationwide multimillion-dollar charity,” Solomon says.

The project also serves as a model for other cities and aims to counter not-in-my-backyard attitudes about affordable housing. For example, Solomon is consulting with developers about adding tiny homes to house homeless veterans in a new subdivision in Longmont, Colo. The tiny homes with mountain views will be built among 500 homes priced between $400,000 to $900,000.

Solomon is also working to commission a study to confirm his anecdotal evidence that the Kansas City tiny-home community has helped raise nearby property values. “We want to change the narrative,” Solomon says. “Done correctly, you can build homes with dignity for vets and others—and if you do it correctly, it can even help raise local values.”

Addressing the need for affordable housing has become a personal mission for these impassioned real estate pros. “There is a regulatory impediment to housing affordability,” Lafayette says. “We need to get more people joining our pack. We need lenders, city officials, lawyers, everyone in this fight with us. We have a part in engaging in education on this and making a lasting change.”

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© Elizabeth Siuta, REALTOR® MAGAZINE

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