When the costs of labor, land, materials and debt are all quite high, it’s impossible to produce an affordable housing unit affordably. I was reminded of this recently when I came across a sweet new project coming to Old City in Philadelphia — a five-story building with 34 units of efficiency housing for formerly homeless people. The project, built by a local church using low-income housing tax credits, also entails community space, supportive services, and offices.
The price tag? More than $20 million.
While the project sounds great, do the math, and even discounting the cost of extra amenities, each efficiency unit of housing will cost more than double the price of an average full-sized home in Philadelphia
If it costs nearly $600,000 to build a studio, something’s wrong, right? Except that the cost of new construction in most major American cities is astronomical. You’ve seen the stories about places like Los Angeles, where the city has spent $800,000 per tiny home for the homeless. Use Urban Institute’s nifty calculator to explore why it’s so hard to make affordable housing pencil out.
Cities or nonprofits continue to underwrite tax credit projects because their portion of the overall cost is small, while federal tax credits cover the majority of the bill. But increasingly, there is recognition that this model of building housing — primarily centered around our country’s tax credit and other large subsidy programs — is not sustainable.
Instead a new idea is taking hold: buying housing, rather than building it from scratch.
Don’t build. Buy
When hotels fell empty in 2020, cities and states saw an obvious opportunity: These hotels could be converted to housing. At the same time, many 1970s subsidized housing projects with 50-year land leases or 50-year affordability requirements started to expire, resulting in the potential loss of thousands of affordable units in cities across the country.
To address both these issues, California launched Project Homekey in 2020, a nearly $4 billion effort to help local governments purchase multifamily buildings. It’s one of the country’s best case studies in the effectiveness of buying rather than building affordable housing. In its first two years, California has added or preserved 12,500 units throughout the state. For a state with some of the most strict environmental reviews, buying rather than building units dramatically cuts down on the time needed to bring new affordable housing online.
While nonprofits with specific needs will continue to build new tax credit subsidized affordable housing, city entities should focus on buying and preserving naturally occurring affordable housing when possible.
Seeing these advantages, some forward-thinking municipal governments have sought to make it even easier to get their hands on property, through an option to have a right of first refusal on multifamily properties. This means that when a multifamily property goes on the market, its owners must give notice to the local government, and that government can put in an offer before the public. Prince George’s County has had a right of first refusal process since 2015 and has either bought or successfully assigned buying rights to third-party nonprofits to preserve more than 1,000 units of affordable housing.
Cities buying affordable homes
Philadelphia passed a “People’s Preservation Package” earlier this year which would give the city, tenants and affordable housing providers 45 days to make an offer on expiring federally subsidized housing before the property is offered to the market. This comes after a highly contentious sale of the University City Townhomes, a 70-unit expiring affordable housing project in a prime West Philadelphia location.
Colorado nearly passed a right of first refusal bill this year, which would have required multifamily properties that are more than 30 years old to give local governments an option to buy them. But the bill was vetoed by the governor, who noted that governments can now purchase such properties on the open market and argued this would have added unnecessary complexity to real estate deals.
Indeed, right-of-first-refusal laws aren’t entirely necessary, and they also don’t solve the biggest problem facing cities: Cities don’t have the money or specialized entities to beat out faster, better-capitalized actors. For example, the selling price for the University City Townhomes was estimated to be $100 million — a price way beyond what the City of Philadelphia, or any local government, could pay.
Rather than focus on right of first refusal for multifamily properties, perhaps cities should flip the script on the iBuyer model — where traditionally investors such as OpenDoor and Zillow have offered to buy homes if the price is right.
Instead of investors buying up these single-family homes, the City could offer to buy homes at their assessed values. These homes could be put into an affordable housing trust. Sellers would get the convenience of an easy sale, and the City would have a straightforward path to build their affordable housing arsenal.
This would also encourage cities to build up their stock of single-family homes, rather than just multifamily buildings. If you look in parts of West or North Philadelphia, you can find plenty of two- and three-bedroom homes that cost less than $200,000.
But they might be more endangered than they seem: When these homes sell, they’re often going to developers who fix them up to rent them at higher rates, or flip them, further eliminating the stock of affordable housing. If instead the City of Philadelphia were able to buy these homes, the City could grow its affordable housing stock at a fraction of the cost and speed of new construction.
Whether they focus on buying single-family or multifamily properties, if cities are truly serious about this, they need to start figuring out how to do this now. Where will they get the capital? How will they staff these real estate investment entities? How will they review and prioritize the real estate investment opportunities — and opportunity costs of not buying up real estate? And how will they convince the public that government-owned housing is a good thing?
While nonprofits with specific needs will continue to build new tax credit subsidized affordable housing, city entities should focus on buying and preserving naturally occurring affordable housing when possible. Few cities have transitioned their funding and their administrative models to this new future, but the ones who do so fastest will be rewarded with a more livable city in the coming years.
MORE HOUSING SOLUTIONS FROM THE CITIZENThe Friends Housing Cooperative in North Philadelphia.