Posted by: Josh Lehner | February 15, 2022

Construction, Housing Supply, and Affordability

Demand for housing is very strong. Vacancy rates are falling, home sales are rising, and while new construction activity is increasing some, in the big picture it is relatively steady here in Oregon.

The lack of a sustained supply response in housing in the past 20 years is problematic for both current residents, and longer-term economic and revenue growth.

Oregon has underbuilt housing by 111,000 units in recent decades. Unfortunately the industry is running into supply side constraints. In general these include the lack of financing, particularly for land acquisition, development, and construction loans, which contributes to the low supply of available land and buildable lots. Layered on top of those are local land use, zoning and parking requirements, permitting processes and design reviews, and the like which are generally well-intentioned, but can reduce the timeliness and number of units being built. Furthermore labor is tight, particularly for an industry that has seen zero productivity increases in recent generations. It will take more workers to built more units.

All of these issues exist, and then the pandemic hit which simultaneously boosted homeownership demand and disrupted supply chains. Material and product availability is challenging, with longer lead times and more slowdowns in new housing production.

A market where demand is stronger, mostly due to rising incomes and favorable demographics, but supply is weaker, is one in which prices can increase quite quickly. And when the market becomes a bidding war, as it does in a supply constrained environment, it is our lowest income neighbors and family that lose out.

The statistics on the struggles of low-income households are myriad, and staggering. In Oregon, about one in four rental households spend more than 50 percent of their income on rent. There are twice as many very low-income rental households in Oregon (<$22,000 in income) than there are rental units that are affordable to those households (<$600 per month) without subsidies. And only about one in four eligible households actually receive federal rental assistance. As a result, estimates are that half of the state’s underproduction of housing – 54,000 of the 111,000 units – is needed among those earning less than half the area median income (AMI), or about $40,000 per year. The greatest need is among our lowest income neighbors, family, and friends.

It’s important to keep in mind that housing affordability has two components: housing costs, and household income. Affordability is the ratio of the two. As such, a growing economy with more-plentiful and better-paying job opportunities does help housing affordability, at least insofar as incomes rise faster than housing costs do. Improvements can be made on both components.

The issue is worse housing affordability forces families to make difficult, and at times impossible trade-offs. This includes other basic needs like food, clothing, transportation, and health care. Affordability problems are also the root cause of homelessness. New market rate construction is necessary and provides a lot of benefits, but it does not solve low-income affordability problems in the near-term. As such, continued investment in Affordable housing is needed. New Affordable projects are expensive – for example, two recent projects in the Portland region are approximately $400,000 per unit – and require substantial public funds either from the public sector directly or voter-approved bonds. Even so, it is clear that every single unit counts.

But those investments and improvements in low-income affordability cannot be achieved in a vacuum either. New market rate construction is required. New construction meets the demand of mostly high-income households. What this means is they are not competing with middle-income households for the same units, of which they will most likely remodel extensively bringing the older, less expensive units back up to the luxury tier. New market rate construction also contributes to longer-run affordability through filtering, which is a decades-long process. Filtering is the main source of workforce, or middle-income housing. Older units are generally less expensive in part due to being used, with a little more wear and tear, less up to date, and broader societal changes in housing tastes and preferences. Consumers are willing to pay a premium for new, and/or updated homes.

For more see this UCLA literature review on the effects of market-rate developments on neighborhood rents.

Today’s tight housing market is in part a function of the lack of new construction in the 1980s and in the aftermath of the Great Recession this past decade. There are fewer units to go around as a result. Housing supply matters, and if you build more units, you get more filtering. For example there are more housing units that are in the most affordable third of the market built in the 1990s than were built in the 1980s, despite being 10 years newer. This is due to the fact Oregon built 80,000 more units in the 1990s than in the 1980s. Similarly there are nearly as many units in the most affordable third built in the 2000s than were built in the 1980s, despite being 20 years newer. This is due to the fact Oregon built 40,000 more units in the 2000s than in the 1980s. Again, if you build more units, you get more filtering. What this also means is that given Oregon built so few units in the past decade, it will unfortunately have a lasting impact on availability and affordability for decades to come.

Our office’s forecast in the decade ahead is for 220,000 new housing starts, which are closely tied to the population and demographic forecast. This outlook does not make up the existing shortfall. The primary reasons are all of the supply side constraints discussed earlier, and the simple fact that Oregon has not built enough units in recent decades so it is hard to assume we suddenly will tomorrow.

Now, public policies like duplex legalization (HB 2001, 2019) and regional housing needs analysis (HB 2003, 2019) do support an increase in housing supply. These changes should provide economic, environmental, and societal benefits in the decades ahead. These benefits include better affordability, improved economic mobility, more walkable neighborhoods, and more efficient use of infrastructure to name a few. However these policies are best thought of as long-term improvements and are not a silver bullet to the immediate supply issues. Rather, it will likely take a concerted policy and workforce effort to increase the authorization and actual construction of more units than in our office’s baseline outlook.

Ultimately, housing affordability is a longer-term economic and revenue risk. Our office’s forecast assumes that households will continue to move to Oregon in search of the plentiful job opportunities and high quality of life. However to the extent fewer households can afford to live in and move to Oregon, or choose to live in a relatively more affordable state like those in the Intermountain West, then our office’s longer-run outlook will need to be revised lower. A slower growing population means there are relatively fewer workers earning less total income than in the baseline forecast. This translates directly into fewer customers and sales for local firms, and less taxes paid to state and local governments. This is not the baseline outlook for our office’s forecasts. However, housing affordability remains a key risk.


Responses

  1. FALSE! And unsupported by evidence:

    “Public policies like duplex legalization (HB 2001, 2019) and regional housing needs analysis (HB 2003, 2019) do support an increase in housing supply. These changes should provide economic, environmental, and societal benefits in the decades ahead. These benefits include better affordability, improved economic mobility, more walkable neighborhoods, and more efficient use of infrastructure to name a few.”

    TRUE FACTS:
    * HB 2001 has no provisions for affordability, renter protections, or climate protection.
    * HB 2001 has no provisions for mixed-use development, proximity to public transit, public parks and open space, protection of the Willamette River Greenway, etc.
    * HB 2001 is a purely and simply a massive deregulation that will increase land value and costs, and which provides enormous incentives to large private equity firms to outbid prospective single-family buyers for demolition and redevelopment, especially of the lowest cost rentals in “opportunity area” (i.e., near amenities).
    * Filtering will not help produce housing that is affordable to the very low-income households — no matter in how many decades, and Josh Lerner knows that!
    * HB 2001 deregulation is specifically based on a dispersed, relatively low-density development that will not scale up to the actual needs. Instead, it will undermine public transit, reduce the tree canopy, and cause chaos in infrastructure planning and high costs.
    * HB 2001 is egregiously inequitable and racist because high-end subdivisions with CC&Rs are totally exempt, and subdivisions comprising very large, lot-filling, expensive single-family homes will not be redeveloped.
    * What is needed is obvious: A combination of subsidized and market-rate apartments on high-service public transit routes. This is what would actually result in “better affordability, improved economic mobility, more walkable neighborhoods, and more efficient use of infrastructure to name a few.”

    This whole post is a thinly vailed propaganda piece promoting the “build-baby-build” special interests of large investors and developers.

    To get the actual facts, please visit:
    Housing-Facts.org

    Don’t take my word for it. view and read what genuine housing justice advocates have to say at:
    Housing-Facts.org/voices

    Here is one of the “takeaways” from Ananya Roy’s advice:

    “I want to make a distinction between ‘all housing matters’ and housing justice. Housing justice is a set of programs and policies focused on the experiences and needs of communities on the front lines of dispossession and displacement. It recognizes that the land and wealth loss suffered by such communities has often been the grounds for gentrification and other forms of urban development. *** Most important for the issue at hand, housing justice insists that the housing market is the problem, not the solution.“ ***

    • Hi Paul,

      Thanks for the comments. A few thoughts.

      First. HB 2001 does not have an Affordability provision. But it can still help with affordability. Attached units are more affordable than detached units, in part because they are generally smaller. 3 townhomes on one lot are each smaller and at a lower price point than the single detached home that would be built on the lot, for example.

      Second, filtering does not produce housing for the lowest income households. That is directly in the post that there needs to be a two-pronged approach for Affordable investments, but those cannot happen in a vacuum and new market rate is needed too.

      Third, in terms of improvements to existing laws I would suggest contacting your legislators and asking them to address the inequities you bring up.

      Best,
      Josh

      • “[HB 2001] can still help with affordability. Attached units are more affordable than detached units, in part because they are generally smaller. 3 townhomes on one lot are each smaller and at a lower price point than the single detached home that would be built on the lot, for example.”

        Josh,

        You’re an economist, and you frequently do a deep dive into “market” forces.

        So why do you ignore that so insistently by repeatedly stating what could — IN THEORY — be a benefit, without explaining what the market response will ACTUALLY be?

        The simple, well-documented fact is that upzoning with no other provisions creates land value that investors (rationally) leverage to gain the optimal combination of tolerable risk and maximal return.

        The result is predictable and documented (it’s already happening in Eugene):
        Investors outbid normal homebuyers for lower-value structures on larger lots near amenities. Demolish the NOAH structure and build “lux” apartments.

        I can show you concrete examples.

        Now, can you show me market-rate development in upzoned areas (e.g., RIP in Portland) that have improved affordability for the population that is truly housing-cost-burdened?

        That’s the crisis. And blanket deregulation without affordability requirements and/or renter protections is going to make things worse, not better.

        — Paul

      • First, this is not theory. I have a half dozen projects around the state showing new townhomes are about 20% less expensive than new detached single family homes in the exact same neighborhood. Actual concrete examples.

        Second, we know new market rate construction does not help our lowest income neighbors tomorrow. That is literally what the post says. But new market rate does help alleviate market pressures and over time helps with affordability across a broader spectrum, even if it never reaches the bottom 30% or 50% unless it falls into disrepair.

      • Josh,

        Your examples are unresponsive to the question, which was:

        “Can you show me market-rate development in upzoned areas (e.g., RIP in Portland) that have improved affordability for the population that is truly housing-cost-burdened?”

        How many times do I have to agree to the simple fact that if you build to the same specs (floor area, bedrooms, etc.) and quality, it is so obviously going to be less expensive to have to pay for some fraction of the land costs, e.g., 1/3 for a triplex vs. one unit. Equally obvious is that for a few units at least, attached structures will cost less than detached structures.

        None of that has anything to do with what the market will ACTUALLY build, and it isn’t even remotely “affordable” housing.

        Again, dodging the question: “New market rate does help alleviate market pressures and over time helps with affordability across a broader spectrum helps with affordability across a broader spectrum.” Fine. I’m happy to leave it to the market to supply expensive housing to help the wealthy Californians who move to Oregon get a better deal. However, that is not a “crisis,” and in no way justifies ripping apart the social contract inherent in zoning.

        Furthermore, you fail to address the documented worsening of “affordability” caused by demolitions of NOAH and rising rents caused by gentrification that result from deregulation without protections. Even DLCD admits that’s a very real problem, although the DLCD staff haven’t got a clue about effective approaches, such as “right of return” and “no net loss” redevelopment.

        The actual answer is clear in the final sentence of your response: market rate housing “never reaches the bottom 30% or 50%.” This is exactly why any upzoning needs to both protect lower-income renters from displacement and capture land value increase in a way that mitigates the burden on truly housing cost burdened households.

      • Hi Paul,

        Cities, economies, and societies evolve. That means the social contract does as well. In high-demand areas, not allowing change contributes to worse affordability and greater displacement. But you need at least a two pronged approached. Investment in Affordable housing, and increased new market rate construction. To your long-standing point about market elasticities, these are different segments of the market. Different segments may require different solutions, and I think in this case they do. As this post stated, the greatest need is at the lowest end. This is a point I have emphasized to a greater degree in recent years and in legislative testimony last week. I think we agree on the broad outline there.

        But as the post says these investments and improvements for low-income affordability cannot happen in a vacuum. We need new construction. I hear from some folks that they’re not worried about market rate. I do. Because if you don’t build it, it leads to more displacement as higher-income folks buy existing properties and renovate. That’s the loss of NOAH I’m worried about too where the overall supply is stagnant but you lose a relatively affordable unit. So no, new construction is not affordable to low-income households. But adding supply helps with overall market affordability and less displacement. See the UCLA research roundup linked in the post, which itself has a like link to an NYU paper on housing supply skepticism. We need policies that encourage or at least do not hinder new construction.

        Finally in terms of redeveloped properties resulting in lost NOAH. A couple of things. First, if you build more housing you get more filtering. As new construction opens up, it also tends to open up older, more affordable units via the migration/vacancy chain. We need to keep adding to the housing stock. There’s a paper on that in the UCLA literature review. Second, there are two recent research pieces that find that simply changing the zoning as HB 2001 does, will not result in some massive wave of demolitions. The thing that pencils out are backyard cottages/ADU type properties. Yes, there are always some demolitions that occur. I believe you found 1 example in Eugene. The point I keep trying to emphasize here is that properties get redeveloped. You can’t really stop that. And if you do, it really just means the existing stock gets renovated extensively and brought back up to the luxury tier, at least in high-demand areas. Anyway. When properties get redeveloped what do we want to see in their place? This is where townhomes and the broader economic, environmental, and societal benefits come into play versus a new, detached unit. Here are the two pieces on missing middle, zoning, and redevelopment:
        https://norcalapa.org/2021/08/why-zoning-for-middle-housing-doesnt-make-it-so/
        https://www.sightline.org/2021/08/01/we-ran-the-rent-numbers-on-portlands-7-newly-legal-home-options/

        Best,
        Josh

      • Josh,

        You are simply not up-to-date on the market and have misunderstood some of the studies you cite.

        I won’t go into great depth here, but it’s available to you and interested parties at:
        Housing-Facts.org

        See “Resources” and “Voices.”

        Here are the five big deficiencies in your theory:
        1. The huge “permanent renter” strategy of large, international private equity firms. You are simply dead-wrong that “The thing that pencils out are backyard cottages/ADU type properties.” The evidence is all over the cities that have upzoned. Fourplexes are the “hot spot” for deregulated, “single-family” areas.

        2. Neither “trickle-down,” nor “filtering” have any impact on housing affordability for lower-income households when there is a surplus of mid-range housing available. That is actually the case in Eugene. The ONLY deficit is at the VLI and ELI levels. It is nonsense to keep bring this myth up.As researcher, you need to dig a little deeper into the complexities of housing markets. It seems that OEA is lacking that expertise.

        3. The authors of the “chain migration” paper that is often miscited by YIMBYs explicitly state their study provides NO EVIDENCE of an effect on housing costs. Obviously, this is another one of those housing market complexities that cannot be ignored as a basis for policy. Effects vary depending on submarket and cross-market characteristics. Read up on it from Lisa Bates paper:
        https://works.bepress.com/lisa_bates/14/

        4. You neglect a much more important migration factor: “Leap-frog sprawl.” It’s happening rampantly in the South Willamette area where prospective homeowners who want single-family detached are buying in the surrounding towns that are exempt from HB 2001, i.e., Veneta, Junction City, Creswell, etc. It seems you and OEA are hesitant to touch the “third rail” in Oregon land use — sensible expansion of the Urban Growth Boundary. Eugene has ideal opportunities to expand mixed use and EmX up Hwy 99 and the Northwest Expressway. It would allow Transit-Oriented Development, including mixed housing types and tenancy that would deflate migration to outlying towns that require much higher VMT for work.

        5. “Middle Housing” is not scalable and there is plenty of land for what is really needed, i.e., a combination of market-rate and subsidized apartments on major BRT (e.g., EmX) routes.

        “Middle Housing” and neoliberal, deregulation and placing complete trust in the market are scams, plain-and-simple. Recently one of the HB 2001 promoters even cited “research” by “Up for Growth,” which is a Trumpist, no-holds-barred group fighting to deregulate everything, from EPA standards to Climate Actions to Zoning.

        As to your dismissive comment: “Cities, economies, and societies evolve. That means the social contract does as well. In high-demand areas, not allowing change contributes to worse affordability and greater displacement.”

        Yeah — democracies can evolve into authoritarianism, too. You make a vacuous argument that anyone could use for any kind of change. Let’s stick to actual evidence of what’s needed and what’s ethical. I suggest you take a look at to better understand the ethical issues:

        Click to access zoningandtheneighborhoodcommonsexcert.pdf

        Unfortunately, one thing that doesn’t seem to “evolve” is zealots’ unwillingness to look at the facts and democratically engage the people who will be impacted.

        Your comment smacks of total disconnect from the actual people that this deregulation is going to harm. Open your eyes to my senior neighbors who have been brought to tears as some rapacious developer has jammed a looming threeplex in the backyard next to them (under a previous upzoning). Open your eyes to the massive displacement that happened in Portland as a result of the same kind of zealous policy of fixing “blighted” areas.

        Check back after you’ve watched Lydia Edwards describe the real world.

        — Paul

        P.S. There are multiple documented cases of speculative investments in Eugene already, not just the one “poster child” on W. 15th Ave. You’re the researcher — go look.

      • The two research pieces on zoning and ADUs are a few months old! They’re not out of date.

        Now, I will say that the institutional build-for-rent trend does seem to be even more recent than that, at least in terms of public reports. Those same public reports that the Sun Belt markets are where it is happening to a greater degree, with Portland at a below average rate. Plus it’s important to keep in mind that homeownership rate has been rising overall, which means the renter share is declining. Now, if in a supply constrained market, it can feel like every single option is problematic.

        Filtering is not a myth. This post, and links to previous posts, don’t claim that new construction today results in units for ELI in two or three decades. Even so, the literature reviews from UCLA and NYU show that there are myriad papers showing new construction helps with overall market affordability.

        As for the migration chain, the paper states “new construction reduces demand and loosens the housing market in low- and middle-income areas.” Again, yes, the exact new unit is not affordable to lower income households, but as units open up and people trade up their units, it opens of relatively less expensive ones for other people to move in to. Here’s a direct link to the paper:
        https://research.upjohn.org/cgi/viewcontent.cgi?article=1325&context=up_workingpapers

        Can I ask what zealous policy you are referring to that lead to massive displacement?

  2. FALSE! And unsupported by evidence:

    “Public policies like duplex legalization (HB 2001, 2019) and regional housing needs analysis (HB 2003, 2019) do support an increase in housing supply. These changes should provide economic, environmental, and societal benefits in the decades ahead. These benefits include better affordability, improved economic mobility, more walkable neighborhoods, and more efficient use of infrastructure to name a few.”

    TRUE FACTS:
    * HB 2001 has no provisions for affordability, renter protections, or climate protection.
    * HB 2001 has no provisions for mixed-use development, proximity to public transit, public parks and open space, protection of the Willamette River Greenway, etc.
    * HB 2001 is a purely and simply a massive deregulation that will increase land value and costs, and which provides enormous incentives to large private equity firms to outbid prospective single-family buyers for demolition and redevelopment, especially of the lowest cost rentals in “opportunity area” (i.e., near amenities).
    * Filtering will not help produce housing that is affordable to the very low-income households — no matter in how many decades, and Josh Lerner knows that!
    * HB 2001 deregulation is specifically based on a dispersed, relatively low-density development that will not scale up to the actual needs. Instead, it will undermine public transit, reduce the tree canopy, and cause chaos in infrastructure planning and high costs.
    * HB 2001 is egregiously inequitable and racist because high-end subdivisions with CC&Rs are totally exempt, and subdivisions comprising very large, lot-filling, expensive single-family homes will not be redeveloped.
    * What is needed is obvious: A combination of subsidized and market-rate apartments on high-service public transit routes. This is what would actually result in “better affordability, improved economic mobility, more walkable neighborhoods, and more efficient use of infrastructure to name a few.”
    This whole post is a thinly vailed propaganda piece promoting the “build-baby-build” special interests of large investors and developers.

    To get the actual facts, please visit:
    Housing-Facts.org

    Don’t take my word for it. view and read what genuine housing justice advocates have to say at:
    Housing-Facts.org/voices

    Here is one of the “takeaways” from Ananya Roy’s advice:

    “I want to make a distinction between ‘all housing matters’ and housing justice. Housing justice is a set of programs and policies focused on the experiences and needs of communities on the front lines of dispossession and displacement. It recognizes that the land and wealth loss suffered by such communities has often been the grounds for gentrification and other forms of urban development. *** Most important for the issue at hand, housing justice insists that the housing market is the problem, not the solution.“ ***


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