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Demand, costs fuel Valley housing crisis; Labor shortage, strong market complicate problem

Posted 7/27/19

Finding an affordable place to live can be difficult for many Valley residents as rising housing costs outrun income growth.

While apartment rents and home …

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Demand, costs fuel Valley housing crisis; Labor shortage, strong market complicate problem

Posted

Finding an affordable place to live can be difficult for many Valley residents as rising housing costs outrun income growth.

While apartment rents and home prices continue to rise without a balancing increase in wages, the housing market faces a crisis, which some experts warn may not be easily unraveled.

“We continue to have an income crisis coupled with a pricing issue,” said Mark Stapp, director of the Center for Real Estate Theory and Practice at Arizona State University’s W.P. Carey School of Business. “We simply can’t price this stuff at a point where people can afford when it’s not financeable.”

As investors continue to build apartments — with 6,000 to 9,000 new units predicted for delivery by the end of year based on first-quarter data reported by ABI Multifamily Apartment Brokerage & Advisory Firm — most of those projects are high-rent luxury communities.

“80 to 88% of new construction is Class A. The workforce affordable housing … with a rental point around $950, that’s not getting built pretty much at all,” Roland Murphy, ABI’s director of research in Phoenix, told Daily Independent earlier this year.

Mr. Stapp agreed, saying meeting the demand for those earning in the bottom half remains a challenge for the local real estate market to resolve.

“The other side of this equation is what we would call workforce housing. That’s housing people who make a median income and below can afford and that’s where the real dilemma is,” Mr. Stapp explained.

According to the U.S. Census Bureau, of the county’s estimated 4.4 million residents, half are earning a gross income under the $30,186 annually — or about $2,500 monthly, roughly equivalent to full-time employment at $14.50 an hour.

But, based on data compiled through mid-2018, 13.5% of residents — nearly 600,000 individuals — don’t rise above the poverty threshold as measured by the agency.

“… the Census Bureau uses a set of money income thresholds that vary by family size and composition to determine who is in poverty. If a family’s total income is less than the family’s threshold, then that family and every individual in it is considered in poverty,” the bureau states at its website, www.census.gov.

For a single person, the gross annual income needed to exceed the poverty line is $13,064 for those under 65 and $12,043 for those older than that. For a family of four with two children under age 18, the threshold is $25,465.

As incomes have stagnated, population growth in the Valley has exceeded most metro areas nationally, with an increase of 15.5% since 2010, leading to continued demand for new housing developments.

With a median mortgage payment of nearly $1,500 and apartments going for a median gross monthly of $1,033, the carrot of stable, affordable housing still dangles beyond reach of many full-time workers.

However, basic supply and demand aren’t the only contributors to the problem, Mr. Stapp said.

“This is almost a Gordian Knot, this housing affordability issue” he said. “There’s not an easy solution and I don’t think looking at developers and blaming them is the way to approach this because they’re simply reacting to the material cost increases, labor shortages which cause labor cost increases, and land prices, which have continued to go up.”

But while Alexander the Great, according to legend, hacked the impossibly tangled knot with his sword to break its bind, a simple solution to the Valley’s housing crisis remains elusive.

“You look at all the factors of production, the one that’s missing from this equation is financing,” Mr. Stapp said. “It takes land, labor and capital; those are the three functions of production. But in this case, there’s not the money available to build a substantial amount of affordable housing at one time. You don’t get a lot of affordable housing built because it costs more to build it than what it’s worth when you’re done building it. So, you need subsidies.”

He said a lot of local factors also may squelch affordable housing developments, such as apartment projects, because municipal regulations and fees affect the bottom line for investors, while many communities opposed new high-density construction.

“Rental communities have become undesirable in many neighborhoods,” Mr. Stapp said. “Is it because of land use policy? Is it because all of the costs to get your approvals are so high and it takes so long? That answer is, yeah, that’s all part of it. But those other factors are the real significant drivers.”

The problem seems to be one of imbalance — though population growth has driven more development, the market and governmental forces needed to profitably build more affordable housing have not yet emerged, he explained.

“You have trouble in a very competitive, highly constrained marketplace maintaining pricing for people that make median income and below when median wages have not gone up substantially,” Mr. Stapp said. “Look at the Valley. We just basically recovered last year in terms of our median household income, so it’s only been very recently we’ve gotten back to where we started in 2007 and that’s in whole dollars, not in inflated dollars.”

Another factor stymieing workforce-affordable housing is the rising cost of construction labor, due mainly to an ongoing skilled labor shortage in Arizona.

Real estate industry analysts Marcus & Millichap concluded low unemployment and slow job growth have further driven demand for more apartments, according to a report published in June.

“The slowing pace of job growth has not hampered rental demand, with multiple attributes drawing people to apartment living. These range from greater mobility to on-site amenities, and rentals are often the most cost-effective housing option,” the firm stated in the report.

And while fewer workers are competing for jobs, occupations in skilled labor roles have not kept pace with demand either – driving up demand for skilled workers and, consequently, the cost of obtaining those workers.

That cost, Mr. Stapp explained, gets passed down to the market and, in the end, those looking for a place to rent.

“Finding qualified labor when there’s a shortage, for those who are in the market, it’s going to garner higher rates,” Mr. Stapp said.

He said as contractors struggle to fill skilled labor positions on their projects, not only does the cost to pay those workers rise, but stretching construction timelines boosts interest rates for project financing as well, further exacerbating the problem.

According to Marcus & Millichap, the tightening labor market could help drive up wages, however, which could expand housing access for some workers.

“The number of voluntary job leavers increased by 66,000 to 803,000 people in May, the highest level since February,” the firm reported.

“People have confidence in the job market and are choosing to leave their current roles to find better positions. This trend should add upward pressure to wage growth and could contribute to higher labor productivity.”