Wednesday, August 18, 2010

The Challenges of Building Affordable Housing

Given the enormous inventory of unsold homes in the marketplace, it’s very easy to claim that the U.S. is simply over-housed. But despite 300,000 new foreclosures per month and a national apartment vacancy rate of nearly 8%, in many metro areas there is still not enough housing for low-income households. The reasons for this shortfall are many, including high prices for land, impact fees, zoning requirements and pricy carrying costs. Add to that list uncooperative neighborhood groups who assume that affordable housing equals increased traffic, utilitarian architecture and neighborhood decay, and it’s no wonder that the demand chronically exceeds supply.

In the case of Heritage Walk, a collection of 34 single-family homes built on small lots in the Southern California City of Fullerton, they look like many other infill developments and feature Spanish-style elevations which blend with the surrounding neighborhood, LEED certification for energy-conscious buyers and three pocket parks for those with families.

Not surprisingly, like many infill communities in established areas, sales have been brisk, with the first phase of homes selling out within the first weekend of opening. Yet not all hopeful buyers will qualify even if they can afford it: in a fairly unique situation for California in which the builder partnered with the city’s redevelopment agency, eligible buyers cannot earn more than 120% of the Orange County median income based on household size, the home cannot be rented out (not even a bedroom), and it must be resold to another eligible buyer at an affordable purchase price based on the same formula used for the original sale.

Consequently, it’s possible that if interest rates rise faster than countywide incomes and they’ve not paid down enough principal, if they sell original buyers could actually lose money – an issue which made it difficult for us to price the community against competing new home developments and resale homes which had no such restrictions. Fortunately for Olson, the combination of low costs, an efficient land plan and an effective marketing campaign in an area desperate for affordable new homes has meant brisk sales as well as a healthy profit margin.

For rental housing, the Low Income Housing Tax Credit (LIHTC), which was created under the Tax Reform Act of 1986 and provides dollar-for-dollar tax credits administered by each state and ultimately sold by developers to investors to raise funds, has historically been a huge success, accounting in part for nearly 90% of all affordable rental housing nationwide. And yet as the Great Recession began and corporations no longer had the earnings against which to shield income taxes, it’s become nearly impossible to find willing buyers for these credits even though the demand by low-income households remains unabated.

In these cases, affordable housing developers have had to be both nimble and quick, cobbling together financing from local jurisdictions, tax-exempt state bonds and HUD-administered HOME funds. Moreover, although the market studies which must be produced by third parties typically adhere to LIHTC guidelines, they’ve gradually become so complex and time-consuming that most traditional consultants can’t or won’t touch them.

However, in MetroIntelligence’s dealings with both non-profit and for-profit entities, such projects are increasingly crucial, whether providing the inclusionary housing to get a large master plan approved, allowing a builder of market-rate apartments to clear a financing hurdle by reserving some units for low-income households, or ensuring that cities are meeting their requirements for low-income families, seniors and other special populations. And for those driving or walking by, these projects are certainly not the public housing projects of yesterday. They’re now just part of the fabric of a dynamic community.

Friday, August 13, 2010

Yes, there is still a move-up market in the Inland Empire!

Although one would think that the Inland Empire would not be a primary place for a builder to build move-up product, with the right price point even half-million dollars can be sold, something which Ryland Homes has been finding out lately. From a story in the Riverside Press-Enterprise:

Dale F. Casey, Ryland's Southern California division president, said Sunset Ridge is the first new community that Ryland has launched in the region in about five years. He said Ryland aims to build homes that can compete with existing houses for sale in The Retreat. He said he also expects to attract buyers who want to avoid the risk of buying foreclosed homes "as is."

Houses in the first phase at Sunset Ridge range from 2,695 square feet to 4,248 square feet and are priced from $489,550 to $594,240. They have such amenities as hardwood cabinets, granite countertops, stainless steel appliances, extra-wide staircases, walk-in pantries and cavernous master suites.

Sunset Ridge homes are unlike most new homes being built in Inland Southern California that have been downsized and streamlined for young, first-time buyers. Move-up home construction generally is considered risky for builders today because many homeowners who would like to upgrade won't accept the deflated prices that their existing homes will sell for or are stuck in homes that are worth less than the mortgages on them.

Patrick Duffy, principal of MetroIntelligence, a Los Angeles real estate consulting firm, said The Retreat is "one of the few places in the Inland Empire where you can build move-up (homes) and get away with it in this market." He said that is because of the community's upscale appeal and location, where it can compete favorably on price with nearby Orange County.

Casey said he believes there are well-qualified buyers with cash "who have been waiting on the sidelines for an opportunity to buy their dream."

Heather Stevenson, vice president of sales and marketing for Ryland's Southern California division, said some potential buyers intend to rent out their existing homes and make a down payment on a new one with cash tapped from their savings or retirement accounts...

Click here for entire article.


August column for Builder & Developer magazine now online

My August column for Builder & Developer magazine is now posted online. For this month's issue -- which is oriented towards green home building and entitled "Green Building Success Equals Proper Execution" -- I wanted to discuss how the most forward-thinking builders such as Pulte and Pardee are profiting by educating buyers throughout the sales and process and partnering with outside providers to troubleshoot once the sale has closed.

An excerpt:

For the building industry, given the complexity of marketing, merchandising and selling the benefits of sustainability and green technology, education during the sales process and customer service after the closing are critical components that not all builders provide.

To this day, I still remember walking through models in the late 1990s when builders were trying to showcase options such as home theater systems, whole-house audio and structured wiring. And yet more often that not, I’d see TV sets flashing a “signal missing” message, fake computer monitors, sales agents who could only refer my questions to an outside vendor, and brochures that gave only a passing glance on these new features...

You can read the entire article by clicking here.

50 Ways for Home Builders to Waste Money

If a penny saved is a penny earned, then it certainly makes sense to avoid wasting money. To help builders avoid common pitfalls in today's environment, Builder magazine has compiled a list of 50 ways to boost profits and avoid leaving money on the table:

It’s fair to say that home builders are more worried about cash flow and cost efficiencies today than ever before. It’s a necessity. After all, that botched foundation pour, costly callback, or unchecked billing error could mean the difference between making or breaking a wafer-thin margin.

Which makes it all the more mystifying that so many builders continue to leave money on the table, or—as some expert observers and peers will tell you—commit the operational equivalent of throwing a pile of cash into a dumpster and setting it ablaze. Even in the most brutal of economic conditions, capital is being squandered in some amazing and clueless ways.

So, if your ultimate goal is to bury your business, forgo all of your worldly possessions, and live in a yurt on the edge of eastern nowhere, then by all means, go ahead and do what many builders have been doing for years. Sticking to the status quo could be your ticket out.

But if you’re looking to shore up your bottom line, run a tighter ship, and maintain the time-honored American tradition of turning a profit, then read these tips as a cautionary tale. And, if you have cautionary tales of your own to tell, pass them on. Submit a comment at www.builderonline.com/tradesecrets.

Then, make a new plan, Stan. Hop on the bus, Gus. Drop off the key, Lee. And get yourself free.

I have to admit one of my personal favorites is #13, "Eschew Market Research:"

Outsourced surveys and independent research reports can be expensive, but spending an hour or two of your day to read the local newspaper and/or business journal, talk with suppliers, subs, and lenders, give a home buyer seminar to a community group, and set up a simple survey on your website and at your sales center(s) can go a long way toward identifying market opportunities. And, even easier, the NAHB’s “Consumer Preferences Survey” and the National Association of Realtors’ “Profile of Buyers and Sellers” report, both available online for a modest cost, provide national and MSA-level data to broaden your perspective.

Although these are all good suggestions, I would also recommend asking for another opinion when pulling the trigger on a new development. And be sure to add Builder & Developer magazine and The Housing Chronicles Blog to that reading list. :)

For a list of all 50 suggestions, click here.

Monday, August 2, 2010

Who will buy the $75 million Porcupine Creek property?

Recently a reporter for Palm Springs Life magazine called me regarding the listing for the $75 million Porcupine Creek in Rancho Mirage, which on its 249 acres includes a true rarity -- a 19-hole private golf course with its own clubhouse and driving range. Who might the potential buyer for this ultra-exclusive property might be? You can read the article by clicking here.