The ‘living wage’ fallacy
The April jobs report was bad news for the post-COVID-19 economic recovery. Across the United States, employers added just 266,000 jobs and the unemployment rate ticked up to 6.1%. This…
Nearly everyone acknowledges that the lack of housing available for people of low and middle income is one of the most serious problems facing the Twin Cities today.
Experts use a standard measure to determine whether housing is affordable: If a household spends 30 percent or more of its income on housing expenses (mortgage or rent), then that household is considered “cost-burdened” and their housing is not affordable.
By this measure, more than 27 percent of Twin Cities resi- dents were cost-burdened in 2017, according to Minnesota Compass, using U.S. Census Bureau data. And the poorest are hit hardest. Nearly 85 percent in the Twin Cities making less than $20,000 per year cannot find affordable housing. But it’s not just a problem for the poorest. Nearly 23 percent of households earning $50,000 to $75,000 per year are cost- burdened. For context, the area median income (AMI) in the Twin Cities is about $100,000 for a family of four.
The Family Housing Fund estimates that nearly 375,000 working residents of the Twin Cities—one in every five— cannot find affordable housing.
The cost of newly built homes exacerbates the problem. According to the Housing Affordability Institute, 85 percent of Twin Cities households are unable to afford an average newly constructed home. In fact, in 2018, less than 10 percent of new homes built in the Twin Cities cost less than $225,000 and less than a third cost less than $325,000—and most of those homes were condominiums or townhomes, not single-family homes.
The Minnesota Housing Partnership says only 164 of the 1,336 units of “affordable housing” constructed in 2017 (about 12 percent) were affordable to extremely low-income households, defined as those earning 30 percent or less of AMI.
And the disparity in homeownership for households of color is also substantial. Thirty-nine percent of Twin Cities households headed by a person of color or indigenous person are homeowners, versus 75 percent of white households.
The shortage of affordable housing is not unique to the Twin Cities, but it is more acute in the Twin Cities metro area than most metro areas around the country, and it is far worse than any other metro area in the Midwest.
Among the 100 largest metropolitan statistical areas to the concept, asserting that more inclusionary zoning requirements are necessary to address the affordable housing problem. The City of Minneapolis, for example, passed an IZ mandate effective January 1, 2020 that requires developers to include “affordable” units in any apartment building with 20 or more units.
Kelly Doran of Doran Cos., one of Minneapolis’s largest developers, told the Star Tribune that he now avoids projects in Minneapolis in favor of suburbs and other states. “I just know from a business standpoint the numbers won’t work, so why look?” he said.
Research shows that Doran is the rule rather than the exception regarding IZ laws throughout the country. Studies have shown that IZ mandates tend to prevent new housing starts and make market-rate housing more expensive. A 2012 study found that IZ mandates dis- couraged production of housing overall and raised prices in California. Another study found that IZ mandates contributed to price increases and lower construction rates in Boston.
Many of these same politicians also continue to champion age-old govern- ment “solutions” like rent or mortgage subsidies, tax credits and government- owned housing. After spending hundreds of billions of dollars over the last few decades on these “solutions,” we find ourselves in the current situation.
The problem with subsidies is pretty basic: They increase housing demand but do little or nothing to address the supply problem, thereby creating higher home prices and rents. As one small example, the Minnesota Housing Finance Agency recently found that housing projects in the Twin Cities that used the federal Low-Income Housing Tax Credit (a significant federal subsidy to developers who agree to keep costs lower for a per- centage of their tenants) cost 29 percent more than non-LIHTC projects in MSP.
That is not to say that some creative use of taxpayer dollars is not a part of the solution, but no amount of spending will solve (or even lessen) this problem unless government is willing to do what it hasn’t in the past: reform and actually roll back government mandates, regulations and fees that are contributing considerably to the lack of affordable housing in the Twin Cities.
Minnesota has the strictest codes in the Midwest and there is broad consensus they contribute to the high cost of housing in the Twin Cities. If the governor and legislature truly care about the creation of more affordable housing in the region, they will conduct an in-depth analysis of every code requirement and begin to eliminate some of the requirements that have been added in the past two decades based on political considerations. Minne- sota should strive to be at least somewhat competitive with our neighbors with respect to these costly requirements.
It is also broadly agreed that the myriad fees and zoning restrictions placed on builders by cities contribute significantly to the high cost of housing in the Twin Cit- ies. Certainly, more responsible action on the part of local governments would help, but that likely will not happen on its own. Both the state and federal government, however, could spur action in this area.
For example, the Minnesota Housing Finance Agency provides funds to cities through economic development and “housing challenge” no-interest loans. The federal government provides hous- ing money to cities through the Commu- nity Development Block Grant program (and several other sources). Some or all of these funds could be restricted to cities that maintain “reasonable” zoning restric- tions and fee levels as defined by statute.
It’s encouraging to note that such a proposal has been championed by both the Trump White House and the Eliza- beth Warren presidential campaign. If Warren and Trump can agree, we should be able to get it done.
The Met Council is the most powerful, expensive and unaccountable regional planning organization in the country. In addition to the costs it adds to housing through fees, it has created an artificial restriction on housing development that has contributed to the uniquely high cost of land in the Twin Cities. Nearly every other metro region with housing costs as high as the Twin Cities has natural geo- graphic barriers to growth in the form of mountains or an ocean. MSP does not, but the Met Council, through its MUSA line and attempts to direct the housing market, has created such barriers and contributed to the high cost of housing in the region.
There have been attempts to reform (or even eliminate) the Met Council in every legislative session for many years. Little has been done, however, to make it less powerful or more accountable. The ideal solution would be to dramatically scale back the authority of the Met Council to its original purpose of coordinating water runoff and the sewer system and serving as a facilitator of regional planning and growth. Taxing authority would not be necessary under such a charge.
Short of that, there are numerous reforms regarding both the power and makeup of the Met Council that would at least help. Bottom line, we will not get housing prices under control in the Twin Cities unless something is done to rein in the Met Council.
There is a role for government spending to address the affordable housing issue, but it will only bear fruit if accompanied by the reforms listed above. Ideally that spending will be focused on vouchers provided to tenants and homebuyers, rather than grants to developers. And if aid to developers is deemed necessary, it will be dispersed through revolving loan funds rather than outright grants.
There are also creative solutions that are much less expensive than the massive subsidies we’ve seen over the years. One example is to preserve existing affordable housing through a program called NOAH (naturally occurring affordable housing). These programs seek to preserve older rental property that is at risk of conversion to higher rents and displacement
of low- and moderate-income residents. Such programs often provide capital assistance or loans for capital repairs to owners of this housing in exchange for an agreement to keep rents at or near their current levels.