Why Biden’s Plan To Build, Build, Build Won’t End the Housing Crisis
(Source: OSD Deputy Secretary of Defense.)
President Biden has posted the following to X (formerly known as Twitter):
The budget I released has a plan for 2 million more affordable homes, including an innovation fund to help communities build housing, renovate housing, and convert office space into homes.
— President Biden (@POTUS) March 12, 2024
We have to build, build, build.
That's how we bring down costs for good.
In a time where many feel they’re squeezed out of the prospect of home ownership, renters are budgeting more and more of their annual income to afford remaining in the apartments they’ve called home for years, and losing a roof over one’s head is seemingly less of an anomaly, the president’s words may feel reassuring. There’s no doubt that across the country, the supply is not meeting the demand when it comes to housing. Yet, according to Strong Towns President Chuck Marohn, there’s reason to be skeptical of exactly how President Biden is suggesting we tackle this crisis.
“Having people take on more debt to build more housing does not scale,” Marohn said. “We need to look at what scales. What does scale is when homeowners can build their own wealth and their own capacity. What does scale is when you fertilize the ground for incremental growth, where people can respond when needed, as needed. What does scale is a housing finance market that is more localized and responsive to people’s real ability to pay.”
Currently, the patchwork regime of zoning laws, parking mandates, and building codes make it expensive, if not impossible, for the shop owner to develop the lot next door when their business takes off, for the homeowner to renovate and rent out a part of their home, and for the local developer to fix up the long-vacant row home midblock. It would cost virtually nothing for local governments to reform if not repeal these restrictions, Marohn points out. “This is where we should start.”
Injecting massive amounts of money while these restrictions remain in place appears paradoxical. In effect, it denies those who are arguably best poised to respond to emerging local needs the agency to build while inviting large-scale developers to “build, build, build!” That, for Marohn, is a recipe for fragility. Even worse, it can distort the market, he warns, making building even more expensive and, consequently, more out of reach for those local partners.
The playing field is already rigged in favor of the larger, corporate developer. In his article, “Why small developers are getting squeezed out of the housing market,” Coby Lefkowitz identifies banks as being in the “risk mitigation business,” and with construction being an inherently risky business (”There are a hundred things that can go wrong. A dozen usually do, and that’s only if you're lucky.”), banks favor loaning hundreds of thousands of dollars to more established firms. Those larger firms can also better absorb the fees and the aforementioned obstacles local governments produce, and local governments even court them with tax breaks and subsidies. The same happens with stadiums and entertainment districts.
The logic follows that big risks reap big rewards, but in these deals, cities often end up weaker than if they had diversified the development. And the grand irony, Marohn adds, is that it would actually be cheaper for cities to invest capital in the smaller local developer rather than accept the inflated promises and “free money” of a large project.
One city is doing just that, he notes, and it’s proving to be successful. Like many cities across the United States, Muskegon, Michigan, has suffered a shortage of housing and a surplus of vacant, abandoned lots. That’s why in 2019 the city enacted a program that allows it to redevelop those lots into housing at both a low risk to the city and an affordable margin for the prospective buyer.
A key feature of the program is how the city uses tax increment financing, or TIF, to finance the homes for less than for what they would cost to build. According to Jason Eckholm, who pioneered the program and otherwise works as Muskegon’s director of development services, new construction averages at about $220 to $250 per square foot to build, which would put a 1,000-square-foot “starter home” at $220,000 to $250,000. In using TIF, the city is able to deliver a similar home for $135,000 to $200,000, which more accurately aligns with the area median income, or what locals can actually afford. (Note that the city is not losing money on these projects, so the project can scale to meet demand.)
Since the program’s adoption, the city has completed or started construction on 143 units, contracted another 61 units, and sold approximately 20 lots to private builders, according to Eckholm. And the developments have been evenly spread out through Muskegon's wealthy neighborhoods on the waterfront, as well as the historically disenfranchised ones that made up the city’s core decades ago.
“It’s a win-win for everyone,” Eckhold explained. “Because these were formerly publicly-owned (tax-exempt) vacant lots, and then they end up having a new home on the tax rolls once we’re all said and done.”
Marohn concedes that he is generally skeptical of TIF, but that’s also because the majority of projects that capitalize on this type of financing are large top-down developments that not only squeeze out the community, but generally fail to provide the return on investment they promise. He’d rather see local governments capitalize on the tools already available to them to usher in projects like this program in Muskegon.
Muskegon’s model can be replicated in and tailored to many of America’s small and midsize cities. For Marohn and Lefkowitz, the incentive isn’t only that it’s a more financially sound means of filling the housing gap. There are already people in every town and city, they insist, that want to make that place better. They’re just not given the same privileges as larger institutions. “It’s my belief that it’s better for the health of a neighborhood if more buildings are constructed by the people who live within it, or at least in the area,” Lefkowitz writes. “Fewer local developers, the corollary follows, diminishes the health and character of a neighborhood.”
Local developers are likewise uniquely tuned into the actual material needs and appetites of the community in which they reside, and relatedly feel a sense of accountability and pride for something they’ll “pass by everyday,” as Lefkowitz notes.
Their incentives also differ from the corporate firm. “[Small developers] tend to be less motivated by squeezing every last dollar out of a project than creating somewhere they can be proud of,” Lefkowitz adds. “This isn’t to say they don’t care about making money—of course they do. But their capital structure doesn’t require them to grind down every last dollar…I’m constantly surprised (and heartened) by how many of them care deeply about the quality of what they build. They defiantly underwrite rents lower than what they might be able to achieve because they don’t want to spurn the community that gave them so much.”
If the goal is not only to bridge the gap between supply and demand but to, as Biden noted in his original statement, “bring down costs for good,” then the approach needs to empower the local developer. For Marohn, few top-down initiatives like this can truly keep prices aligned with what the average American can afford without heavy subsidies that would be subject to shifting political will.
In the end, not building is not an option but that doesn’t make the question, “Do we build?” Instead, it’s “how do we build” and for Marohn, the answer is obvious: from the bottom up.
Asia (pronounced “ah-sha”) Mieleszko serves as a Staff Writer for Strong Towns. A dilettante urbanist since adolescence, she's excited to convert a lifetime of ad-hoc volunteerism into a career. Her unconventional background includes directing a Ukrainian folk choir, pioneering synaesthetic performances, photographing festivals, designing websites, teaching, and ghostwriting. She can be found wherever Wi-Fi is reliable, typically along Amtrak's Northeast Corridor.