Creating Long-Term Value to Solve the Housing Crisis
The lack of “missing middle” homes is a real problem in the US., but the inventory crisis won’t be solved by building the lowest cost-per-square-foot products.
For over two decades, builders and developers largely ignored the vital “missing middle” housing segment—ranging from 80-120% of AMI (average median income), reaching as high as 170% in some communities—primarily because it was more profitable—and aligned with consumer demand—to build the largest home possible on a lot.
The price-per-square-foot valuation metric principally drove this decision making: given that land and infrastructure costs were the same irrespective of what type of structure was built, it made sense that the larger the home, the more money the builder could make.
While some developers were able to access government funding for low-income and affordable housing projects, most builders had little incentive to offer lower-priced homes that would result in smaller margins.
In recent years, shortages of land, labor, and materials have exacerbated the missing middle housing crunch, escalating it to an unprecedented crisis that is impacting families and communities across the nation.
Attainable Housing Quandary
On a global scale, the World Bank estimates that 1.6 billion people could be impacted by the housing shortage by 2025, and the UN forecasts that 96,000 new homes need to be built across the globe every day through 2030 to accommodate the seemingly insatiable demand for attainable homes.
In the United States, Freddie Mac estimates that the nation is short upwards of 3.8 million missing middle homes today, with fewer units available for sale or rent than at any time in the last 30 years. And the predicament is intensifying, particularly since the price of an average American home is more than three times the average annual household income.
No doubt, we’re in a pivotal moment—one that could impact our long-term national economic wherewithal and quality of life. It’s absolutely essential that we ask ourselves the right questions today if we are to fashion appropriate solutions for the future.
New Home Valuation Metric
If we fall into the trap of building homes based on AMI metrics, lowest upfront cost, and price per square foot alone, we will inevitably perpetuate the vicious cycle that got us here in the first place.
Unless we’re building next-generation homes that are net-zero, electrified, resilient, healthy, connected, solar powered, and, in some cases, prefab (to address insufficient labor), then all we’re doing is erecting structures that someone down the line will need to fix, repair, upgrade, or tear down.
If we put ourselves in what I like to call AMI jail, building homes to meet some arbitrary lending metric that is no longer applicable in today’s market, then we do ourselves, future home buyers, and communities a major disservice.
Changing the Housing Ecosystem
The only way to build long-term, generational wealth for first home buyers and every home buyer afterward, is to shift away from the outdated price-per-square-foot valuation metric and finally acknowledge that lowest upfront cost isn’t full cost. That will require nothing less than the transformation of the entire housing landscape.
Healthy Home. First, we need to start thinking about homes as a panacea for health and wellness. The National Center for Healthy Housing avows that homes in the United States are one of the most dangerous places for families, estimating that 35 million homes place their occupants at risk because of poor indoor air quality (IAQ).
Fortunately, consumer interest in healthy homes and IAQ has surged since the onset of the pandemic. According to a recent COGNITION Smart Data survey, 92% of early adopter and first-mover homeowners in the U.S. believe that good IAQ is extremely important or very important, and 85% say they would pay more for a healthy home.
This same survey reveals that healthy home is now homebuyers’ top priority (followed by resiliency and net zero energy), and healthy home is now as important to many buyers as location when making home purchase decisions. Clearly, the demand exists, now the onus is on the homebuilding industry to offer viable, cost-effective solutions.
Energy Efficiency and Water Conservation. Next, we have to decisively, conclusively, and irreversibly shut the door on any thinking that doesn’t recognize this simple truth: if we’re building homes that aren’t energy and water efficient, we’re building tomorrow’s slums.
The outdated price-per-square-foot metric plays itself out on the efficiency stage more than any other. It’s time for the industry to slam the door on the vicious lowest-upfront-cost death spiral and replace it with a system that values long-term value and operational cost savings.
According to the Department of Energy, homeowners can save up to 20% on utility bills with high-efficiency HVAC systems, 15% with upgraded insulation and proper air sealing, upwards of $600 annually on high-performance windows, and over $350 annually heat pump water heaters. Clearly, the numbers pencil out in favor of sustainability.
Offsite Construction. We also need to drive the adoption of building solutions that are scalable, minimize waste, optimize quality control, and solve for labor and supply chain challenges. The obvious answer in today’s market: offsite construction, panelized systems, prefab, and “alternative” building envelope systems like Structural Insulated Panels (SIPs) and Insulated Concrete Forms (ICFs).
These solutions are generally higher performance and more resilient than site-built solutions, and, given soaring prices for lumber and labor, they have reached price parity in many markets.
Another important factor in solving the housing crisis is rethinking how we use and prioritize space to allow for more mixed-use communities. According to COGNITION Smart Data, today’s homebuyers want to live in communities that offer amenities like open spaces, walking trails, co-working facilities, retail, and community gathering areas.
To remove the bottlenecks that drag out the development process, drive up costs, and prevent the construction of multifamily structures, local governments need to act quickly to update burdensome requirements like outdated zoning, land use, density, and entitlement policies.
Additionally, we need to start thinking about creating generational wealth, which is intricately linked to performance, durability, and resiliency. (The famous yellow house built with SIPs that was the last survivor of Hurricane Ike comes to mind.)
A fortified home that can withstand nature’s fury and doesn’t need constant maintenance is futureproofed, offering current homeowners, as well as others down the line, enhanced savings, comfort, and mental security.
Financial Options. Finally, we need to develop new financing vehicles that address current funding gaps (like for prefab homes), capitalize sustainability upgrades and improvements, and incorporate energy efficiency and resiliency.
The solar sector offers an innovative example. Solar companies were able to grow in the U.S. through the implementation of Power Purchase Agreements (PPAs), which allowed home and building owners to effectively lease systems rather than purchase them outright, thereby saving substantial amounts of money upfront and enabling the energy users to pay for their energy service over time, like a utility.
Fortunately, some pioneering companies are beginning to offer finance options that capitalize the upfront cost of smart home devices (like thermostats), battery storage, electric vehicle chargers, and demand-side energy management systems (the companies then make their money back based on energy savings either through energy markets or utilities.)
These creative financing vehicles take line items out of the cost of a home, allowing builders to focus their budgets on enhancing building performance, upgrading indoor air quality systems, improving resiliency, and augmenting occupant comfort, offering an avenue for builders to deliver a better home at the same cost as a conventional home.
Ultimately, we need to drive change throughout the entire housing sector to generate a meaningful solution to the housing crisis. But that solution will not come from Pavlov-like thinking or resorting to outdated valuation metrics that separate profit and performance.
Moving forward, we need to intricately bind the two together, so that higher quality, more sustainable homes are the ones that yield the highest reward for builders, homebuyers, and communities alike.