Tuesday, June 16, 2009

Are Apartments a Better Answer to the Housing Crisis?

Sometime in the early sixties, a large California developer opened its first development of condominiums for sale. Even by the standards of the day, they were offered at rock bottom prices. A home for a single family that could be bought for $10,000.00 was big news. The need for suburban housing that could be built in high densities and thus be affordable was apparent. It allowed for volume sales, which, of course, meant higher profits for home builders. Other developers followed suit, and the affordable, single-family attached home became a ubiquitous part of the California (and national) real estate market. An industry, as well as a type of housing, was born. Multi-family developments, however, were not new, even in the sixties.

For decades, rental apartments provided affordable housing for millions of people. What was new was the offering of these apartment units for sale. Because that's exactly what condominiums were - apartment units that could be sold to individual owners. In every other respect, they were just like the apartment buildings that everyone was familiar with. The big difference was that the maintenance and repair of these condominiums was now the responsibility of the owners - there was no landlord to foot the bill.

Now, even those homebuyers who could not afford a single family home could get on the real estate ownership bandwagon. Low interest and low down payment loans offered by various government agencies, gave many low and moderate income wage earners the opportunity to purchase a home. Most people could buy with 5% or no money down. Veterans could buy a new home for nothing down. Condominiums, and their planned development cousins, became the darlings of the real estate industry, and they were constructed by the car load.

During the roughly thirty-year period that preceded 1991, approximately 30,000 condominium and planned development projects were constructed in California. They were enormously attractive to a number of demographic groups--first-time buyers, transient workers, retirees, and vacation home buyers. They could be purchased for far less than a comparable single-family home, and the buyer did not have to worry about maintenance--it was all taken care of from the homeowners association monthly assessment.

The flaws in that concept (See "The Uncertain Future of Common Interest Developments," ECHO Journal, 1999) were still unknown. Even though the various real estate recessions of the past 30 years slowed things down for a year or two, the super-heated California real estate market was too hot to cool down, and developers could sell anything that could be built, as fast as they could build it. But we eventually found out that a lot of those condominiums were racked with not only original construction defects, but other hidden problems like underfunded reserve budgets, that did not make themselves known for many years, leaving the then owners to foot a large repair bill. When owners cannot afford to pay the additional assessments that become necessary to maintain the project, values, and the condition of the housing fall off and in some cases, owners lose or abandon their homes under this financial pressure.

Given the current recession, and our experience with two prior real estate crashes, is attached for-sale housing really the best solution to provide low-cost housing? Could apartment buildings not again pave the way for a renaissance in affordable housing? Rental apartments could provide quality low-cost housing as they have in California for over a century. Apartments, more so than condominiums or other for sale attached housing, are often better suited to the needs of low and moderate income families. As we stated in the "Myth of Affordable Housing," are we really doing families with moderate incomes any favors by encouraging them to buy housing that is poorly built, expensive to maintain, and impossible to sell? With all of the liabilities that have been discovered in attached housing in recent years, what benefit is there to saddling low and moderate income families with impossible maintenance burdens? When we sell housing with hidden defects and even normal maintenance costs that greatly exceed expectations, are we really conveying an asset? More likely, we have asked these families to assume a crushing liability.

Rental housing carries none of these detriments. Maintenance and repair costs are borne, at least initially, by the landlord. Rents are determined by the market, not by hidden costs of repair. There is, of course, no creation of equity, but as we have seen with much attached housing, when the costs of long-term maintenance and repair are figured in honestly, much of the equity disappears. Rental housing is liquid. Tenants are free to move in or out whenever the term of the lease expires. There is no situation like that described recently by Robert Bruss in his real estate column, where a widow could not sell her condominium because it had not been maintained properly and had deteriorated. She was trapped.

The long experiment with affordable for sale attached housing has produced very uneven and unsettling results. It has failed to produce substantial equity for the owners. It has required an extraordinary amount of maintenance and repairs that owners often find to be unaffordable. It has a limited service life, and when obsolescence sets in, owners find it difficult, if not impossible, to cash out. Condominium sales are the first to be hit by any real estate recession, and the last to emerge. In short, compared to single family detached housing, attached housing can be as much of a liability as an asset.

Builders are often unable to build attached housing for sale because land is expensive, construction costs are high, or cities and neighborhood groups resist it. And, to build a quality product, with it's attendant higher material, labor, and inspection costs, would eat up most of the builder's expected profits, especially if the builder is called upon to repair construction defects. High land and construction costs effect rental housing construction also, but construction of rental housing eliminates the problem of unaffordable repairs, trapped equity, and most litigation over construction defects, especially if the owner is also the builder.

The problems with city resistance can and should be overcome with the growing realization that some type of affordable housing must be provided adjacent to jobs. Of course, rental housing does not provide the same tax incentives as does owned housing. Also, it lacks that elusive pride of ownership. But if the true cost of ownership is illusory, then the pride won't last long. Cities and counties must reassess their willingness to allow the construction of rental housing. Higher densities can increase economies of scale.

Non-profit organizations should be encouraged by local jurisdictions to build not only rental housing, but, where possible, high-rise rental housing. By allowing special consideration to non-profit organizations, the cost of construction is decreased at least by the profit margin of the developer, an important difference for low and moderate income families.

High quality, luxury apartments are much in demand by young professionals. The construction of quality rental housing could be one of the fastest means to deal with the affordable housing crisis. Rental housing offers the same degree of housing affordability, located near jobs, as did attached for sale housing over the past three decades. If they are built in quantity, apartments could be the condos of the new millennium without the pitfalls that can accompany condo ownership.

High rise rental housing is better engineered, more permanent, and less invasive to the environment than low rise, lower density wood frame structures. Looking forward, it may be that rental housing could solve many of our immediate housing issues. It behooves cities and counties to explore this historical model as a possible solution to the present and future housing crisis.