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Understanding Affordability

A new initiative at MIT’s Center for Real Estate is helping to tackle the high cost of homes.
October 1, 2005

You can easily drive past Elm Brook and miss it. The 13-acre Concord, MA, housing project is tucked along a meandering cul-de-sac. A marshy area, dense with viny growth, encircles most of the development, blocking it from the views of neighbors to the east and west. To the south, Elm Brook abuts undeveloped land.

There are 12 houses: clapboard-clad capes, saltboxes, and two-story colonials, all with less than 180 square meters of living space. They are single-family units on small lots landscaped to conform to the natural environment. Each of these three-bedroom modular houses was crafted to meet exacting energy standards in central New York state and then shipped to Massachusetts for on-site assembly.

Completed just three years ago, Elm Brook offers no hints of the local resistance that Toby Kramer, SM ‘91, a Concord real-estate consultant, and Peter Roth, MAR ‘85, SM ‘86, developer of the project, encountered in bringing the project to reality. The Elm Brook homes seem, well, commonplace. But in a community where expensive historic properties abound, these houses are an increasingly rare commodity. They are “affordable.”

Housing affordability is a complex issue. For many years, conventional wisdom held that a household should not spend more than 30 percent of its income on housing. But that view does little to help policymakers address the region’s needs. Much more useful is a clear understanding of a community’s proximity to job markets. Affordable housing that is 25 miles from a concentration of employers is not as valuable as housing within 10 miles. States and communities cannot develop appropriate housing policies without a tangible definition of the problem to be solved. And that means understanding just what affordability means. Through its new Housing Affordability Initiative (HAI), MIT’s Center for Real Estate is helping the housing industry do that.

What Does “Affordable” Mean?
Traditionally, housing sales have been viewed as an economic engine. But in Massachusetts, housing sales–with the exception of condominiums–were flat last spring. And the area’s population is shrinking. Census Bureau figures released last June showed that between April 2000 and July 2004, nearly 20,000 people, 3.4 percent of the city’s population, left Boston.

Although no single factor can explain this migratory trend, the price of housing–the median cost of a single-family home in Massachusetts is closing in on $400,000, according to the Massachusetts Association of Realtors–is certainly a major issue.

Over the same period, more Americans moved to the South and West, where all 10 of the nation’s fastest-growing cities larger than 100,000 people are located and where housing is far more affordable. During the four years that Boston shrank, the population of Gilbert, AZ, the nation’s fastest-growing city during that time period, increased by nearly 50 percent. Yet even that growth did not pump housing prices up to the rarefied levels of Boston.

The trend toward unaffordability is of such grave significance to the region that MIT’s 22-year-old Center for Real Estate introduced a special program in 2004 called the Housing Affordability Initiative. Its purpose is to better understand the issues that are contributing to the affordability problem and, by clarifying an often muddy picture, help the real-estate industry to address them.

That means research. During 2003, Henry Pollakowski, director of the initiative, and his colleagues spent a lot of time talking with industry professionals to learn what research was being done, what research needed to be done, and how the center could help solve the affordability problem. The first step was to clarify what “affordability” actually means.

“It’s nearly impossible to explore ways to solve the problem if the scope of the problem is not clear,” says Pollakowski. “Most of what we’re doing is about getting facts straight. We’re attempting to create a more economically meaningful definition of affordable that is sensitive to the many types of households, whether they rent or own, and the location of affordable units relative to jobs.”

Mark Baranski, SM ‘02, senior vice president with the Overland Development Group, who was instrumental in the development of HAI, says, “Affordability is a multidisciplinary question. There are no simple answers, but MIT has traditionally been a nexus where different disciplines interact.” The initiative, says Baranski, “represents a willingness to invent new ways to get the answers the industry needs.”

Refuting NIMBY
Pollakowski and his colleagues wasted no time tackling their assignment. In the past year they have produced research that is already changing the way municipal leaders, real-estate professionals, and lenders think about affordability.

The initiative’s first report, released in April, took on one of the most prevalent myths developers face when seeking approval for projects–the fear that affordable and high-density housing projects will depress the value of nearby single-family dwellings.

Pollakowski, David Ritchay, MCP ‘04, and Zoe Weinrobe, MCP ‘04, studied the effects of seven affordable-housing projects in six suburban Boston towns. They used data from 36,000 property sales between 1982 and 2003 to compare housing values in the affected areas with those in other parts of the same towns.

“In every case,” says Pollakowski, “house price movements in the impact areas simply tracked those in nearby market areas.” The study’s release was like a small explosion, garnering both media and industry attention and underscoring the value that the initiative can bring to the affordable-housing issue.

“A study of this sort could have been very useful to us,” says Kramer, who became all too familiar with the “not in my backyard” syndrome while working on Elm Brook. The project was delayed for a year by the appeals of neighbors who feared it would drive down the value of their properties. In fact, Elm Brook turned out to be an affordable-housing success story.

The seeds for Elm Brook were planted in 1995 as part of a rezoning when a local company offered to swap the 13 acres on which the houses are built for other property in Concord. This enabled the town to create a housing complex while honoring a conservation restriction to retain much of the surrounding property in its natural state. Affordability was an objective from the outset, and the houses were priced from $150,000 to $300,000.

In 1999, following a three-year feasibility study, Peter Roth was selected to create Elm Brook. Roth was the ideal developer. He founded Boston-based New Atlantic Development Corporation in 1994 with a specific focus on affordable housing. Under his guidance, Elm Brook successfully addressed a number of different affordability-related issues.

First, the project’s houses were priced for families with incomes specified between $56,000 and $98,000. Moreover, each home was sold subject to a deed restriction that requires owners to sell only to buyers who are in the same income bracket. The resale price must not exceed what would be affordable for families earning incomes comparable to those of the original owners when they purchased the home.

Next, qualified buyers were selected through a public process involving four informational meetings attended by more than 400 families. Those meetings culminated in a lottery to determine the buyers. Of the 12 homes, four were sold to minority households. Six of the buyers were teachers (including four who work in Concord public schools).

Others included a nurse, a social worker, and a computer technologist. The project, which relies upon higher housing density than is traditional for Concord, is surrounded by meadows and woods that serve as a buffer between Elm Brook and its neighbors. This landscape will be preserved as open space, benefiting both the Elm Brook residents and their neighbors.

It has now been four years since the Elm Brook homes sold and, says Kramer, “It has lived up to all our hopes and expectations.” The surrounding property values have held firm.

Viewing Affordability in New Ways
Flush with the success of its first affordability research, the Center for Real Estate hosted its first annual housing affordability conference last May. More than 120 people, including planners, developers, local government officials, nonprofit-housing representatives, and bank executives, were on hand to learn about two more HAI research projects. If attendees hoped for another breakthrough perspective, they weren’t disappointed.

The center unveiled a prototype index, the Rental Housing Affordability Index, that tracks the availability of low-priced housing throughout Greater Boston. The index assigns a numerical score to each town by evaluating the availability of affordable housing against other criteria such as access to employment.

Affordable-housing lenders can use this index as a guide to target where investments will provide the most benefit to the region. Developers can use it when considering where to build and in making their cases before planning boards. The data can also help policymakers, such as the Massachusetts Department of Housing and Community Development, in evaluating regional policies.

Recognizing the value of having affordable housing in proximity to jobs in the Boston region, MassHousing, a quasi-public agency that provides financing for affordable rental housing projects, and the Federal Home Loan Bank of Boston provided funding for this research. Pollakowski says that indices based on other income brackets are scheduled to be released in coming months.

“Having an affordability index that is informed by access to employment may create a different series of decisions,” says Thomas R. Gleason, executive director of MassHousing. “More information is needed on housing in this market, both subsidized and unsubsidized, to make good lending decisions,” he says.

Another study presented at the May conference analyzed land use in the Boston area between 1997 and 2001. Lynn Fisher, an assistant professor of real estate in the Department of Urban Studies and Planning, and her colleagues studied the size of lots for 34,000 new single-family detached homes built during that time.

Their research showed that median lot size was nearly an acre, unusually large by both historical and national standards. The implications are clear. “By limiting the supply of available land for development, larger lot sizes constrict the future supply of job-accessible housing in all price ranges,” Fisher says.

Fisher is quick to note that affordable housing can be found in a variety of ways. “People in the real-estate industry tend to get fixated on new construction,” she says, “but it’s important to remember that renting is a perfectly legitimate way to afford housing. Also, lower-cost housing is typically older housing. There is usually a large stock of older houses and, consequently, renovation is an important tool for increasing affordability that should not be overlooked.”

Sometime this year, the initiative expects to produce a report on the extent to which workers such as nurses, teachers, police, and firefighters are able to afford housing in the communities they serve. “In fact, we don’t really know who those workers are, what kind of incomes they have town for town and household for household,” says Fisher. “So, it’s unclear how dire their situation is.”

But HAI will soon bring some clarity. Poring over detailed census data, a squadron of graduate students spent last summer creating a profile of those workers and their income distribution in the same 161 towns covered by the Rental Housing Affordability Index. Like all the research being conducted by HAI, it exemplifies a willingness to look at the problem of affordability from all perspectives and in fresh ways. That makes sense, because–as HAI personnel will tell you–the problem of affordability is being redefined, all the time, by a host of factors.

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