Category Archives: Uncategorized

While looking through the list of workforce housing articles in my Google Alerts yesterday, I came across one from the South Florida Sun-Sentinel titled “Palm Beach County looks to revamp affordable housing program.”

While I routinely review the workforce and affordable housing articles Google provides, this particular article hit home.

The gist of the article is that Palm Beach County had passed an inclusionary zoning ordinance in 2006 but there has not been a one affordable single family home constructed in the 11 years since the law was enacted and the county commission is now looking to either revise or repeal the ordinance.

Why did it hit home? Eleven years ago, I was consulting for the Gold Coast Builders Association (the local chapter of the National Association of Homebuilders) in an effort to create an inclusionary zoning program that would meet the needs of the homebuilders and of the county.

So what happened? The first thing that happened was the great recession. Housing prices dropped throughout the country. Florida was particularly hard hit. Housing starts in places like Palm Beach County from more than 14,000 to only a handful. This one was out of local control. No matter what the county commission did, housing starts were going to fall until the recession ended.

But there is a second thing, and this second thing goes along way to explaining why Palm Beach County hasn’t seen any single-family workforce units constructed since the recession has ended.

Ultimately, the county went with the program as designed by county staff rather than the program design being pushed by the homebuilders. But the program as implemented had a fatal flaw. The requirements and incentives in the inclusionary zoning ordinance implemented by the county didn’t make sense economically for the homebuilders. Simply put, the numbers didn’t work. And judging by the absence of construction since the end of the recession, the numbers still don’t work.

Inclusionary zoning uses a carrot and stick approach. The builders are required to sell a certain percentage of units in any new development at a below-market price that is affordable to the local workforce (the stick). In return, the builders are offered some fee reductions and an opportunity to increase the number of units constructed on the property (the carrot).

For inclusionary zoning to work, the numbers have to work. The cost of creating the affordable units and selling them at a below-market or below-cost price must be offset by the additional profit that is earned by creating additional units with the increased density. That is, the builder must be able to sell the affordable units at below cost and still make a profit on the overall development. If there is no profit, the builder isn’t going to build.

One of the core discussions when the county commission passed the inclusionary zoning ordinance in 2006 was the profitability of the builders. The numbers in the inclusionary zoning program the county adopted were based on an incorrect assumption that builders were earning 30% net margins and would still be willing to build if the inclusionary zoning requirements cut into their margins.

The key problem was the builders weren’t earning anywhere near 30% consistently. Even the Microsoft’s and Apple’s of the world don’t earn this type of net margin consistently. Most builders were earning the 5%-10% net margin more typical of small businesses. If the inclusionary zoning requirements took out even a few percent of their already small profits, the economics of homebuilding in Palm Beach County wasn’t going to make sense. And as the actions of the homebuilders have demonstrated over the last 11 years, the economics didn’t make sense in 2006, and still don’t in 2017.

For inclusionary zoning or any other market-based approach to workforce or affordable housing creation to work, the numbers have to work. If the county is serious about creating workforce and affordable housing programs that work, the best approach is to analyze the numbers applicable to the local market and design the requirements and incentives specifically to fit the local market conditions.

As we end 2016, I can’t help thinking back seven years to 2009 to a conversation I had with some folks at the National Association of Home Builders.

We were talking about the tight credit standards the Fed was imposing on banks for anything that had to do with housing and difficulty builders were having finding money for land development.

Seven years ago, the country and the world were in throngs of the great recession caused in large part by the collapse of housing markets that had been fueled by easy money and irrational exuberance.

During the recession, we saw the typical reaction from lenders, borrowers, and the bank regulators. With their future uncertain, people cut back on their borrowing. In an effort to avoid any more problem loans and to meet the conservative requirements of their regulators, banks tightened their lending standards. Only those with impeccable credit could get a mortgage. Funding to builders for land development was pretty much non-existent.

As we end 2016, the economy and consumer confidence has generally recovered since the depths of the recession. Interest rates are low. Foreclosure victims have rebuilt their credit. A new generation of millennials who have come of age during the recession have entered the housing market. The demand for housing is up.

What’s not going up fast enough is the supply. The absence of funding for land development for seven years is beginning to show up in housing prices.

The National Association of Realtors reports that supply is down 9 percent from last year while prices are up 6.8 percent. Supply and demand are once again out of balance.

It takes several years to bring a property through the land development process, and because of the funding shortage, many builders were not able to get their projects started until this year or last. It should be another few years before we see supply of new houses catching up with the demand.