Housing crisis continues; Fed rate cut unlikely to improve workforce affordability

Work continues on The Heritage, a 100-unit affordable housing complex under construction in the Original Town Site neighborhood of Surprise, which will be managed by the Maricopa Housing Authority. Such affordable housing developments remain the exception, not the rule, in the Phoenix metro area, according to some experts. [Matt Roy/Independent Newsmedia]

By Matt Roy, Independent Newsmedia

The Federal Reserve late last month announced it had lowered its benchmark rate by a quarter-point, the first such reduction since the depths of the Great Recession in 2008.

But will cutting borrowing costs do anything to make housing more affordable to the Valley’s middle class and low-income workers?

National and local experts suggest the housing affordability crisis may continue.

More than just lowering interest rates will be needed, according to Mark Stapp, director of the Center for Real Estate Theory and Practice at Arizona State University’s W.P. Carey School of Business.

“I don’t think the current interest rate reduction by the Fed will have any discernible impact on housing affordability,” Mr. Stapp stated. “Mortgage interest rates are already very low and they are not as closely tied to 10-year treasury rates as they used to be. There are many other factors impacting affordability and none will be impacted by this rate cut.”

Roland Murphy, director of research for the ABI Multifamily Apartment Brokerage & Advisory Firm in Phoenix, concurred with Mr. Stapp’s assessment.

He suggested while the rate reduction will continue to fuel the pace of commercial real estate development, affordable workforce housing will remain a challenge in the local market.

“The Fed’s decision to cut rates after the stock market volatility at the end of 2018, which resembled nothing so much as an orchestrated hissy fit, will continue to raise the value of commercial real estate assets,” Mr. Murphy said. “Treasury yields are going to stay low, even inverted for now, and investors need some place to park their money that will generate returns. Commercial assets, particularly in multifamily, will continue to be among the best outlets for that.”

Nation-leading record population growth in the Valley has put pressure on both housing demand and employment — driving up the cost of the former, while holding the latter steady and well-short of income levels needed for many full-time workers to afford an apartment, let alone enter the home buyer’s market.

According to the U.S. Census Bureau, of the county’s estimated 4.4 million residents, half are earning a gross income under the $30,186 annually — or about $2,500 monthly, roughly equivalent to full-time employment at $14.50 an hour.

With a median mortgage payment of nearly $1,500 and apartments going for a median gross monthly of $1,033, affordable housing remains just beyond reach for many full-time workers.

And while lowering the Fed rate may excite some investors, it may only further hamper those trying to get a home loan, since lower rates can discourage lenders from extending credit to all but the most-qualified buyers, Mr. Stapp explained.

“Low rates means no risk mitigation,” Mr. Stapp stated. “I don’t think this helps those with marginal credit. It’s interesting how loans get priced and the underwriting process takes credit into consideration and adjusts rate. Most marginal credit folks get FHA loans; that guarantee is more important than the Fed rate.”

He said location of the home, down payment and source of income are also key factors lenders use to determine credit worthiness.

Mr. Stapp suggested some policies, which might improve housing affordability for Valley workers, including:

  1. Build higher density housing developments; though many communities object to this.
  2. Builders could buy larger numbers of lots; though many don’t want to carry large inventories.
  3. Utilize special district bond financing for infrastructure — offset some increased infrastructure costs long term (25 to 30-year term), low cost of funding ultimately assumed by home buyers.
  4. Reduce required infrastructure to lower costs, such as a sidewalk on only one side of the street and soft surface trail on the other.
  5. Build smaller homes.
  6. Reduce development processing time and municipal impact fees.

Mr. Murphy suggested commercial development will continue apace; but workforce housing won’t be a priority for developers seeking to maximize profits.

“In terms of affordable development, it’s going to be more of the same. Capital will flow to the highest-returning projects, and that will continue to be Class A,” Mr. Murphy said. “The demand is still there since we’re still under-building across all classes, and you get more bang for your inexpensive-to-borrow buck building luxury than workforce-affordable.”

His firm’s analysis points to record market growth, but with continued focus on luxury developments, with 6,000 to 9,000 new units predicted for delivery by the end of year based on ABI’s first-quarter data.

But most of those projects are high-rent, luxury communities.

“80 to 88% of new construction is Class A. The workforce affordable housing … with a rental point around $950, that’s not getting built pretty much at all,” Mr. Murphy told Daily Independent earlier this year.

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