The New Starter Home

by Shanice Harris

Even though there is a historic level of demand among first-time buyers, the price of housing is still too high for many to enter the market, and it certainly hasn’t decreased of late. But how can the market meet the needs of this group with costs increasing industrywide?

Over the decades, Chicago developers and builders have moved from the traditional two-flat and bungalow-style homes to investing in different options for affordable housing, like infill construction, modular-type homes and flexible buildings. Is it working, and what will the landscape of entry-level housing look like in the near future?

Also in this issue

What brokers see on the horizon for entry-level housing

A push for gentle density in City Council

Affordable homeownership with a unique twist in Chatham

More first-time buyers jumping in the suburban market

The roots of the affordability crisis

Ali Wolf, chief economist for Meyers Research, said in a recent webinar (Incorporating Manufactured Housing Into the Builder Model) that while most consumers would like to purchase new homes, affordability and attainability are real problems. “We have done surveys consistently. It doesn’t matter which market, it doesn’t matter which life stage, which demographics,” she said. “People want new homes, but the issue has been affordability.”

Part of the pressure on the new-construction industry comes from the fact that affordable units are being torn down and replaced with luxury ones. According to the Institute for Housing Studies at DePaul University, the neighborhoods of North Center, Lincoln Square and parts of West Ridge dropped from a 36% affordable rate to 21% between 2012 and 2017. “Chicago has seen 20,000 units disappear over the last 15 years,” Bill Williams, developer and founder of KMW Communities, told Chicago Agent magazine. “The city needs about 41,000 units to make up for that demand.”

Tim Swanson, chief design officer for Skender — a construction company based in Chicago — told Chicago Agent magazine that, since July, the focus of his role as a developer has shifted to addressing the affordable housing crisis. “It’s this ever-continuous challenge of meeting what people can afford and what the actual cost burden is,” he said. “The cost of living increases in a place like Chicago 2.5% to 3% a year. Construction, material and labor costs are going up between 5% and 15% every year. You just created an inability to solve for the housing costs for starter homes.”

Swanson also points out that the housing industry hasn’t changed much in decades. “Over the past 60 years, construction is the only industry that has lagged behind inflation for productivity enhancement. That means to say, we haven’t done anything,” he said. He added that housing has not had audacious advancements in innovation and efficiency. “My iPhone is a million-and-a-half-dollar super computer when you really think about what it is. I certainly didn’t pay that much,” he said. “That can only [exist] through this idea of scale and focus. The challenge collectively in our real estate industry is how do you incentivize that when it’s such a broken and bifurcated system?”

The affordability issue is not just a Chicago problem. Cities like Portland, San Diego, and San Francisco have also been dealing with a housing crisis, especially with the rise of tech in the last 10-plus years. As demand increases, so do costs. “In Atlanta, Chicago, New York and San Francisco, based on the current construction cost for housing, none of those cities could build housing for anybody who makes less than 120 percent of the area median income … think about that,” Swanson said.

Additionally, as more people move into an area, developers are not incentivized to create affordable housing. “If I can build a house for somebody for $300,000, but there are people in the market who would buy that for $700,000, why am I selling it for 300?”

Many first-timers are looking to suburbia for the answer, as prices are much lower the further away from the city a home is. Maria Etling, broker at Berkshire Hathaway HomeServices Chicago, has worked with first-time buyers looking for affordability outside of Chicago proper and has seen an increase in activity lately. “It depends on the area that you are looking at, but yes, demand has increased certainly, and there’s less on the market,” she told Chicago Agent magazine. She noted the COVID-19 pandemic has some responsibility for the current market. “Some sellers are pulling back, and that does leave buyers with fewer options.”

Wherever buyers are looking, it’s important to understand the nomenclature. Market-rate housing is housing that individuals can afford without a subsidy. Affordable housing is housing that individuals require subsidies to afford. “Subsidized or affordable housing is truly focused on people who make 60 percent of the area median income. So in a place like Chicago, it’s under $40,000 [a year] for a family,” Swanson said. He added that there’s also a sort of doughnut hole effect, estimating the 60% to 80% of most cities’ residents make too much to qualify for subsidized housing, but not enough to buy the types of housing that’s currently being built. “It’s daunting — unless you start thinking about new models.”

Fixes on the horizon

Developers are finding new, innovative ways to approach housing, and changes from government agencies are helping make them a reality. According to Williams, recent updates made to Chicago’s building codes have allowed the integration of different materials, and new design standards reflect the changing culture. “I find that very refreshing,” he said, adding that allowing alternative materials will lower construction costs for developers. “Not saying we are using some [cheap] materials in the structure, but in the infrastructure, the sewer lines can be a similar material like what our neighbors [in Michigan and Indiana] are doing.”

Even with changing policy, Williams says the ending price tag will depend on where you build. “The cost of land, it varies dramatically across the city,” he said. “There’s a lot of inexpensive land, and city-owned land, in areas that some people deem undesirable. … But folks aren’t willing to go into these — what I call emerging markets — for various reasons.” Those reasons could be proximity to downtown, access to public transportation and safety concerns.

But Williams acknowledges that some people are willing to compromise, and he hopes that trend continues because homebuyers can get more bang for their buck that way. Expanding the ideal neighborhood market will put homeownership closer to arm’s reach for more buyers.

Emerging markets are generally neighborhoods that are adjacent to those that are already deemed successful and stable. Since the price of land in neighborhoods like Wicker Park, South Loop and Lincoln Park are expensive, developers have no other choice but to look at other options if they want to build affordable units. Woodlawn, North Lawndale, Washington Park and West Humboldt Park are just a few that Williams and his team are focusing on. “If you start stitching those neighborhoods together, it would allow for entry-level homes, the prices would be lower and you will also be connecting one neighborhood to another, so the city won’t be so blighted,” Williams said. New families bring business, business brings clientele and clientele circulates money into a neighborhood that can start to thrive.

In addition to expanding locations, developers are hopeful that city dwellers will adapt to new housing models as well. Developers like Swanson are focusing on modular housing that’s prebuilt in sections away from the construction site, usually in a factory. They are then transported to the intended site and put together on the premade foundation. The modular building model is still in its infancy, but the biggest pro for this type of construction is that developers don’t have to worry about weather delays since the pieces are built indoors.

In the fall, Swanson and his team will install affordable walk-up three-flats in West Pullman. Over the next year, he hopes to have an additional 40 of those flats installed in the Greater Chicago area. “We can control the process; we can control the quality,” he said.

Williams pointed out that modular homes are just one of the solutions that developers are looking into. But he sees the continued value of two-unit buildings as a classic affordable option in Chicago that shouldn’t be phased out.

The Chicago two-flat, a two-story building with an apartment unit on each floor, has been a part of the fabric of the city since the beginning of the 20th century. According to the Chicago Architecture Center, most of them were built between 1900 and 1920. The introduction of the two-flat coincided with the rise of Chicago’s middle class, and in many ways, they still support that today. As Chicago industries grew in the late 1800s, so did the population. At the time, developers found it more economical to build up as they built out. Hence, the creation of the two- to four-flat buildings that made up 27% of Chicago’s housing market as of 2014, according to the DePaul Institute of Housing Studies.

“Two-units are actually a naturally occurring affordable unit because the second unit subsidizes the cost of living there,” Williams said. He added that such a structure also allows a multigenerational family to live in the same building and maintain separate spaces. KMW Communities is currently developing two-unit model duplexes to help address affordability, with a nod to the traditional but also an updated design.

The suburban POV

Some buyers have opted out of the expenses of city living and are looking for more affordable options further away from the downtown hustle and bustle. First-time buyers are still very much interested in single-family homes, in Etling’s experience. But now they are looking for multiple bathrooms and office space, both more enticing as people have been confined to their homes due to the pandemic.

“They are more interested in the amenities and upgrades over square footage,” she said. “Office space is becoming a need-to-have.” Etling added that suburban communities like Hawthorn Woods, Grayslake and Wauconda offer first-time buyers a better payoff than other, more expensive suburban communities.

Etling’s most recent clients were “move-up buyers” who were looking to purchase their first home. One young couple was transitioning from a condo and purchased a home in Deerfield. Another couple — newlyweds — were moving out of their apartment in Libertyville and purchased a home in Hawthorn Woods. In Chicago proper, it’s not as easy. “In the city, it’s still multiple offers [for] a single-family home in a desirable or desirable-adjacent area,” Etling said. She added that many properties in urban areas are listed over value as well.

How local government factors in

Bringing more subsidized affordable housing online may also take some of the pressure off of market-rate developers. Maurice Cox was appointed as Chicago’s new Planning and Development commissioner by the Lightfoot administration in October 2019, and in a January Chicago Sun-Times article, he vowed to enact a new affordable housing strategy. In May, the City Council approved new measures to restore two affordable housing developments (Emmett Street Apartments and South Chicago YMCA Senior Housing), creating 200 units on the North and South sides. Then in July, the City Council approved a similar restoration of 30 rowhomes in Pullman.

Williams has faith in these efforts. “There’s political will with this administration to help solve this problem for the first time since I’ve been in business,” he said. “The city is also pulling resources for these type of initiatives to solve this 41,000-unit shortage of moderately priced housing. “

Swanson is also optimistic for the future of housing in Chicago. “The city of Chicago and the now-retired building commissioner [Judy Frydland] was responsible for one of the first overhauls of our building code in Chicago in 70-some-odd years,” he said. “That is a big seismic shift.”

As Williams pointed out, the new building codes allow for new modern materials and new techniques, which Swanson hopes allows for some cost savings. “The city is realizing that the somewhat archaic building code that Chicago still abides by is a significant cost burden — so that’s a good place to start,” he said.

The city is also reviving programs that already exist but have been neglected for many years. The City Lots for Working Families program provides vacant, city-owned lots for one dollar each to developers who build affordable single-family homes and two-flats. The Building Neighborhoods and Affordable Homes program provides tax incentives to homebuyers who move into targeted neighborhoods, such as Englewood Square, North Lawndale, South Lawndale, Humboldt Park, Garfield Park and Woodlawn.

“Planners are really trying to find ways to remove the cost burden of land for qualified housing that is affordable,” Swanson said. “If we work together here, maybe we can solve the equation differently.”

The future of affordable housing in Chicago

Even with all these new techniques, builders and brokers need to shift their mindset and see how serving first-time homebuyers can contribute to a healthier market and city overall.

The events of 2020 have exposed issues that have already long existed in the housing industry. “Since COVID and the civil uprising, it has shined a light on the inequities across the spectrum,” Williams said. “And those inequities are not about black or brown, those inequities are more socially and economically — and that’s also showing up in our housing.”

Williams said it’s important for brokers to have an open mind. “Don’t be discouraged by the dollar amount. I know a lot of agents see something that’s $200,000, they’d rather go for the half-a-million or million-dollar houses,” Williams said. “Homeownership equals equity. It equals a stake in the neighborhood. That stake in the neighborhood has a multiplying effect: an increased tax basis, which can result in improved amenities, improved local school councils, better schools. By building moderately priced houses, it has a tremendous effect on the local economy. Once there’s income and once there’s density, the services come.”

As the housing industry navigates this new climate, developers such as Swanson believe this is the perfect time to build a better future. “There is such a powerful opportunity for brokers and agents in Chicago to understand the organizations who are helping to facilitate housing affordability,” he said. “There are phenomenal nonprofits across this city who focus on financial readiness, there’s a number of grant programs, so an agent who is equipped with those tools becomes a superhero to limited- and middle-income households. There’s opportunity for agents and brokers to work more symbiotically with developers to help them see what the demand is.”

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