ITHACA, N.Y. — A few weeks ago, the Voice reported on the cancellation of Ithaca Neighborhood Housing Services’s (INHS) Greenways affordable townhouse project. The article concluded by saying the Voice would be following up with an in-depth exploration of the changing market conditions that led to the project’s cancellation. Now we have the data and numbers to do that.
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For starters, let’s look at this from the angle of an affordable housing developer. Building affordable housing, especially for-sale housing, is like a complex jigsaw puzzle.
Projects are typically financed by intricate deals between public, private and not-for-profit orgs that leverage a number of different public and grant funding sources with private financing in order to pay for construction.
These complicated setups exist because there are different legal and tax benefits with each corporate structure, and the partnerships are designed to take full advantage of each with as few drawbacks as possible, so that a project can move forward.
It’s so complicated that most builders and developers won’t bother with affordable housing.
Now let’s take a look on the buyer’s angle for affordable home ownership.
Per the U.S. Department of Housing and Urban Development (HUD), the general guideline for what’s considered affordable is 30% of gross monthly income or less. So if a hypothetical you makes $4,400/month, the ball park number is $1,320/month to cover the cost of mortgage, property taxes, insurance and any HOA fees. Principal, interest, taxes and insurance – or, appropriately enough, PITI.
Commercial banks are a little looser with what they define as affordable to a home buyer, because in their estimates they include financial benefits of homeownership like income tax benefits and equity growth from paying down a home loan.
Instead of 30% like it is with the HUD, most banks establish PITI by basing it off a ratio of Debt to gross income, called DTI. DTI is normally about 38% of debt-to-income, but once car and student loans are factored in, most banks are comfortable with a DTI of up to 43%.
That means a prospective buyer’s mortgage, student loans, car loan, alimony or any other recurring debt payments shouldn’t be more than 43% of their monthly gross income. So let’s say you make $4,400/month gross (i.e. $52,800/year). Your total debts can’t be more than 43% of $4,400, which is $1,892/month. Any more than that, and banks will not finance you, and you won’t be buying that new home.
Exact values vary from region to region, but under a standard 20% down-payment and using the 43% debt-to-income ratio and some sample values gives a rule-of-thumb buyer’s budget of no more than 3.4x their annual income.
So if you make $52,800/year, under these idealized conditions your maximum purchase price for a house is $179,520.
With that rather math-filled explainer out of the way, it’s time for reasons why why affordable housing is so hard to build and buy in Ithaca. The following charts come courtesy of Paul Mazzarella, Executive Director of INHS.
1. Rapidly rising property values
It’s no secret that thanks to low supply and high demand, housing prices are rising rapidly in the Ithaca area.
If you owned a perfectly average house in the Ithaca City School District (ICSD) in 2000, it was worth about $120,000. By 2013, that perfectly average house was up to about $230,000. Meanwhile, local incomes did not increase as much, with the average household income rising about 61% from 2000 to 2013.
If you lived in the city of Ithaca itself (the “City Target Area” above), the rise in housing costs has been even more dramatic.
Compared to neighboring counties, median household income in Tompkins County isn’t that different at about $53,000/year, but the $230,000 median purchase price for a house is much greater.
In most of the counties, the median purchase price is 2x or 2.5x median household income; but in Tompkins County, it’s 4.5x median household income.
Remember that rule-of-thumb from the explainer?
It means John and Jane Ithacan’s perfectly middle-income household doesn’t qualify for a loan to buy the the perfectly middle-market house in Tompkins County, and since their wages aren’t rising as fast as housing prices, their dollars will buy them less with each passing year.
What these graphs show is that families of modest means are being rapidly priced out of the home-buying market.
2. Rapidly rising construction costs
It’s not just buyers feeling the pinch on their wallets. For developers like INHS, the cost of building has mushroomed.
The chart above from INHS shows the actual per square-foot construction costs for all INHS for-sale homes since 1980, including both major renovations of existing homes as well as new single-family home and townhouse construction, large apartment projects like Stone Quarry and Breckenridge Place are not included on the chart.
According to Mazzarella, “The rapid rise for residential construction beginning in 2004 coincides with rapidly rising insurance costs and more new construction by INHS. INHS used to hire many small firms, often with only 1-3 people, for construction projects. Many of these companies can no longer work for INHS because they lack the types and levels of insurance required by our insurance carrier. Construction can be a dangerous business and the cost of worker’s compensation and liability insurance is very high.”
Not only is INHS affected by this, most commercial lenders have strict standards on liability insurance as well.
No one’s denying the importance of good insurance in case of an accident, but as the costs have shot up, it’s made construction itself more expensive.
The latest INHS project, for a house underway at 203 Third Street, cost $190/SF. That 1,150 SF house will cost $218,500 to build. If INHS intends to sell to people making median county income of about $53,000/year, and looking at the explainer again, they will take a loss of tens of thousands of dollars just to keep this house in the price range of a middle-income household. INHS may be not-for-profit, but such large financial losses are a big burden on their bottom line.
3. High property taxes
All of the for-sale houses developed by INHS have been built for our Community Housing Trust Program,” said Mazzarella. “This program builds high quality homes that are sold to low-income buyers at prices that are below both market rates and the development cost. In exchange for the opportunity to buy at a low price, Community Housing Trust buyers agree in advance that when the house is sold, it will be sold at a price that is capped by a formula and only to another low income homebuyer. This keeps these homes permanently affordable and maintains them as community assets.”
Not included in that cost, however, is property taxes.
Mazzarella said the typical CHT house is sold for about $130,000 today, but the county assesses and taxes the properties at full market value, which is about $185,000. That $55,000 difference leads to an extra $2,000 a year to be paid in taxes on average, even though a CHT home buyer could never sell the house for full market value. The higher taxes factor into the PITI for a potential buyer, making existing homes less affordable.
INHS has continued to contest the county’s assessments to no avail.
4. Other homebuyer debt
While at first glance it would seem that student loans and car loans wouldn’t play a role in housing costs, thanks to debt-to-income ratios, they do.
As student loan burdens have soared, and average monthly payments grow larger, the average buyers’ total debt has grown, and it limits how much a homebuyer can afford. A large student loan burden can prevent an individual qualifying for a home loan.
5. How does this tie into Greenways?
Greenways was intended to be for-sale housing to individuals making $40,000-$50,000/year, with qualifying Cornell employees getting first dibs. These individuals would qualify for home loans on home purchases of up to $170,000 using the rule-of-thumb in the explainer.
The townhouse units were to be 1,100-1,300 square-feet each. That equates to $209,000-$247,000 per unit if they cost as much as 203 Third Street did. For 46 townhouses, INHS would potentially lose millions of dollars in an effort to keep the units affordable.
From the data above, it’s clear that there was little chance INHS could build the townhouses and remain financially afloat.
Perhaps even more unfortunately, it shows that in the bigger picture, high property costs, high construction costs, high taxes and high debt are effectively making Ithaca unaffordable to the working and middle classes.
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