Terry Mitchell

Bring Workers Home: 2010 Regional Forum on Workforce Housing
The Growing Cost of Place: Why Workforce Housing Matters in Austin
Terry Mitchell
August 12, 2010

Workforce Housing
Provided by the market only in the fringes of our metro area.
Traffic congestion makes these commutes very costly.
Continual regulatory changes drive up costs.
Neighborhood opposition makes affordable development difficult. . . Density needed.
Financing limitations hurting availability of “for sale housing”.
Current capital environment making projects expensive.

Sample Capital Cost During "Normal" Times Project Investment 10,000,000 Debt Interest Rate 7% (IF AVAILABLE) Required Equity Return 20% (COMPOUNDED) Debt $ 8,000,000 Equity $ 2,000,000 End of First Year End of Year Two End of Year Three End of Year Four Totals Debt Interest $ 560,000 $ 560,000 $ 560,000 $ 560,000 $ 2,240,000 (8,000,000 x Debt Interest Rate) At 20% (compounded) $ 400,000 $ 480,000 $ 576,000 $ 691,200 $ 2,147,200 Total Capital Costs $ 960,000 $ 1,040,000 $ 1,136,000 $ 1,251,200 $ 4,387,200

Sample Capital Cost During "Boom" Times Project Investment 10,000,000 Debt Interest Rate 7% (IF AVAILABLE) Required Equity Return 13% (COMPOUNDED) Debt $ 9,000,000 Equity $ 1,000,000 End of First Year End of Year Two End of Year Three End of Year Four Totals Debt Interest $ 630,000 $ 630,000 $ 630,000 $ 630,000 $ 2,520,000 (8,000,000 x Debt Interest Rate) At 13% (compounded) $ 130,000 $ 146,900 $ 165,997 $ 187,577 $ 630,474 Total Capital Costs $ 760,000 $ 776,900 $ 795,997 $ 817,577 $ 3,150,474

Sample Capital Cost During "Capital Crunch" Times Project Investment 10,000,000 Debt Interest Rate 7% (IF AVAILABLE) Required Equity Return 30% (COMPOUNDED) Debt $ 5,500,000 Equity $ 4,500,000 End of First Year End of Year Two End of Year Three End of Year Four Totals Debt Interest $ 385,000 $ 385,000 $ 385,000 $ 385,000 $ 1,540,000 (8,000,000 x Debt Interest Rate) At 30% (compounded) $ 1,350,000 $ 1,755,000 $ 2,281,500 $ 2,965,950 $ 8,352,450 Total Capital Costs $ 1,735,000 $ 2,140,000 $ 2,666,500 $ 3,350,950 $ 9,892,450

Sample Capital Costs in Differing Times End of First Year End of Year Two End of Year Three End of Year Four Totals Total Capital Costs "Normal" Times $ 960,000 $ 1,040,000 $ 1,136,000 $ 1,251,200 $ 4,387,200 Total Capital Costs "Boom" Times $ 760,000 $ 776,900 $ 795,997 $ 817,577 $ 3,150,474 Total Capital Costs "Capital Crunch" Times $ 1,735,000 $ 2,140,000 $ 2,666,500 $ 3,350,950 $ 9,892,450 So, what does this mean for us? Here are some POSSIBLE conclusions: • Money is available, but not many deals fit the capital requirements. • To make deals fit, investors try to obtain lower land costs and construction/development costs. • In Austin, however, there is NOT a lot of excess lots available (some, but not a tremendous amount), so heavy discounting has not hit this market. • In the Austin area, there is a lot of available raw land (that could be discounted), however, raw land typically comprises 15% to 30% of the cost of a residential lot. This means that heavy discounting of raw land will not produce substantial lot cost savings -- certainly not enough to pay for the additional capital costs being sought today. • Offsetting any land price reductions are the continual development cost increases that occur due to regulatory changes This is NOT a complaint -- just reality. Examples would include capital recovery fees; new code requirements; boundary road fiscal; increased code requirements; increased detention and water quality requirements; top soil changes; affordable housing requirements; fiscal requirements. • Austin is still growing: positive job growth in the last three months; Austin grew 32,000 people through in-migration last year; Austin is ranked first or second in lists for the best places for job growth and in-migrations. Demand will grow. • If the capital does not return to "normal" structures, Austin could face a tight housing market in the next few years.

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Homes For People

Terry Mitchell

by National Housing Conference & the Center for Housing Policy on Aug 15, 2010

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Terry Mitchell — Presentation Transcript