Under the basic laws of supply and demand, when housing demand exceeds housing supply, housing prices increase. In a perfect market, housing supply would increase in response to the housing demand and housing prices would stabilize.
Unfortunately, the Wisconsin housing market has not reacted in this manner. Statewide housing inventories and vacancy rates are at historic lows; median home prices and rents continue to rise; and the supply of housing, both owner-occupied and rental, has not increased accordingly. In short, Wisconsin has a significant housing shortage, especially moderate-priced housing that working families can afford.
Wisconsin’s housing shortage is also taking a toll on employers as well as our economy. Wisconsin employers are finding it increasingly difficult to recruit workers unless the nearby area has attractive and affordable housing options. Unless this workforce housing problem is fixed, Wisconsin will be unable to keep and attract the skilled workers necessary for our state and local economies to thrive.
Causes of Wisconsin’s workforce housing shortage
While numerous factors play a role in Wisconsin’s workforce housing shortage, a recent study conducted by Professor Kurt Paulsen of the UW-Madison Department of Urban and Regional Planning identifies three primary contributors to the workforce housing shortage.
1. Wisconsin has not built enough homes to keep up with population and income growth
Compared to pre-2009 recession levels, Wisconsin has created 75% fewer lots and 55% fewer new housing units since 2012. See Figure 1. When adjusted for population, building permits per capita and new lots per capita are less than 50% of what they were in the 1990s and early 2000s.
2. Construction costs are rising faster than inflation and incomes
Since the Great Recession, construction costs have increased by 14.7% in Madison, 14.9% in Milwaukee and 16.2% in Green Bay. Most builders believe these estimates are extremely conservative and the actual construction costs are two to three times higher. The increased construction costs are due to higher material prices but also due to a “severe labor shortage.” Dr. Paulsen’s report cites an Association of General Contractors survey, indicating that 73% of Wisconsin construction firms reported labor shortages.
3. Outdated land use regulations drive up the cost of housing
Local land-use regulations such as large minimum lot sizes, prohibitions on non-single-family housing, excessive parking requirements, requirements for high-end building materials, and long approval processes raise the cost of housing.
How municipalities can increase the workforce housing supply
The solutions to Wisconsin’s workforce housing shortage are both simple and complex. Increasing the supply of housing is the easy answer, but achieving this goal is more challenging and would require, among other things, an increase in construction labor, lower building material costs, and better ways to finance infrastructure costs.
While most of these solutions must be addressed at the state or national level, local communities can play a significant role in increasing the supply of workforce housing in the following ways:
1. Expedite approval processes
The approval process for new residential development often takes an excessive amount of time. Whether a new development requires rezoning, a conditional use permit or planned unit development approval, the process takes time and often requires considerable patience and a big checkbook to navigate through it.
In most cases, only large developers can afford to fight through this process. But, even in such cases, they generally will need to increase the size and scope of their project to recoup their costs. This will often prevent more modest-priced houses from being included in the development project.
Delays resulting from the permitting process add to the cost of housing, either directly through higher prices, or indirectly through the loss of new construction projects, which reduces supply. A housing project will not be built if the developer will lose money.
Streamlining permitting processes can be achieved with relatively little if any cost to municipalities. In fact, a municipality may save money by reducing administrative costs.
2. Increase densities and smaller lot sizes
Land costs are one of the biggest contributors to overall housing costs. Houses built on larger lots generally will be more expensive than houses built on smaller lots. While this seems obvious, many local zoning regulations and platting requirements ignore this fact.
Similarly, zoning regulations that require only single-family homes to be built on each lot will increase housing costs. More housing units built on individual lots will spread the lot costs over multiple units, thus lowering the per-unit housing costs.
Increasing densities by integrating smaller-scale, multifamily dwellings with single-family houses has been a popular trend. Minneapolis, for example, has banned single-family zoning to encourage more accessory-dwelling units, duplexes and other multi-unit buildings. Seattle relaxed zoning regulations in 27 transit-oriented neighborhoods. The state of Oregon enacted a law to eliminate single-family zoning across the state.
While the approach taken by each of these jurisdictions is slightly different, they all share in common the recognition that increasing housing densities is the correct path for lowering the costs and increasing the supply of housing.
3. Reduce development-related fees
Despite claims to the contrary, impact fees increase the cost of housing. It’s a common misperception that impact fees are paid by the developer, not the homebuyer, and increasing fees will simply result in less profit for developers, rather than make housing less affordable. This false belief is further reinforced by the notion that housing prices are set by the free market and increasing development costs cannot increase the price of housing beyond what the free market is willing to pay.
Impact fees are passed on to the homebuyer in the form of higher home prices. When fees are so high that home prices are no longer affordable and cannot be built for a reasonable profit, the homes are not built. New housing that most workers and young families can afford is currently not being built because it is too expensive to build, and impact fees are partly to blame.
Every year, the National Association of Homebuilders (NAHB) calculates the impacts of increased housing costs on housing
affordability. Specifically, the NAHB calculates how many households are priced out of the homebuying market for every $1,000 increase in home prices based on statewide median home prices and the income needed to qualify for a typical 30-year mortgage. According to the NAHB’s 2020 study, 3,561 households statewide are priced out of the homebuying market for every $1,000 increase in home prices. See more of those statistics at www.wra.org/NAHBstudy.
With impact fees being charged for such things as parks, fire protection, law enforcement, libraries, transportation services and water management, it is easy for impact fees to add thousands of dollars to the price of a new home. While the amount of impact fees varies by municipality, the point is clear: as home prices increase, fewer people can afford them, resulting in fewer homes being built.
4. Quiet NIMBYs
One of the biggest barriers to new homebuilding in communities is the “not in my backyard” (NIMBY) opposition from existing residents. Regardless of what new development is being proposed, someone is bound to object.
Communities often spend years and thousands of dollars on outside consultants, public hearings and staff time to help develop a comprehensive plan to guide future development in the community, only to ignore the plan due to public opposition when a developer actually tries to build the type of housing specified in the plan.
The list of reasons for NIMBY opposition is long and may include the loss of open space, increased density, traffic, overcrowding in schools, neighborhood character, property tax increases or just change in general.
While developers are often the targets of NIMBYs, the victims of NIMBYism generally are those who would occupy these new homes. Generally, they include fellow members of the community who are on fixed incomes, young families, teachers, police officers, and workers in the service industry who are looking to improve their lives by finding a better place to live.
By opposing the development of new housing, NIMBYs limit the supply of housing necessary to meet demand, causing prices to increase further. In addition, when people cannot afford to live in the communities in which they work, they are forced to move farther away to find homes they can afford, putting more cars on the road for longer commutes and creating more wear and tear on our roads.
5. Plan strategically for workforce housing
Numerous communities identify the shortage of housing as a major concern, but very few fully utilize the strategic planning tools necessary to help attract and create new housing. In fact, they often ignore or make halfhearted efforts to comply with state laws that direct them to provide workforce housing.
For example, under Wisconsin’s comprehensive planning law, all municipalities are required to proactively plan for housing by providing, among other things, “an adequate supply of housing to meet existing and forecasted housing demand” and “a range of housing choices that meet the needs of persons of all income levels.” See Wis. Stat. § 61.1001(2)(b). While many municipalities have created well-crafted housing elements that identify areas within the community for workforce housing, very few communities are willing to implement the plan and approve workforce housing proposals when faced with local opposition.
Moreover, cities and villages with a population of 10,0000 and above are required to complete a housing affordability report by January 1, 2020. See 2017 Wis. Act 243. The housing affordability report is essentially a self-audit of the municipality’s own development-approval process, building codes and development-related fees to assess their impact on the cost of housing. As part of this report, municipalities must identify ways to reduce housing costs by 20% within their community.
To date, many of the completed housing affordability reports lack sufficient detail to serve as an effective tool to promote more workforce housing.
Conclusion
Wisconsin’s workforce housing shortage is not going away anytime soon. Too few residential lots are being created, and too few housing units are being built. Unless changes are made to local regulations, fees and approval processes to reduce the cost of new housing, Wisconsin will continue to fall further behind in meeting the housing needs of our families, workers and economy.
Tom Larson is Senior Vice President of Legal and Public Affairs for the WRA.
Falling Behind Special Report
Last fall, the WRA released a groundbreaking study, “Falling Behind,” that examined the severe workforce housing shortage and highlighted the need for bold bipartisan action to address this growing concern.
The report, authored by University of Wisconsin-Madison professor of urban and regional planning Dr. Kurt Paulsen, Ph.D., AICP, highlights three main causes of the workforce housing shortage.
See the full report: www.wra.org/FallingBehind
Read the press release: www.wra.org/PressRelease/FallingBehind