by Matthew Durkee, New England President, Community Bank Vermont, like many other states in the US, is facing a severe affordable housing crisis. Affordable Housing Month provides an opportunity to raise awareness about the current crisis and the need for more affordable housing options. Affordable housing is defined by the US Department of Housing and Urban Development as housing where the occupant is spending 30% or less of their gross income on total housing—including utilities—and is typically available in low- to moderate-income areas.
The housing crisis is particularly concentrated in cities where the cost of living is high and rental prices are skyrocketing. Chittenden County for example, is approximately 2,000 units of affordable housing short of demand. There is an urgent need, throughout Vermont, to meet the basic housing needs of its community members. Without actions to address the crisis, the situation is likely to worsen with more and more Vermonters facing housing insecurity.
The 2019 Vermont Housing Finance Agency (VHFA)’s Affordable Housing report contained several startling observations, including:
- 47,000 privately owned households (19% of total housing) were cost burdened, paying up to 49% of their income for housing.
- 38,000 privately owned households (15%) were severely cost burdened, paying over 50% of their income for housing.
- This combination means that over one third of Vermont households are living in unaffordable housing.
- This is even more severe for renter households, of which 51% live in unaffordable housing.
The VHFA report also outlined four drivers of housing costs: 1) land and labor costs; 2) investment for energy efficiency; 3) inefficiencies from regulations; and 4) financing costs. It’s important to note that this report was issued prior to the onset of the COVID-19 pandemic and the historic rise in inflation. So where are we since 2019?
- Land and labor: Wages have risen significantly across almost all industries, and labor availability for construction companies is very limited. Demand for land has skyrocketed, increasing acquisition costs, and Vermont has an arduous and expensive permitting process. Neither of these provide any relief to the cost of building housing.
- Investment for energy efficiency: Energy programs are often required as part of the permitting process (solar, power stations, increased thermal insulation, etc.) which may decrease monthly operating costs over time, but add to construction costs up front, and this cost must be recouped through the sales price of the house or the rental charge of a housing unit. It is not clear whether any community has reduced any of these requirements to help reduce costs.
- Inefficiencies from regulation: Almost any residential housing developer can tell stories of the convoluted and costly permitting process for housing. Multiple layers from local, regional, and state agencies are sometimes in conflict with each other, requiring a developer to navigate multiple constituencies that each have their own agenda. It often feels like each area is working in their own silo and not considering the whole. An example would be towns that want housing density and more open space in each development (which is desirable to keep the Vermont “feel” to an area) but due to the open space requirement, the developments have less space for construction housing units, and have to spread the cost of the open land over the units. To offset this, developers often want to build vertically, to spread the costs of the foundation, roof, and infrastructure over more units. However, many towns limit new-building heights, when another floor or two could materially decrease the end costs of units.
Many municipal regulations require fees, conditions, and lengthy review processes which increase costs, delay construction, and add uncertainty to a project. I have seen cases where it has taken five years for a developer to get final approval for a project. Consider a developer that began the permitting process four years before COVID, but did not receive approval until COVID started. The economic assumptions developers used to plan their projects no longer worked by the time they secured approval in 2020, and as a result some builders simply mothballed their projects and less affordable housing was constructed.
- Financing costs: With the significant rise in inflation came increased interest rates, so home buyers are faced with increased mortgage costs and reduced eligibility for loans. The interest rates are market driven and essentially out of the control of local bankers. Now, a couple that qualified for a $200,000 mortgage when rates were at 4%, with no changes in their economic condition, only qualify for slightly over $150,000.
Every bank is required by law to engage in affordable housing projects as part of its Community Reinvestment Act activities. The Community Reinvestment Act (CRA) was established in 1977 to incentivize financial institutions to invest in and meet the needs of the lower- and moderate-income communities in a bank’s footprint. Vermont’s banks are active participants in helping fund affordable housing through significant donations to various not-for-profits focused on housing, special lending programs requiring a lower down payment, reduced and/or eliminated mortgage insurance, and funding loans at lower than market rates for various housing entities throughout the state.
Community Bank—and many others—have created lending programs to eliminate the cost of Private Mortgage Insurance (PMI) for loans up to 90% loan-to-value and reduce the cost of PMI for loans over 90%. Banks also make investments to a wide variety of programs, including purchasing Low Income Housing Tax Credits used to reduce the costs of new housing and investing in local non-profits like Champlain Housing Trust and EverNorth, experienced organizations that fund the construction and renovation of affordable housing properties throughout the state.
Vermont’s affordable housing crisis not only requires action from government and non-profit organizations, but also from individuals. It is important to give back and support the communities where we work and live and not rely solely on government mandates. The perception of what affordable housing means has shifted in recent years: it has become more mainstream to have affordable housing in areas where middle-class people live, which provides more opportunities for residents. Affordable housing does not mean poor living conditions or low-quality housing; it is a necessity for many individuals and families, and providing it in more mainstream locations can benefit everyone involved.
While the affordable housing crisis in Vermont is complex, there is hope for the future. Banks are partnering together to make deals happen, recognizing that it is important to make their communities more affordable. It is not only the responsibility of banks to combat the affordable housing crisis; we need the help of communities. With a shortage of affordable housing units and increasing demand, it is crucial that our communities work together to find solutions. Simplifying the regulatory burden, both at the state and local levels, will reduce the costs required to get a project approved, reduce the overall project costs, and allow for a lower-cost end product. By investing in local, affordable housing projects and providing education and funding, we can help ensure that all Vermonters have access to safe and affordable housing, improving the quality of life for all.
Matthew Durkee is the New England Regional President and leads Community Bank’s team. A native Vermonter, he has been active in the local banking community for his entire 30+ year career.