The Expert Podcast

So here is a very often overlooked factor in why affordable housing is very difficult to build. If you're a builder, you already know this and you may have talked about this to politicians or clients, but this is the reality of why affordable housing cannot be built easily.

Now, this comes from a letter to the editor of a local paper in Oregon. They're talking about Governor Kotek, who is the current governor of the state of Oregon. This is a person who's trying to build an ADU for a relative and doing the math on why it doesn't work. But this same logic applies to many builders trying to build homes. Let’s walk through this and see where this math makes no sense for finances.

For some context, the person who wrote this letter, his name is Dick Nson. He has worked for 43 years in real estate, land use consulting, and providing housing for all people. He is currently an active member of the Build Small Coalition in Oregon, which sounds like something that's building homes for people with lower incomes.

He tells a story about how he's trying to build middle housing to place four cottages. One is for his mother, and her cottage would have been 400 square feet, facing a common garden with the other cottages. The others were going to be for seniors, priced at low rent to help them. He went to the City of Hillsboro building department, and there was a set of fees and permit estimates. So, you have to pay for your permits and your fees, which would have been $49,000 per unit. That averaged out to be $123 per square foot. This is going to be a 400-square-foot cottage, so they have to pay $50,000 per unit, that's their standard fee.

If you scroll down, he talks about another property he looked at. This is a big house that was already built near the cottage site, right down the street. It was a nine-bedroom house, with two full kitchens and 4,000 square feet. The permits for that house were the same $50,000, which equals $12 per square foot.

This is the problem for many build projects. The permit fee, many of them are the same. Sometimes they scale a little bit based on the square footage or the number of bedrooms, but a lot of times it's impact fees for the neighborhood—more sewer lines, more sidewalks, more engineering. They’re trying to extract money out to have the developers pay the fees for the city to upgrade their infrastructure. Whether that's right or wrong, we all have an opinion about that, but that's not the point. The point is that this larger home could be built because absorbing $50,000 on this nine-bedroom house isn't a problem. It's going to be an expensive house. But absorbing $50,000 on a 400-square-foot cottage, like this one, can’t work. The math just doesn’t make sense.

So, as a builder, you're seeing this all the time. Somebody wants to build a smaller home, but they may not do it. Or if you're going to build a home on spec, you have to build it big enough to be able to absorb those impact fees and those permit fees.

I know you have an opinion about this—let us know in the comments. Plus, the other question is, why is this happening? Is this intentional? Are they not wanting to build smaller homes, or are they just not wanting to incentivize building homes that are workforce housing, affordable housing, or even just market rate for normal people?