Solutions Sidebar: A Building Boom Of Entry Level Housing with Charles Marohn

If we had an abundance of entry level units, there would be a lot of different opportunities,” says Charles Marohn. “A person who is in their first job, a person who’s just getting started with their family, a couple that has just gotten married, people should be able to move up when they’re ready.” In his book Escaping the Housing Trap, Marohn says because we can’t afford for housing prices to fall, one strategy is to look around your neighborhood and instigate a building boom of 600 sq. ft. houses. Among other things, in an interview with Brick by Brick, he talks about what a difference incremental developers can make.

Interview guest: Engineer, Author and Strong Towns CEO Charles Marohn

Brick by Brick Website

Transcript

Ann Thompson:

It is no surprise we face a crisis of unaffordability. The State of the Nation's Housing 2024 report says home prices have reached an all-time high. Prices are 47% more than they were in early 2020. For renters, the number of people paying more than 30% of their income has also hit an all-time high, nationally. For Cincinnati, it's 27%, and for Dayton it's 26%. 

Chuck Marohn:

Most humans throughout history would look at today's housing market and say, this doesn't make sense.

Ann Thompson:

According to the book is Escaping the Housing Trap, in a little less than a century, housing has gone from being abundant and low quality to relatively good quality, but out of reach for many. So how can we make housing more affordable when we can't afford for housing prices to fall?

Chuck Marohn:

Essentially, everybody who's near power, benefits directly from housing prices going up. Who doesn't benefit? The poor, people who are renters, people who would like to be owners.

Ann Thompson:

On this episode, we break format from our typical show for something we call a Solutions Sidebar. Brick by Brick sits down with author, engineer and Strong Towns leader Chuck Marohn and my colleagues Hearns Laguerre Jr. And Emiko Moore join me at the end for some takeaways, so let's get into it. This is Brick by Brick: Solutions for a thriving community.

Ame Clase:

Brick by Brick is made possible thanks to leading support from t e Debra and Robert Chavez and Greater Cincinnati Foundation. With additional major support from AES Ohio Foundation, Laurie Johnston; Susan Howarth Foundation, the George and Margaret McLane Foundation, Diane and Dave Moccia, The Dayton Foundation, the Robert & Adelle Schiff Family Foundation, and more. Thank you.

Ann Thompson:

Chuck Marohn, welcome to Brick by Brick.

Chuck Marohn:

Thanks for having me.

Ann Thompson:

Your most recent book is called Escaping the Housing Trap. What is the housing trap and how did we get into it?

Chuck Marohn:

The housing trap is this situation we've put ourselves in where housing serves as both shelter and as an investment vehicle. We recognize that everybody has to be in a home. We realize everybody needs a place to live, but we also can step back and see that in the current American context, housing is both an investment for individuals, for families and also an investment for the economy. Banks actually hold mortgages, mortgages bundled into these securities as their key reserves on their balance sheet, and so we have this tension where as an investment housing needs to go up in price in order for it to be successful to function the way it needs to in our economy, it needs to go up in value, but the more housing goes up in price, the harder it is for people to get into shelter. The harder it is for people to find a place to live, to be able to move, to participate in the American experience fully, and the more people are being priced out and finding housing very difficult to obtain. And so this trap, this tension between those two objectives of housing is what the housing trap is all about.

Ann Thompson:

You compare the housing supply to shoes, how so?

Chuck Marohn:

Well, I use it as an analogy for people to think about the way we have transformed the housing market. If you look at shoes, we don't have a shoe shortage. There's no shoeless people. We produce shoes in many different varieties at many different price points, and we're comfortable with that. We understand that we don't fret over whether we're going to have shoes tomorrow, but when it comes to housing for some very logical reasons, for some very thoughtful reasons, for some very, I would say moral reasons, we created a housing market that in a sense provides only two products. It provides single family homes, duplexes, things that are in that variety and it produces very large scale condominium type units, apartment buildings, five over ones is the construction term. These two products are really financial products. They're very financial products and the analogy to shoes is imagine we only produced two shoe products and they were both very high end and very expensive, and the way you got into shoes if you couldn't afford that higher end product is to wait for, in a sense, a hand-me-down shoe.

The market would be constricted in limited to only these two varieties. We would find this very bizarre. It doesn't make much sense. The reality is that most humans throughout history would look at today's market, today's housing market and say, this doesn't make sense. It should be as fluid as shoes were as shoes were throughout all of history, so was housing. It was very easy to get into. There were many, many different price points. There were many, many different levels of quality. We are the first generation or the first society to create this bifurcated system with this very high entry point.

Ann Thompson:

And as we think through trying to solve this housing shortage, and you mentioned that in the housing trap, it doesn't benefit us for the prices of homes to come down who is benefiting from high housing prices.

Chuck Marohn:

I think this is a realization that is very important. Once you grasp the asymmetry of benefit, it makes it clear why we're here and why we're stuck. If we line up everybody who benefits from high housing prices, the list is really long, right? Every level of government benefits from this banks benefit from this. Big banks, small banks, midsize banks, all benefit from this. Insurance companies, if we look at the private sector, contractors, builders, developers all benefit from it. Individual homeowners benefit from high housing prices. If you think of all of those groups in a political context as voters or as people who influence decisions of policy makers, essentially everybody who's near power benefits directly from housing prices going up, who doesn't benefit the poor, people who are renters, people who would like to be owners, people who maybe would like to move or change homes and are worried about getting caught or don't have a lot of equity built up yet. It's a very small subset of people and they tend to be people who are not very powerful or connected in our system. And so it creates this asymmetry where we're very, very sensitive to the housing price and prices going down in housing and we tend to overreact when prices go down, but we are less sensitive as a society, as a culture to the negative impacts when prices go way, way up for people who generally can't afford homes.

Ann Thompson:

And to further explain this concept, I remember hearing you speak to a group and you were talking about for let's say Baby Boomers, there's a certain price that they expect to get out of their house, but yet Millennials can't afford that.

Chuck Marohn:

Well, if you are a baby boomer, you were born in the couple of decades after World War II, you were able to experience a housing boom. You've probably at some point inherited wealth that came from that housing boom, the kind of stable post-war development pattern. You yourself have been able to get in a home that has appreciated at a faster rate than inflation. And a lot of the narrative that you might be telling yourself is about how you save up money, you make a down payment, you get into a house, you pay your mortgage, you go to work and work hard, and at the end of the day you have this large nest egg because that is how it has worked for them. For subsequent generations, it has not worked that way. It has been increasingly difficult to get into a house. Housing has been increasingly volatile and the idea of investing in a house when an index, like the Case Schiller index is suggesting that housing is two and a half times overvalued all of a sudden, this is not the super smart investment that baby boomers made at the end of World War II.

Yet when you look at this group of people, they are planning on housing equity as a way to finance their retirement. They're planning on housing equity as a way they're going to pass on an inheritance to their children, and this is a part of their, it's not just a small part. It's sometimes the entire part of their savings and their net worth and their wealth and their capacity. So the idea of cutting it in half or cutting it by 60 or 70% to return to a market that they would've bought into, I mean those would be rates that baby boomers would've paid compared to where incomes are at today is just unthinkable. It is not something that is plausible in their experience.

Ann Thompson:

In a couple of previous episodes on Brick by Brick, we focused on Cincinnati's new zoning code. What role does zoning contribute to in the housing shortage?

Chuck Marohn:

Zoning is one of these things that from a bottom up has created a kind of artificial stagnation on communities. I think it's very important to kind of parse this because we are not at Strong Towns anti- zoning. We don't think there should be anarchy. There are some groups out there that are calling for and abolishing all zoning and all local land use regulation, and that's not us, but it is important to recognize that what zoning has done is it has enforced a certain level of stasis on communities that used to be very dynamic when we needed housing in the past, and I'm really talking pre great depression, when we needed housing in the past, there was lots of ways to build it very quickly, lots of ways to provide it both at small scale and at large scale at many, many different price points. What zoning does is it artificially stagnates a neighborhood generally around one price point, one static condition.

So you will have middle class housing over here and then upper middle class housing over here, and then very luxury housing over here and then poor housing over here. And we don't allow the neighborhoods to respond to stress, respond to opportunity to change, evolve and adapt. And what this means is we just lack fundamentally some of the tools that we need to respond to housing shortages. In the past, what we would see is neighborhoods evolve to where you would add, take a large house and make it into four smaller houses, take a single family home and add a backyard cottage, take a small undeveloped lot and build a starter home on it. All of these things become really, really difficult because of zoning.

Ann Thompson:

So here at Brick by Brick, we focus on solutions. I know Strong Towns kind pushes back on the concept of a solution per se. You don't pick solutions, you have an approach, but we wanted to spend much of this interview on the last four chapters of your book focusing on your approaches to this unaffordability crisis, as you call it.

Chuck Marohn:

The idea of a solution is really what got us into the trap that we're in the idea that we could go out and once and for all, fix the city, make everything right, set up the right financing, the right zoning, and poof the city would be perfect. The realities of that cities are human habitat, they're complex systems. They need to be able to evolve and adapt and change and when a neighborhood, a city can't adapt to stress, when it can't respond to opportunity, you get stagnation and ultimately you get decline. And so we don't want people to be thinking about a solution like here's one thing you do to solve the housing crisis, or here's three things you do to solve the housing crisis. We need to think about this in terms of creating dynamism in our neighborhoods, creating dynamism in our cities so that people can respond to stress and bring us better solutions, better approaches, things that are more refined for their neighborhood.

Ann Thompson:

Okay, well let's talk about some of these approaches and you say in your book that the answer is not for people to borrow more money or get a 50 year-mortgage. It's a building boom. So what kind of a building boom are you talking about?

Chuck Marohn:

A building boom that would be in every neighborhood in the country. I mean we really talk about this. We have an internal campaign where we just call it incremental housing everywhere. Let's be clear about the idea that we can't finance our way out of this or we can't help people borrow more money. If you think about our response to housing since really the middle of the Great Depression, it has been to make it easier for more people to borrow more money and essentially pay more for housing. Even in the last year, the president and we are a nonpartisan organization. This is not just this president, but it's been really all past presidents, but the current president came out and said, my plan for housing is tax credits for first time home buyers, in other words, will allow first time home buyers to save money on their down payment, meaning they can actually make a larger pay more for the same house, right?

This is driving prices up and it's not actually getting at the underlying problem. So instead of making it easier for people to pay more for a house, we actually need to make housing prices broadly go lower. We need to make the local housing market more responsive to local supply and demand. This is a strategy focused at a particular segment of the housing market. It's not the middle class, it's not the upper middle class, it's not the wealthy. What we really need is a building boom in entry level units, small entry level units, something that will allow people to get a start to get the first rung of the ladder. These units look a lot like backyard cottages. They look a lot like taking the person in the four bedroom house where all the kids are moved out and they've got three empty bedrooms and allowing them to rent out one bedroom as an apartment.

This looks a lot like building a small house, like a 600 square foot house. That would be a starter house that would be added onto over time. These are all the types of units that used to be broadly available in our market that are not available today that if they were here might not be the exact unit that people would want to move into, but they would be units that would anchor the prices in local market at a lower point. So in other words, let me give you an example of a person that I've run into recently. Someone who was divorced and in between situations like moving out, trying to get their life back where they want it. What is the option for this person today? It is to rent a place or to buy something bigger than what they probably want or probably need.

If we had an abundance of entry level units, there would be a lot of different opportunities for a person like that. A person who is in their first job, a person who's just getting started with their family, a person who just a couple that just gotten married. There are a lot of people in this position that are a sense forced higher up on the financial ladder and are competing with people for housing who are at, in a sense, a different phase in life. We need to allow people who are at that to be able to get comfortably into a place and then move up when they've saved money, when they're ready, when they can do it in a financially responsible way.

Ann Thompson:

I hope you're enjoying our conversation with Chuck Marohn. There's still more ahead following this short break. This is Brick by Brick.

Ame Clase:

Brick by Brick is made possible thanks to the generous support of so many, including Murray & Agnes

Seasongood Good Government Foundation, Rosmary & Mark Schlachter, The Camden Foundation, Patti & Fred Heldman, DeeDee & Gary West, The Stephen H. Wilder Foundation, Judith & Thomas

Thompson... a donation in memory of Frank and Margaret Linhardt, and more. Thank you. We couldn't do this work without you.

Hernz Laguerre Jr.:

Hey, it's Herns Laguerre Jr., one of the team members behind Brick by Brick. Our new show is about solutions for a thriving community, but if you think about it, we all have a different perspective of what a thriving community should look like. That's why we need to hear from you. We want to know what a thriving community looks like to you. Maybe it's more housing, more parks or stores or even safer sidewalks. Whatever your vision, we hope you'll share with us. You can do that by heading to the Brick by Brick show page on cetconnect.org or thinktv.org. There you'll find an audience question button just fill out the survey in. That's it. We look forward to sharing your hopes and dreams with the rest of our neighbors in future episodes. Thank you.

Ann Thompson:

Welcome back to Brick by Brick, I'm Ann Thompson. Let's get back into our conversation with Chuck Marohn and Hernz, Emiko and I will be back at the end for some reflections. You mentioned adding housing incrementally, so what are incremental developers and what is their role?

Chuck Marohn:

Right now if you want to build housing, you're really kind of trapped in a market where it's either going to be a large home builder, a big wall street backed type of builder with Wall Street backed capital or in some markets that's it, you don't have an option or it's going to be someone who in a sense has gotten kicked out of that game or in some ways opted out of that game. Either way, those are often problematic options. If we look back at home building over time, the home builder that has gotten squeezed out is the incremental developer. It's the person who lives in the house and sees the house across the street going into decline, wants to buy it, fix it up, convert it into a duplex and rent it out. It's the school teacher who has summers off and would like to spend that time in the summer working on a project worthy of their time and investment, not only helping to build housing in their neighborhood, but making a little bit of money on the side doing it.

It's someone who's underemployed, someone who is working a job, could do more, would like to do more, and this is a really good outlet for them to do that. Our cities used to be filled with this type of developer, this kind of jack of all trades, the ability to do a kind of little project here, a little project there. The financing of how we do housing has squeezed these people out of the market. If we can fix the financing in a sense, allow the type of building that we need to be financed locally, there's actually a whole cadre of people we can get off the sidelines, get them working together in a sense they are going to be in a competitive marketplace, but what we find is that this style of developer works really well cooperatively, so helping each other identify good contractors, good banks to work with all that. They tend to create an ecosystem that is self-supportive. When we can create the environment for those people to get off the sidelines, what we find is that every neighborhood is full of them. Every neighborhood has lots and lots of people who would like to be an incremental developer, and when we can solve some of these problems, they actually create a real competitive advantage that markets with just the big top down Wall Street finance developers don't provide.

Ann Thompson:

You provide lots of examples of this incremental developer. What does this story of Mike Keen and how does he fit into the term “Find your Farm?”

Chuck Marohn:

Well, Mike Keen's a beautiful guy. He is a professor in South Bend, Indiana who looked at his community, which was struggling and recognized that their neighborhoods needed some love, needed someone who cared, someone who was ready to roll up their sleeves and do something. He also recognized that there was a market for units that was not being provided, and in a sense, the idea of Finding your Farm was finding the place that you love, that you want to devote time and energy to, and then also the people in it who both want to help. You want to work in similar ways alongside of you and want to kind of cheer on your success. One of the recurring stories we see with incremental developers is that they're never lone rangers. They're not people who operate on their own. They operate in an ecosystem of other people, and some of that ecosystem might be other small developers.

Some might be local bankers and insurance agents and contractors and others who would be in the business, but a lot of 'em are local cheerleaders. People who will show up at the meeting and say, Hey, I know this guy. I know Mike Keen. He's a good guy. Let's help get his housing development passed. Let's stop the delays. Let's get this moving. It might be in the case of South Bend, people in city hall who recognize the value of this and say, we're not going to put the incremental developer through two years of permitting the way we put the big Wall Street developer who's doing the huge transformative development. So finding your farm is finding the place that you are willing to, in a sense, nurture along the place that you love and where quite frankly the returns on your investment are going to be measured in more than just capital. They're going to be measured in a certain serenity about a place, a certain pride that you have in your work and a certain satisfaction that you get in seeing your neighbors benefit from the labor that you put into restoring a neighborhood.

Ann Thompson:

How do we finance the housing boom?

Chuck Marohn:

One of the things that I hear when I travel around the country talking to people about housing is a sense of hopelessness. Public officials, staff at city halls, people in the community who care about this issue feel very hopeless because they look at the only financing options as being ones that come from the top down. The federal government needs to do something. Wall Street needs to do something. We need some type of program. The reality is, is that cities, local governments have an enormous amount of tools to finance, not the big single family home, not the new housing subdivision. They always lose money doing those kinds of things, but local governments can finance the entry level housing that we need and they can do it at scale. Things like co-signing on loans, providing tax increment financing, subsidies for starter homes. Again, not middle class homes, not three four bedroom homes, but literally like one bedroom, 600 square foot homes.

They can do things like using special assessments to create backyard cottages. Again, signing on loans on some of those, be a cosigner on a loan. A lot of the stuff that needs to be built that is very entry level, that is very small that will create this anchor in the market is stuff that the traditional marketplace just doesn't finance. It is too small for them to do. Local government can step in and at relatively no cost, like really very low, low, low cost, if any can finance this stuff, can create a market for it, can partner with local banks and others to finance this and provide the security needed for banks to do this with confidence and allow people to build these units really, really rapidly. We have to do this at scale and there is no Fannie Mae, Freddie Mac, Wall Street, Washington DC way to finance things that are 10,000, 20,000, $30,000 not to do it at scale. It's got to be local government and local government has lots and lots of tools to do this when they fix their mind to it.

Ann Thompson:

Now, I know you didn't study Cincinnati in depth when you were here and you just took a brief walking tour through Over-the-Rhine, but I wonder how you would grade Cincinnati when it comes to success at creating incremental housing. I know we've recently changed our zoning code to allow more middle housing and to get rid of some of the parking regulations, but what did you notice if you recall on your walking tour?

Chuck Marohn:

No, certainly. I think it's important for people to understand where Cincinnati sits in the development landscape of North America generally the further west you go and the further south you go, the more the development pattern reflects the post-war pattern of development. So the more auto oriented is, the more spread out it is, the more kind of locked in place it is the further you go north and the further you go east, the more of it was built before we got to the end of the Great Depression. So the more it reflects kind of a traditional more dynamic pattern of development. So when I walked around over the Rhine, what I saw was a pre Great Depression neighborhood that was in the process of renewing itself. Some of that I know has been renewal that was assisted or facilitated by policy shifts in the local government, but a lot of it has been done just despite the local government really in this style of development, this block, the tile that you see in the Over-the-Rhine neighborhood.

It is a very dynamic type of development and as soon as we step back and allow these places to evolve, they do so almost automatically. There's a huge demand to be in neighborhoods like this. There's a huge amount of investment return that you can get. I think the harder ones are going to be the ones when you get a little bit further out, these are neighborhoods that were designed where the marketing brochure was buy in this neighborhood. It will never change, and the neighborhoods themselves are designed not to change, and those are the neighborhoods where I think the city has been struggling has been trying to craft ordinances and regulations that would allow these places to evolve a little bit more. Those are the places where there's a lot of cultural resistance to change, but those are the neighborhoods where if Cincinnati is going to be really dynamic and see not just a stabilizing of housing prices, but kind of the bottom up entrepreneurial dynamic that you see in a neighborhood like Over-the- Rhine, you're going to have to figure out those are the harder neighborhoods to deal with

Ann Thompson:

As we try to work our way out of this housing shortage. What do you see in the future? Are you optimistic?

Chuck Marohn:

I would like to say that I'm optimistic. Here's what I am. I'm optimistic that we have the tools to address this, and I'm optimistic that there are cities that are starting to access those tools and put them into effect and see real meaningful changes in their communities. I am a little bit more than a little bit nervous and more than a little bit pessimistic about the overall broad trends. We are right now it feels like in the middle of a kind of shakeout, and it's not clear whether housing prices are going to crash or whether housing prices are going to soar, but it kind of feels like we are in an unstable position right now vis-á-vis inflation and interest rates and what have you. And the one thing that everybody seems to agree on is that we can't stay here. So I am not optimistic that in the short term things will get easier, but what I am optimistic about is that I think as more and more places stop wanting to feel helpless as more and more places are unwilling to feel helpless and are ready to step up and do something, that there is a growing body of knowledge and tools and expertise and examples that people can point to so they don't have to be pioneers in this space.

They can actually copy people who have been out there doing good work for some time. Now,

Ann Thompson:

We covered a lot of ground. Chuck Marone, founder and president of Strong Towns and a podcast host yourself. Thanks for your time.

Chuck Marohn:

Hey, thank you. This has been delightful and I do love Cincinnati. It is, I think one of the undiscovered gems in this country, and if you're putting a bet on cities that I think will prosper in the next two generations, where are the places that I think will lead the pack over the next 50 60 years? Cincinnati's got to be at the top of that list. It really does. It's got all the ingredients to be amazing.

Ann Thompson:

Remember, if you're interested in digging deeper into the conversation with Chuck Marohn and want to learn more about Brick by Brick in general, there are web articles and videos. Go to cetconnect.org and thinktv.org. You can also give us feedback or share an idea. We'd love to hear from you. We welcome Emiko and Hernz back to the studio. Hey guys. Hey.

Emiko Moore:

Hello. What's up?

Ann Thompson:

So we've reached the time in the show where we kind of reflect on the whole episode time for takeaways and Emiko, what stuck out with you in this episode?

Emiko Moore:

Well, I liked how he used the shoe analogy. In every other market that we have for products, we have so many choices to choose from. You go anywhere in a store, you got 50 choices, but in our housing market, we only have two choices, and these two choices are upper end choices, and that really stagnates the market because the demand is there.

Hernz Laguerre Jr.:

It's interesting you said that we weren't able to add this part of the interview in the podcast, but I want to play an interesting response Chuck had when it came to supplying affordable housing. He essentially said, subsidies aren't a way to get there, and because it just can't sustain the amount of low income housing that we need. Take a listen.

Chuck Marohn:

In this case, we're tapping into state funds and federal funds and local subsidies. The sense that those can all combine to somehow change the market for housing, it's almost a futile undertaking. It's something we observe over and over again as not being possible. So instead of talking about how do we build affordable housing, we really need to switch a conversation to say, how do we build housing that is broadly affordable or how does our housing market become broadly affordable?

Hernz Laguerre Jr.:

I know we said this during the entire podcast, but affordability is relative. So for the sake of clarity, there's a broad form of affordable housing that applies to people from multiple different income levels, and there's capital A affordable housing that generally refers to low income housing, and Chuck is pretty much saying that these subsidies only account for maybe 10% of a building or maybe 5% of an area. So we can't depend on subsidies to supply the amount of housing when they're only accounting for a sliver of what we actually need.

Ann Thompson:

Very true. Thanks for clarifying. All those terms can get really confusing. When we're trying to come up with a solution that we're going to focus on for the podcast. We want to know can this be replicated? Well, in this case, it seems like it can. Chuck Marohn mentioned Mike Keen. He is a professor at Indiana University at South Bend, and he became an incremental developer, so a guy who yes, studied it, but then he was walking the walk here and he got together with some partners and they decided to redevelop a neighborhood in South Bend that had fallen into disrepair, and because he got to know everybody, the city moved his permits along faster and they now have a hundred properties, and it seems like others can do this too,

Emiko Moore:

And it's great to see what he's done just on a local level because he got to know the community and the unique needs in that community.

Ann Thompson:

Agreed. Thanks guys.

Speaker 6:

Thank you. Thank you.

Ann Thompson:

That's our show. If you like what you hear, please rate and review our podcast. We hope you learn something. And if you did, please share it with your friends and family For Hernz Laguerre Jr. And Emiko Moore, I'm Ann Thompson. We'll be back with more solutions soon. Take care.

Our show is produced, hosted an edited by me, Ann Thompson with reporting and story editing from Hernz Laguerre Jr. and Emiko Moore. Our Executive producer of Mark Lammers. Our show consultant is Gloria Skurski. Gabe Wimberly is our audio engineer and mixer. Zach Kramer runs the lights and cameras. Derrick Smith is our production specialist and Jason Garrison is our production manager. Kellie May heads up our marketing and promotions, along with Mike Shea and Bridgett Dillenburger. Elyssa Stefenson handles the website and Steve Wright is our designer. Bill Dean and Andres Kruza are the engineers for the show and our Chief Content Officer is Colin Scianamblo. Our music is from Universal Production Music. Brick by Brick: Solutions for a Thriving Community is a production of CET and ThinkTV, Southwest Ohio PBS member stations.