Live. Work. Stay.

America's housing industry faces the greatest threat to its sustainability in decades from a crisis of affordability that is shutting out increasingly larger numbers of prospective buyers from purchasing homes, whose prices—despite recent reductions—remain simply out of reach.

Once downplayed by builders and developers as a problem confined to overheated markets such as Las Vegas and San Diego, this affordability crisis is impacting buyers from shore to shore and border to border. Eighty percent of first-time home buyers couldn't afford a $501,390 median-priced home in Los Angeles County in the first quarter of 2007, and three-quarters of all households in all of California couldn't afford an entry-level home priced at $480,670, according to the California Association of Realtors. In Humboldt County, Ariz., north of Phoenix, affordability fell to 12 percent after median home prices rose to $325,000 in March from $309,000 in February. That same month, Vermont issued a report called “Between a Rock and a Hard Place,” which estimates that 67 percent of the state's households don't earn enough to afford the $197,000 median price for a house, and nearly three-fifths of those households can't even afford the state's median monthly rent. Only about one-third of Florida households have annual incomes that would allow them to purchase a median-priced home, compared to 69 percent in 1999, according to Affordable Housing Finance magazine, Builder's sister publication.

“There's a big bubble in the middle,” observes Richard Haughey, the Urban Land Institute's director of multifamily development. James Carr, senior vice president of financial innovation, planning, and research for the Fannie Mae Foundation, gave his audience a jolt when he suggested, during a recent Congress for New Urbanism meeting, that the nation's economic survival could hinge on its creating more affordable housing. If Hispanics and Asians, many with moderate incomes, now account for nearly half of America's population growth, “Who are we building houses for if the fastest-growing segments of our society are least able to afford ownership?” asks Carr.

And what are builders doing to manage this crisis and make their products more affordable? Up until last year, the answer would have been “not much,” as builders milked the surge in home buying during the first half of this decade for every dollar they could wring out of customers. (An index that Yale University economist Robert Shiller uses to track home prices shot up 83 percent between 1997 and 2006; during that same period, weekly earnings for non-farm production and non-supervisory workers increased 31 percent, according to U.S. Bureau of Labor Statistics data.) But by mid-2006, when home sales started dropping precipitously, most builders were concluding that their aggressive pricing had pushed too many buyers out of the market, as the evidence was overwhelming.

Last year, Pulte Homes' Arizona division did research that found its prices and policies excluded 42 percent of Phoenix's buyers. The Boston Globe reports that Northwestern University economist Barry Bluestone calculated that median-income families could afford a median-priced home in only 12 of greater Boston's 161 communities in 2006, compared to those living in 148 of those communities in 1998. While a family of four in Seattle could afford a $280,000 home in 2006, median prices there that year were $450,000 for a house and $290,000 for a condo, reports the Seattle Post-Intelligencer.

The affordability crisis is also manifesting itself uncomfortably in the recent alarming rise of foreclosures that is partly the result of buyers purchasing homes beyond their means. With one in three households spending at least 30 percent of its monthly income on housing, and 15.6 million households—about one in seven—spending at least 50 percent, according to Harvard Joint Center for Housing Studies' estimates, the industry has rarely looked more fragile.

Suddenly, builders are embracing the same affordable customer that many of them had walked away from when their businesses were more flush. And the customers these builders are targeting most aggressively are those “workforce” buyers cherished by employers and municipalities alike. In March, for example, the town of Cromwell, Conn., south of Hartford, held a forum on affordable housing that had an unlikely sponsor: the Middlesex County Chamber of Commerce. The NAHB's CEO Jerry Howard, who attended the meeting, notes that cities and towns understandably panic when escalating home prices force workers—significantly, first responders such as police officers and nurses—and businesses to relocate to less-expensive areas.

AFFORDABILITY PLUS: This Labor Day, Franciscus Homes in Virginia will start selling 68 one- and two-bedroom condos in four-plexes, priced between $250,000 and $300,000 per unit, at its Bridgewater at Eagle Harbor community. Franciscus promotes this community for its affordability as well as for its proximity to one of the more sought-after locations in Wight County, Va.

“ ‘Affordable' has gone mainstream,” says Doug Guthrie, president of Kimball Hill Urban Centers, which Kimball Hill Homes launched four years ago to get involved in mixed-income projects within urban settings. A poll of 1,205 people that the NAHB and other housing advocates conducted in March found 90 percent citing affordable housing as a “high priority” for the country, and more than half saying America's housing policies are on the wrong track if providing decent housing for all is the goal. Builder conducted its own exclusive survey of its readers, and more than three-quarters of the 731 who replied think the U.S. faces an affordable housing crisis.

Two-fifths of those respondents see affordable housing as a potential market opportunity. In the Dallas/Fort Worth area, 30 percent of the permits that builders pulled last year were for homes that would sell for under $160,000, says Eddie Servigon, vice president of operations for Meritage Homes' Legacy division in Dallas. In that market, Meritage sells 2,000- to 2,200-square-foot homes on 6,000-square-foot lots for between $140,000 and $170,000. But affordable home building “isn't for the faint hearted,” cautions Nelson Mitchell, president of History Maker Homes in North Richmond Hills, Texas. Rising land costs, zoning restrictions, and onerous impact fees can strip margins down to nothing. History Maker's evenflow construction and negotiating skills with trade partners allow it to make money selling a 3,000-square-foot, four-bedroom brick house on a 5,000-square-foot lot for $119,000. “It boils down to discipline,” says Mitchell.

Escalating prices are one of several factors that drove America's housing market to this critical juncture. Four consecutive presidents have made homeownership the centerpiece of their administrations' housing agendas, but gains have been modest, especially for Hispanics and blacks whose ownership rates are still under 50 percent. The number of homeless in America—which HUD estimates at 754,000—hasn't changed in 15 years. And the affordable rental market, once a stepping-stone towards ownership, is in disarray, with millions of low-income units having been razed, taken off the market, or converted to market-rate apartments. The National Low Income Housing Coalition estimates another 103,000 rental units are at risk over the next decade because their contracts under Section 8 (the federal government's voucher program that subsidizes affordable rental properties) will expire.

Housing advocates say the Bush administration keeps pulling the rug out from under its own objectives—to increase minority homeownership by 5.5 million people by 2010 and the affordable housing supply by 7 million units by 2014—when it continuously tries to underfund Section 8 and slash budgets for Community Development Block Grants and programs such as Hope VI, which has been instrumental in revitalizing public housing in many cities. Advocates hope that Democrats now running Congress will approve funding for a National Housing Trust that would provide $500 million to $600 million annually for affordable projects.

The federal government, though, hasn't been the sole arbiter of America's housing agenda for some time. The private sector, nonprofits, and state and local governments now play equally influential roles. The $10 million that Ron Terwilliger, chairman and CEO of Trammell Crow Residential, recently donated to the Urban Land Institute and Enterprise Community Partners is one such example. Bank of America, which last year invested $3.2 billion in affordable multifamily rental properties, finds “increasing receptivity for investment among our clients,” says David Leopold, national product executive for community development banking.

Such investments usually filter into the country's largest cities, where plans for change are most immediate. Seattle is forming a regional coalition of government, business, labor, and community organizations it's calling “The Prosperity Partnership,” whose purpose is to develop workforce housing action plans. Last November, voters in Los Angeles approved a proposal to raise property taxes so the city could issue $1 billion in bonds to fund affordable housing. New York has earmarked $7.5 billion to build and preserve affordable housing for 500,000 residents over 10 years. Chicago has an equally ambitious affordable housing agenda, and Boston is working to complete its goal of building 17,500 affordable units by the middle of this year.

One response to housing shortages for a growing number of cities and towns has been to adjust their zoning regulations, a la Massachusetts' 40B law in towns where less than 10 percent of household stock is affordable, that requires developers to make 25 percent of anything new they build affordable to buyers with household incomes under $60,000. In exchange, the developers receive expedited permitting and zoning reviews. Aaron Gornstein, executive director of Boston-based Citizens' Housing and Planning Association, says that 80 percent of all affordable housing built in Boston since 2001 and 30 percent of what's been built in the state are attributable to 40B. Terwilliger strongly supports nationwide mandatory inclusionary zoning, and Don Tomnitz, president and CEO of D.R. Horton, says he, too, is a late convert to the need for inclusionary zoning, after his company encountered it in California and Washington, D.C., and still managed to produce profitable communities.

Besides, says Tomnitz, impact fees that hold entitlements for ransom are what really push builders away from affordable construction. One of Builder's survey respondents writes that affordable housing is “impossible” when municipalities view any development project as a “ripe plum to pick for the financing of all community enhancement proposals.” Two-thirds of the survey's respondents say they'd consider getting involved in affordable projects if municipalities offered concessions such as tax credits or expedited permitting.

A WINNING COMBINATION: C.P. Morgan Communities' Marilyn Ridge neighborhood in Noblesville, Ind., won the NAHB's national award for Innovative Workplace Housing in 2006, with a mixture of housing types from its Cafe Collection ranging from 1,000 to 3,100 square feet and selling from $90,000 to $130,000. The builder is developing similar projects in Greensboro and Winston-Salem, N.C.

“The recent downturn provides a window of opportunity to revisit some of these obstacles,” observes Jeffrey Lubell, executive director of the National Housing Council's Center for Housing Policy, which is among several agencies pressing municipalities for zoning and building code reforms that would open up markets to affordable development. “We're promoting local solutions to local problems,” says A. Bryant Applegate, director of HUD's America's Affordable Communities Initiative that's calling on cities to form task forces for this purpose, “so when they think of affordable housing, they don't think ‘there goes the neighborhood.' ”

Meanwhile, builders that want to add affordable homes to their portfolios are coming up with creative ways to appease planning and zoning commissions now.

A few years ago, The Related Group concluded it could build workforce-oriented high-rises profitably if it didn't have to build parking for them. So it cut a long-term lease deal with the Miami Parking Authority to use nearby garages that, at night, operate at less than 30 percent capacity. That deal cleared the way for Related to build Loft 1 Downtown, a high-rise with 200 units ranging from 700 to 1,200 square feet and selling for $99,000 to $230,000. Phase two's 500 units “sold out faster than the first,” says Oscar Rodriguez, senior vice president for Related's attainable housing division, which launched officially in summer 2006. This spring, Related was negotiating with Dade County, Fla., on a project where that county would donate land that Related would develop and build 1,100 units, half of which would be sold to buyers earning less than $70,000.

AVOIDING LABELS: Bigelow Homes never calls any of its homes “affordable,” preferring instead to present its communities as “towns” that invite people across the income spectrum. Pictured here are less-expensive homes in Bigelow's HomeTown Aurora community in Illinois, with 1,288 units on 173 acres ranging in size from 910 to 3,200 square feet and priced from $150,000 to $400,000.

In Virginia Beach, Va., Franciscus Homes has proposed a financing program, called Rainbow Solutions, that lowers the price of a home to a buyer if the Virginia Housing Authority or another equity partner accepts a lien against the value of the property as a down payment. The buyer would pay back the lien in full if the house is sold in the first five years. For each successive year, the lien is reduced by 5 percent.

Frank Spadea, Franciscus' owner and CEO, thinks builders should get over their apprehension about affordable homes being loss leaders. “The profit margin is there, but you have to start with the design,” which for his company includes higher densities (Franciscus gets 12 to 14 units to an acre) and keeping construction costs under 43 percent of the selling price. “If you can't deliver at $50 per square foot, you can't be on this side of the business,” says Tom Eggleston, CEO of C.P. Morgan Communities, whose Marilyn Ridge neighborhood in Noblesville, Ind., won the NAHB's 2006 Innovations for Workplace Housing award. Morgan's homes there sell for between $90,000 and $130,000, and Eggleston credits his company's rigorous supply-chain and job-site management for whatever profits it squeezes from affordable sales.

Kimball Hill's Guthrie says builders delving into affordable construction must also understand “the total package and risks.” His division is working on two large mixed-income projects in Chicago that involve “seven or eight” different kinds of funding, including tax-increment financing. Losses that Kimball Hill incurs from the sale of affordable homes within those projects are also offset by “the upfront transaction,” says Guthrie, such as public assistance for upgrading existing infrastructure.

Kimball Hill Urban Centers has been talking with Kimball Hill Homes' divisions in other states about capitalizing on the emerging acceptance of workforce housing. And Whittaker Homes has purchased 940 acres in Liberty, Mo., for its second “New Town” community, which the builder hopes will duplicate the success of its New Town neighborhood in St. Charles, Mo., the best-selling development out of 18,600 communities in 16 states evaluated by MarketGraphics Associates, a market research firm. The 738-acre St. Charles neighborhood will eventually have 5,700 homes, 25 percent of which will be priced under $200,000. “Density isn't a problem when things are designed correctly,” says Greg Whittaker, Whittaker Homes' president.

Lubell of the Center for Housing Policy wants every builder, as it expands, to consider affordable alternatives. He wonders, though, how many truly understand the dimensions of this crisis. “If something isn't done—like in the next five years—and [builders] don't grow in a way that's attractive to more people, we won't be able to grow as a nation.”

Franciscus Homes and the state of Virginia helped a Navy ensign purchase his first home.

Casey Karsten is a 25-year-old Navy ensign assigned to the U.S.S. Ponce at Norfolk Naval Station in Virginia. The station is about a half-hour drive from Bridgewater at Eagle Harbor, a condo community in Carrollton, Va., where Casey and his wife, Justine, moved into their $221,925 home on April 16.

Ensigns don't make much money—monthly pay for that rank ranges from $2,469 to $3,107, plus allowances and benefits, according to the U.S. Navy's Web site—so the couple needed some help financing the house, even with their $20,000 down payment. Resource Mortgage, their broker, steered them towards the suite of loans that the Virginia Housing Department Authority offers for first-time home buyers. The Karstens chose the product that includes a below–market-rate VA attachment. By buying two points, Casey says he was able to negotiate a mortgage with a 5.25 percent fixed-interest rate.

In addition, Bridgewater's builder, Virginia Beach, Va.–based Franciscus Homes, kicked in 3 percent of the closing costs.

The condo the Karstens bought, which is part of a tenplex, is just under 1,400 square feet, with two bedrooms and two full baths. Casey says that he chose this community because of its location, the design of the buildings and their units, and—in keeping with his occupation—the fact that Bridgewater is bordered by the James River.

A California couple alters its retirement plans after touring one of History Maker's affordable houses.

About a year ago, Marlene and Ruben Scott were visiting relatives in Fort Worth, Texas. At the time, the Scotts were thinking about down-sizing for their retirement, purchasing a $479,000 home in Kerman, Calif., not too far from Fresno, where they own a 5,000-square-foot abode that Marlene estimates is worth around $800,000.

Their Texas relatives live in a community built by History Maker Homes, which has established itself in that market for offering large houses at remarkably affordable prices. During their visit, the Scotts toured some of History Maker's models and immediately fell in love with what they saw. “We bought a home that day,” says Marlene. Their 3,500-square-foot house cost $180,000, “and that was with $37,000 in options,” she adds.

When asked why Texas, Marlene notes that she is a cancer survivor and her doctor practices in Fort Worth. In addition, her husband, who was a professor of philosophy at Fresno City College for 34 years until he retired recently, no longer had work ties to that city. “Plus, for the size, the house was cheap, compared to what we wanted in California.”

The Scotts closed on their home in Fort Worth in February, and when BUILDER spoke with Marlene in mid-May she said they were “almost” completely moved in. Other relatives are living in their home in Fresno, which the Scotts intend to hold onto for investment purposes.