Before it’s too late.
By Mervin Jebaraj
Traditionally Arkansas has been a state with a low cost of living, especially compared to coastal states. In large part, the low cost of living was driven by lower housing costs. However, with the fast pace of growth in some of the state’s regional economies, the associated employment and population growth has started to increase housing costs and dent the low cost-of-living advantage that the state once held. Nowhere is this more evident than in Northwest Arkansas, where ever-increasing housing costs are fueled by the population growth that came with a 32 percent increase in employment and economic growth, which led the state during the last economic expansion (2009-19). Just in the last five years median home prices have risen 38 percent in Benton County and 31 percent in Washington County.
Why did this happen? As the population of Northwest Arkansas grew, attracted by employment and the regional investments in amenities such as trails, restaurants, museums, etc., housing production did not keep pace with the demand for housing for all the new residents of the region. Net migration to Northwest Arkansas was more than 61,000 people from 2010-19, but home production added just one home for every 1.5 new households. Initial home production quickly absorbed all the prime land that was slated for construction before the housing market crash and then spread out to smaller cities away from the amenities and commercial centers (consequently increasing workers’ commuting costs and regional infrastructure costs). Over time, the home production in smaller cities slowed down as most smaller cities were limited in their ability to add water and sewer capacity. The limited lots for development with available infrastructure (i.e. water and sewer) in large cities are now very expensive, leading to more expensive homes being built in the region. Construction materials and labor costs have also increased during this time, but the price of lots accounts for much greater proportion of the increase in home construction costs in both Northwest Arkansas and nationally.
Who is affected by the lack of affordable housing? Housing is considered affordable when a household spends less than 45 percent of income on combined housing and transportation costs such as mortgage and rent payments and fuel. This means that rising home prices squeeze the middle-income professions out of the housing market and fewer firefighters, teachers and nurses are able to live in the communities they serve. Low-income households are completely shutout from purchasing homes and compete for a small pool of subsidized housing.
What can cities and regions do to avoid the housing affordability issues cropping up in places like Northwest Arkansas (yes, a lot of places would love to trade challenges with Northwest Arkansas)? Arkansas has regional economic development and transportation groups, but not any regional groups dedicated to housing issues. The challenges faced by our cities are diverse, but a regional approach can identify current and future housing challenges and develop plans to address them. Regional actions can include housing development compacts so that large and small cities work toward a unified regional housing goal, regional housing trusts funds that seed needed housing developments, regional approaches to development incentives (like density bonuses) or the use of public land for affordable housing production. Regions can also analyze current and future land use patterns and work on revitalizing dilapidated commercial zones (think underutilized malls and strip malls) by adding affordable housing to the mix. The best time for Arkansas to enact these regional solutions to develop subsidized low-income housing and market rate middle-income housing was yesterday, but the second-best time is today.
Mervin Jebaraj is the director of Center for Business and Economic Research at the University of Arkansas.