Abstract
In Chap. 6, we explained the concept of financial feasibility for a real estate development, described the front-door and back-door analyses in detail, and gave a simple example of each. One of the characteristics of the front-door analysis is that it only considers one specific location. However, housing could potentially be built in any place, and each site is different. How do we take account of the fact that building five miles from a city center is entirely different from building two miles from the city center? To address this question, this chapter extends the front-door analysis to make the location a choice variable, so that the model analyzes feasibility in any location. First, we briefly review the underlying economic model that describes how rents and land prices vary with location. Next, we develop a numerical example that will explore the feasibility of affordable housing development in multiple locations in a city. The model will show that it is incredibly challenging to make affordable housing “work” without subsidies or tax credits. In Chap. 8, we will continue building on the numerical example to show how subsidies can help make previously infeasible projects feasible.
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- 1.
The 1987 obituary of the British real estate tycoon Lord Harold Samuel credits him with coining the phrase “There are three things that matter in property: location, location, location.” However, a 1926 ad in the Chicago Tribune included the phrase “Attention salesmen, sales managers: location, location, location, close to Rogers Park.” See William Safire. 6/29/2009. Location, Location, Location. New York Times.
- 2.
- 3.
See O’Sullivan (2012) for a baseline model to understand the bid rent curve.
- 4.
We use these numbers because (a) $8 is slightly above the Wisconsin minimum wage (which is $7.25) and (b) we chose 200 hours to highlight that this person is working more than full time (perhaps two jobs). Alternatively, 200 hours can be understood as two earners in a household, both working part time. The idea is that a single parent who earns above minimum wage and also works more that full time could still be rent burdened.
- 5.
We extend the analysis to include subsidies in Chap. 9.
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Luque, J.P., Ikromov, N., Noseworthy, W.B. (2019). Location, Location, Location. In: Affordable Housing Development. Springer, Cham. https://doi.org/10.1007/978-3-030-04064-2_7
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DOI: https://doi.org/10.1007/978-3-030-04064-2_7
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