It seems like nobody can agree on what “gentrification” really is, but everyone knows it when they see it. The most common expression of the term is that people are forced to move directly due to rising costs of living, although I see it as a more slow and insidious change that rarely draws a direct line to people’s immediate housing choices. Gentrification can be a gradual change in demographics that is more like the anecdote of the frog in the cooking pot who does not realize the water is boiling around him. Likewise, neighborhood demographics and costs typically don’t change so quickly that poorer people are immediately relocated.
To the degree we do see rapid changes, that generally happens along transit corridors or in upscale neighborhoods. The controversial Orth House development in Uptown is an example of low-income renters being forced out of their homes because the land they reside upon is worth more to a developer than the existing structure. Thankfully, we have not seen that degree of displacement in north Minneapolis in recent history.
As a housing professional - both as a non-profit neighborhood worker and as a home mortgage originator - I tend to view gentrification through the lens of “who gets to live here and how much does that cost?” Given my field of work, I can best express that cost through home ownership requirements.
So when the Homewood neighborhood raised concerns over a historic designation study as a risk of gentrification, I wanted to see what the numbers tell us about affordability and that cost over time. What some data tells me is that the designation study area is already gentrified, the problem of affordability is getting worse, and designation studies may actually help contain the most extreme forms of gentrification.
I have my own affordability calculation, and it goes like this:
Purchase price minus down payment equals loan amount. At typical market rates for 30-year fixed mortgages, we get the principal/interest payment. Add in payments for taxes, insurance, and mortgage insurance, and that’s our housing cost. Usually an affordable housing payment is between 28% and 31% of a household’s monthly (pre-tax, pre-deduction) income, but in today’s rising market we’re seeing costs go much higher than that. For this calculation, I’m going with 35%. So we take the housing payment, divide by 35%, and get our monthly income needed to make a home affordable. Multiply that number by 12, and we have the annual income a household needs in order to affordably own a home in an area.
And this is where we find out if certain areas are gentrified, and if so, by how much?
For instance, the average purchase price of a single-family home in the Willard-Hay neighborhood as of October 2017 is $149,500. At 4.625% over 30 years, that’s a $745.58 principal/interest payment. Taxes for a homesteaded property would be $165.33, a decent home insurance policy would cost about $110 per month, and if you used a first-time homebuyer loan you could get mortgage insurance as low as $90.63. Put it all together and you have a payment of $1,111.54. In order for that to be 35% of your income, you’d need to earn just over $38,000 per year.
By contrast, a year ago the average property in Willard-Hay would have required an income of $31,850 to be affordable. In my Jordan neighborhood the 2017 income needed is $33,500 and a year ago that was $27,580.
For the Homewood designation area, there is a stark difference. With an average sales price this year of $217,000, the principal, interest, taxes, insurance, and mortgage insurance payment comes to just under $1,600. To keep that payment under 35% of a household’s income, we would need $54,600.
So when a household needs to earn almost 50% more just to have access to affordable ownership, then I hate to break it to you but your neighborhood is already gentrified. In that context, what does a historic designation accomplish?
One of the consequences of historic designation is that it is much more difficult - not impossible as the aforementioned Orth House saga shows, but certainly harder - to acquire properties for the sole purpose of demolition and new construction. Homewood residents may look to the south and lament the higher values in Bryn Mawr, but we are not too far off from the prospect of our land being worth enough to justify the kinds of purchases that only upper-income families or rich developers can afford.
House values are already increasing faster than the rate of inflation, meaning incomes aren’t keeping up with the cost of ownership. The added costs of a designation, perceived or real, is not a significant factor in housing affordability in such a context.
I don’t think I need to run the same set of calculations for acquisition, demolition, and new construction. Just ask yourself, how many poor people do you know who are going through that process to buy their homes in southwest Minneapolis or Edina? Large-scale development of multi-unit housing along transit corridors can certainly provide needed affordable housing units, but who benefits from ownership at that point? Some already-rich developer does.
And that is precisely what a designation could prevent; the acquisition of land for purposes that the average owner could not achieve or compete with on their own. We can create a historic designation process that waives or reduces fees. We can direct city staff to equitably support and guide owners instead of our culture of enforcement and punishment. Done right, historic designation can be a tool that prevents, not causes, gentrification.
Jeff Skrenes is a Mortgage Loan Originator with eighteen years of experience in home mortgage and non-profit housing work. He specializes in first-time homebuyers and down payment assistance programs. Jeff has been recognized by Minnesota Housing as a top-producing loan originator for their bond and assistance loans.
He brings his passion for quality housing to volunteering and has served on the board of the Jordan neighborhood. He helped create a series of housing assistance loans for the Jordan neighborhood. When Jeff isn’t working, he enjoys cheering on the North High Polars football team, cooking spicy food, and appreciating Theo Wirth Park with his dog Rayne.