First they were a niche, then a novelty. But as the affordability crisis in housing grows worse, and land-starved coastal areas confront the limitations of single-family zoning, accessory dwelling units (ADUs) are now very much a serious part of the conversation.
Perhaps the clearest sign of how much potential policymakers see in these structures (sometimes still referred to as “granny flats” or “in-law suites”) came last month, as Freddie Mac rolled out new financing guidelines that theoretically will begin opening up opportunities for ADUs—as rentals, affordable housing and non-traditional living arrangements—to a huge new segment of the population.
“We have a unique opportunity where the cost of building is less than the cost of buying,” said Meredith Stowers, business development manager for Cross Country Mortgage.
Stowers joined a diverse group of advocates, real estate practitioners and policymakers on a University of Southern California-sponsored panel last week to discuss how impactful these changes can be in elevating lower-income families into homeownership, as well as how they can expand housing stock in areas that are traditionally resistant to growth.
The most immediate change from Freddie is support for ADUs in all their mortgage products—with plenty of requirements and restrictions. This includes loans for both existing homeowners looking to add an ADU as well as homebuyers who want to include the addition of an ADU with their purchase.
It’s also important to note that buyers will be able to use (some) rental income from the ADU in their mortgage application, giving low- or moderate-income buyers access to a larger pool of properties.
As local governments have loosened restrictions and encouraged ADU production in their areas, some have not seen a significant increase in people taking advantage of the new opportunities. According to Amy Anderson, senior vice president of the Wells Fargo Foundation, inaccessible, obscure or missing financing options for the structures are often to blame.
“Financing has emerged as one of the top barriers to production ,” she said. “A critical aspect of ADU financing…is how to change those federal agency programs that can really play a central role in unleashing more private lending financing.”
Only a month after going into effect, it is certainly too early to make any sort of judgment on how the new guidelines will shape markets. Some panelists were a little more cautious in their assessment of just how quickly or broadly ADUs will pop up in real estate markets based on the changes, describing them more as a first step than a huge leap forward.
“Why don’t you allow multiple ADUs particularly on a family property?” Stowers wondered. “Why can’t we build detached ADUs? We also need to eliminate random obstacles.”
Samar Jha, government affairs director for the AARP, said that a Freddie demand that applications using ADU rental income need at least one ADU comp for the appraisal could prove to be a significant roadblock.
“Some sort of flexibility on that requirement would be nice,” he said.
As the technical aspects of the Freddie program are worked out, and as more lenders look into ADUs as a potentially important part of their portfolios, the question is no longer whether they will erase inventory, affordability and accessibility challenges in the housing market, but rather, how much they can alleviate these issues—and where.
“ADU is part of the solution, not the solution,” Jha added. “People say ADUs are not going to solve affordable housing, but it has to be part of the solution.”
Who and where
None of these changes matter if ADUs aren’t in demand from consumers, or aren’t viable projects for builders. Stowers, who described herself as a boots-on-the-ground mortgage lender “slugging it out” in a competitive California market, said ADUs are growing to serve a mostly unrecognized niche for living.
“Our housing policies have tended toward a unique vision of family where we oust the kids out of the house and tell them to go buy a house,” she said. “In fact, most families—brown families especially—are used to ‘family compounds.’ That is the norm for most people around the world.”
Working in areas just north of the U.S.-Mexico border in San Diego, California, Stowers claimed that ADUs are often perfect for upwardly mobile immigrant families who utilize the space for long-term multi-generational living situations—something becoming much more common at least in some areas.
Even though there is a demand, because financing and land use policies are historically unfriendly to ADUs, many who want an ADU are simply not able to pursue that living arrangement. Stowers said that in her experience, people will “ghost” contractors and blame the builders if there are hiccups in the financing, making them a riskier proposition for everyone.
But as financing becomes more stable, and more data allows better underwriting, builders will have a lot more confidence taking on ADU projects, she adds. Conversely, if financing remains difficult, builders and private lenders will likely back away.
“If we don’t address this financing more quickly, it will kill this trend,” Stowers lamented. “Freddie, in my view—God bless ‘em, it’s awesome—but it’s a baby step. Because we have to get built first.”
Susan Geddes Brown was a longtime mortgage lender who now runs her own company advising financial institutions on construction loan programs (with a specific focus on ADUs). She called Feddie’s changes “a really bold step,” and described how appraisers are working to quantify how valuable ADUs are, even as they are still scarce in some areas.
“I think the other piece of that is helping appraisers understand there are multiple ways to get to an opinion of value, where you’re extrapolating data, where you’re overlaying data to help demonstrate what those values are,” she said. “Appraisers just simply don’t have the tools, and it’s not a property tech they’re accustomed to just yet.”
Stowers said she once had an appraiser give a three-bedroom, 1,200-square-foot ADU a value of $0. That comes from federal guidelines, she claims, which only lets appraisers look at “marketability” for these structures, but not rental income. ADUs still cannot be considered part of “gross living area.”
“A clear change in those guidelines would solve every problem,” Stowers said.
Both Jha and the panel’s moderator, Ben Metcalf of the University of California at Berkeley’s Terner Center for Housing, pointed out that many single-family neighborhoods do in fact, have properties with ADUs—they just don’t go by that name.
“We talk to people, they’ll be like, ‘We’ve been doing ADUs all along, we just call them duplexes.’ Or, ‘We do ADUs, but we just call them triple-deckers or three-flats,’” Metcalf explained.
Jha used an example from popular culture to help demonstrate that ADUs are not a new invention.
“The most famous, famous person to ever live in an ADU is The Fonz,” he said, referring to the iconic “Happy Days” character played by Henry Winkler. “ADUs have been since then.”
Appraisers and regulators can start to use these already existing structures, which vary regionally and take on all different shapes and sizes, as models of ADU values, the panelists argued.
Speaking to RISMedia late last year, Jeff Cohen, an economist at the University of Connecticut, says that the traditional single-family large lot neighborhoods—particularly in the Northeast and West—are going to fade.
“Taking these small starter homes, tearing them down and building multi-family units—that might be one way to resolve the supply issues in some ways,” he says.
He adds that savvy investors are starting to realize that a single-family lot can quickly be transformed into a multi-family property, sold or rented for significantly more return on investment. That has potentially negative effects with crowding or an overall loss of entry-level single-family homes, as well as positives, with more housing created in highly desirable, land-limited neighborhoods.
“Where I live, in a very popular suburb because of the schools and the parks and the relatively safe neighborhoods, you don’t see as much new construction because there’s really no vacant land. But if you move further out…you can have that kind of development, but that might not be where the majority of people want to live.”
Back to the financing side, other government entities are already expanding how (and how much) they will finance ADUs. The California Housing Financing Authority (CHFA) recently upped a grant program to $40,000 per family, and a representative who was attending the panel said they had already disbursed $1 million.
Amanda Chiancola, a planner working for the city of Salem, Massachusetts, told RISMedia that her relatively small, suburban town (population 44,000) is independently planning to announce a new financing program for affordable ADUs after pushing to facilitate and loosen restrictions around them over the last couple years.
She adds that while she is not familiar with the new Freddie guidelines, it usually takes some time for those things to percolate down to the point where builders and local governments will see new permits and applications. But regardless of the specifics, from a purely policy perspective, ADUs are very often well worth the investment.
“It’s the least expensive way to create affordable housing,” Chiancola says.