Affordability Roundabout

Daniel Kay Hertz has a nice post up critiquing an article on NYC’s housing policy, definitely worth a read, and I’d like to offer a few thoughts. Understanding what’s causing unaffordability in a city is the first step to solving the problem. If you don’t know the root causes, you probably won’t come up with good solutions. If you call for increasing housing supply in coastal cities in the US, you’ll often hear inconsistent arguments in opposition, and it goes something like this:

A: Housing supply is constrained by regulation. Let’s upzone low-density areas and reduce the bureaucratic hassle of building in the city.

B: But developers only care about the rich! If we upzone and make it easier to build, we’ll just get more luxury units and displace more low income residents.

A: In other cities, like Phoenix and Houston, developers build market-rate housing that’s affordable to people with lower incomes. Are the developers in Phoenix and Houston just nicer people?

B: No! The developers there are just as bad. Phoenix and Houston are cheaper because they’re not as nice to live in as California.

A: Indeed they are not. How odd, then, that those greedy developers are building more in low-margin Phoenix and Houston than in California. Perhaps housing supply is constrained by regulation.

And around we go.

There are kernels of truth in these arguments. They’re not wrong; they’re just incomplete. Certainly, if we only upzone a small area, like Hollywood, we’re going to get luxury developments and displacement. But if we allow ADUs and dingbat-sized projects all over LA? All over the region? There’s not enough luxury demand to suck up all that construction; in fact, there’s no luxury demand at all in plenty of neighborhoods where modest new construction would pencil out.

Progressives have a healthy distrust of corporate interests, learned from centuries of corporate attempts at manipulating markets and evading regulations. So maybe sometimes we lose sight of the fact that more regulation doesn’t necessarily mean better regulation, and less regulation doesn’t necessarily mean less effective regulation. It’s not contradictory to envision a regulatory scheme that encourages a lot of private sector building but also strongly enforces fair housing laws and provides a measure of public housing or housing subsidies to ensure that society’s least fortunate have decent shelter.

On the other hand, it’s also perfectly logical to argue that, like policing or education, the private sector cannot be trusted to provide adequate housing for a large number of people. In that case, you should be arguing for a large government (or quasi-government) investment in building new housing. Few people seem to be making this argument, but it’s an argument that would at least make sense. This is, after all, pretty much what progressives argued in the 1930s and 1940s.

What’s ridiculous is the argument that we can provide housing for everyone by turning the screws on developers even tighter. Imagine if, having declared that education is a basic human right, we proposed to implement that right by allowing construction of private academies, but only if they subsidize one low-income student for every four trust-fund brats they admit. That sounds ludicrous, but it’s basically what Bill de Blasio expects you to believe will make housing accessible to everyone in New York City. This approach makes sense only if your primary goal is to turn the screws on developers. Which is fine, but in that case, we probably don’t have much to talk about.

7 thoughts on “Affordability Roundabout

  1. matthewplan (@matthewplan)

    I agree so much with your (and DKH’s) analysis. But a couple quibbles. Is deBlasio really turning the screws on developers? This model is not inclusionary zoning, it is closer to public benefit zoning or value capture. Developers are getting more density and buildable area. If the area was upzoned to that higher level, increased land values would just erase the gains. This way only hurts the landowners. I’d much prefer a strong social housing model, but it would have to be nationally or state led (cities can’t fund it). NYC already spends an amazing amount of $$ on affordable housing – puts LA to shame.

    1. letsgola Post author

      Very much agree that a social housing model would need to be at state or federal level; the funding & implementation wouldn’t work at a city level.

  2. Urchin Of Venice

    On the other hand, it’s also perfectly logical to argue that, like policing or education, the private sector cannot be trusted to provide adequate housing for a large number of people.”

    For one, policing and education can and are often funded privately. That aside, the reason why they are publicly funded are more specific – good policing benefits everyone, but without forcing everyone to pay their share, you’d run into the free-rider problem. As for education, most believe that it is a good that has benefits to the public far in excess of the benefits to the individual obtaining that education – that an educated populace is essential to effective democracy for instance.

    Housing on the other hand is a good whose benefit mostly redounds to the resident concerned. The more a benefit redounds to the user, like say, a restaurant meal, the less it makes sense to subsidize them.

    “It’s not contradictory to envision a regulatory scheme that encourages a lot of private sector building but also strongly enforces fair housing laws and provides a measure of public housing or housing subsidies to ensure that society’s least fortunate have decent shelter.”

    It’s important to remember that this is a tax on everyone who doesn’t receive housing subsidies. Wherever you set the threshold for housing subsidies, the people who don’t qualify for it are paying extra. The reason we have so many regulations to begin with is because they are taxes whose burden is hidden. To argue in favor of Affordable Housing and remain intellectually honest, one must mention the increased cost that non-recipients of Affordable Housing face.

    When are you doing as you propose, and expanding new construction beyond just luxury homes while retaining Affordable Housing requirements, Affordable Housing set-asides become more than just a tax on the ‘rich.’ We all have our own opinions as to what we should do, but we must all be honest about the impacts of our requested policy.

    Transparency in government has become a goal among many progressives of late, and I share their zeal. In that vein, I propose that if there were to be Affordable Housing, it must be made clear to residents. If a new one bedroom apartment retails for $2,000 a month, and 10% of that is due to Affordable Housing requirements, then their bill should read:
    Rent – $1,800
    Socialized Housing Surcharge – $200
    Total Due – $2,000

    Does anyone have information on how much cost Affordable Housing adds to development?

    1. letsgola Post author

      I would rather see straight cash subsidies (e.g. Section 8) than affordable housing set-asides. New construction is not happening in areas where housing is the cheapest, so you get more bang for your buck if you let people choose cheaper apartments.

      I think you could make an argument that there are societal benefits from everyone being able to afford some minimal level of housing, just like there are benefits to business of having an educated work force. As you note, if you are going to provide subsidies (like food stamps, for example) you will have to tax someone to do it, and the societal benefits of making sure everyone has housing would be the justification.

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  4. LYNND

    Land in established LA/OC communities comes at a premium to develop and so the developments inevitably skew towards what amounts to luxury housing. I’m seeing $700K-$800K single-family housing developments sprout up in North Orange County and the Southwest LA suburbs that are comprised of working-class – middle class neighborhoods where the 1950s-era track homes of the area typically go for $500K. It seems doubtful, on the one hand, that affluent homeowners are going to opt to buy in an area in which the surrounding community is considerably older or less affluent. Either the higher-cost new housing in the area will elevate the entire area (gentrification) or the existing housing stocks (mostly small, older homes) will drag down the resale value for newly constructed, less affordable housing.

    I think you really have to look at the incentives developers in SoCal are routinely awarded by Cities that want to claim they have sought to address the housing shortage. I suspect, more than anything, a perverse set of incentives exists that effectively offloads the risks of building a development that will not sellout. It’s the only explanation I can come up with for why I’m seeing so many communities that were completed in the past 2-7 years that remain nearly half vacant all this time later. A significant portion of the causation consists of out-of-control land costs in established (“built out”), centrally-located portions of LA/OC. In many respects, it just doesn’t make sense to offer housing that median wage earners in a region can afford to buy as long as the cost of acquiring and developing such land pushes the development costs out of the “affordable” zone. At the face of it, SoCal developers don’t seem to give much thought to the occupancy rate after such developments will command when they are complete — and that observation, IMO, ought to raise some serious Red Flags. (Can we blame kick-back arrangements, tax write-downs or an “incentive” system that amounts to wholesale risk transference?)

    Another trend that often goes unreported is the fact that portions of LA/OC represent attractive investment opportunities to foreign buyers (the Chinese in Arcadia, for example). Such housing are owned but not often occupied, which might explain why it would appear to the locals that the developers “miscalculated” what the area market could bear (if judging by the number of seemingly unoccupied units is any indication). Moreover, the influence of foreign money in the certain real estate markets helps account for rising demand and that, in turn, worsens the affordability problem for local buyers (not to mention, that lower-income buyers are competing with all-cash buyers/flippers). Reportedly, median wages in the LA area are lower than they are in other high-cost regions of the country, including San Francisco and New York. I read one study, which I believe came out of the Lusk Center for Real Estate, which concluded that the LA area is the least affordable in the nation when the housing shortage, lack of affordability requirements and median wages are taken together.


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