Affordable housing and neighborhood activists

In July, the City formed an affordable housing task force made up of the usual players:  developers, neighborhood activists, and affordable housing advocates.  They will look for solutions to Austin's affordable housing "crisis."  (I suspect that relaxing zoning restrictions will not end up on their short list of solutions.)

What kind of affordable housing solutions should we expect the neighborhood activists to push for?  If we assume their behavior is consistent with home-price maximization, the answer is easy:  affordable housing quotas.  That is, require developers of multifamily units to reserve a specific percentage of units for sale or rent at below market prices.  The recent commercial design guidelines reflect this thinking; they require developers of vertical mixed uses to reserve 10% of their units for households making 80% of the median household income. 

This will be the NA's preferred affordable housing solution because (i) it will raise home prices, either directly or by discouraging additional construction; and (ii) it will mitigate a political risk posed by the rapidly escalating home prices in Central Austin.

Affordable housing quotas and house prices

Let's suppose Austin adopts a mandatory 10% affordable housing for multifamily housing developments with 10 or more units.  This will have real bite, at least in high-priced parts of town.  (Such a set-aside is probably redundant in the less expensive parts of town.)  For example, suppose a developer proposes to build a 20 unit condo with the units priced at a fair market price of $400,000.  With the set aside, the developer must reserve two units for below market value, say $100,000.  Unless the prices are adjusted, the project will bring in $600,000 less than originally proposed.

If demand is strong, the developer might be able to adjust the prices of the other units to make up the difference.  This means the other units would cost an extra $33,000 each.

If the demand is not there, though, the developer will have to absorb the $600,000.  Some projects might still go forward.  But there also will be projects -- projects that would have been only marginally profitable -- that will not get built. 

The affordable housing quota thus will either raise prices directly (by causing the developer to pass along the cost of the subsidy to the buyers) or indirectly (by discouraging housing supply).  Either way, area homeowners will see their home prices artificially inflated. 

The political benefits of affordable housing quotas

Affordable housing quotas also have a political kicker.  In the long term, they may soften a community backlash against unduly restrictive zoning.

The kind of exclusionary, suburban zoning practiced in Austin is typical of relatively small, homogenous suburbs, where the residents have similar incomes, political views, tastes in housing, etc.  There's not likely to be serious controvery over zoning policy in such places.  Outsiders might not like it, but they don't get a vote.

But Austin is a diverse city, with lots of renters, lots of people who'd like to live close in but can't, and (lots of?) residents who prefer denser development as a matter of taste.  As our central city neighborhoods increasingly become enclaves of the wealthy, the risk grows of a backlash against zoning practices that artificially maintain low densities.  Because the beneficiaries of these practices are a distinct minority (but a well organized one), the risk of a backlash is real.

Affordable housing helps mitigate that risk.  Sprinkling a few lower income residents on the fringes of the pricey neighborhoods may reduce the perception that Central Austin is just for rich yuppies.

As I've noted before, my take is a "behavioralist" one; I'm not making claims about the subjective motives of NA's.  For example, I can't dispute that some of these homeowners feel genuine concern about the lack of affordable housing in Central Austin.  I just don't care.  NA policies should judged by their likely effects and not NA's subjective intentions. 

Incidentally, there's at least some anecdotal evidence to support my view, and not just the city's recent commercial design guidelines.  Anyone who's followed City Council debates on high rise construction knows that NA's constantly push the City to mandate affordable housing in new high-rise construction. 

Objections to affordable housing quotas

I've got three.  One is that they're not very effective.  Two are fairness objections.

First, this kind of affordable housing program is an inefficient form of housing assistance.   With quotas, some low income residents reap huge windfalls, perhaps tens or even hundreds of thousands dollars in home value.  But this kind of housing is scarce, and few will enjoy the benefits.  As a result, quotas are essentially a lottery system.  A few low-income residents will receive huge benefits, but the rest will be unaffected. 

What percentage might be helped?  There are 170,000 households in the metropolitan area with household income of $35,000 or less.  (The data is here.) $35,000 is less than 80% of median household income, which is usually bandied as the benchmark for affordability.  We might have 5,000 or 10,000 condominiums built with the 10% set aside.  This works out to just 1,000 affordable homes.  This won't make a dent in the need. 

Second, I think quotas are unfair.  At least if the City buys units in expensive areas to reserve for affordable housing, the population as a whole bears this cost.  Under the developer set-aside program, the "tax" falls either on the buyers or the developers.  Essentially we get a system that transfers wealth from the few to the few.  That doesn't seem like a fair wealth redistribution scheme to me. 

Finally, the central neighborhoods rapidly are becoming unaffordable for households making a lot more than the median income.  They are not any less deserving of a chance to live in these neighborhoods than the low income folks.  But these programs don't help them; if anything, they make affordable market rate housing even more scarce.

Comments

[M1EK]

Well put, but, well, check this guy out:

http://www.politicalsuicide.org/scott-s-blog/trickle-down-followup

There's way too many self-identified liberals who honestly think the market can never even be a useful tool in the tool-belt, much less a problem-solver.

[AC]

I'd seen his earlier post.

I didn't comment because I didn't know where to begin.

[Tim]

Speaking as a liberal I don't think it's that we don't think the free market could theoretically be a tool. I think we're too pessimistic to believe it could be (there's far too much money involved here for corruption to be far behind). Construction is an inherintly corrupt market as it is. The entire business is lashed into the political process. It's like people talking about the free market and telephones. I agree it would be a great world if there was a free market for telephone service. History's on my side, though, that we shouldn't pin our hopes on it.

Let's be honest, whether you let the market be the guide or try to enact some sort of artificial quota system, the end result is that the neighborhoods are going to do their damndest to stay the way they are. I love the people who live on Mary and say they live in South Austin. Those people need to wake up and realize that everything inside the 183/71/35/1 loop is central austin. And we can only expect it to urbanize further. The question is not really what solution will work. It is how can we reach out to the community and help them transition gracefully into what they've become. If we do nothing eventually those 800 sq/ft houses will be worth millions and we'll see all the poor people who had to scrape bye to get their $450,000 houses unable to pay their property taxes. Gentrification can be a bitch for rich people too.

[AC]

Thanks for commenting, Tim.

You're right of course that "neighborhoods are going to do their damndest to stay the way they are." See my original post -- I don't believe anything's going to change. I don't even believe that there's a way to help neighborhoods transition gracefully in a way that is acceptable to them. If anyone has any ideas, please share.

On corruption, I disagree. I haven't even heard rumors of corruption at city hall. I think corruption means trading bribes (or things of value) for votes. I don't consider lobbying and buttonholing by developers to be corrupt.

[dan]

Wow @ the post on political suicide. He thinks more housing won't reduce prices because trickle-down economics is bunk? The two aren't even related. Please don't associate all of us liberals with that sort of thinking :)

Is there anyone who believes that housing quotas are more effective than a negative income tax in helping out the poor? I'd love to see a solid economic argument for price ceilings, any sort of quota, or a minimum wage over a negative income tax, since imposing any of those seems much easier, politically, than increasing the Earned Income Tax Credit or implementing a local/state equivalent of the EITC.

[AC]

"Liberal" is a pretty meaningless term when it comes to zoning issues.

There are lots of people who say they want to provide affordable housing, protect the environment, fight sprawl, support mass transit -- "liberal" causes all. But stick them in a house in Zilker with a $400,000 mortgage, and suddenly it's all about "car trips per day," neighborhood "character," and the importance of the neighborhood planning process, to hell with everyone else. Is this "liberal"? I think it's just self interest.

There is the "developers are greedy pigs so it's OK to screw them" camp, exemplified by the guy at Political Suicide. I've seen lots of people like that in Austin. That's certainly a leftist sentiment. I don't consider it a properly liberal sentiment, though.

[eliz. s.]

This post is one of our picks for the week (even though it's from last week) on Austinist.

http://www.austinist.com/archives/2006/09/08/best_of_the_austin_blogs_week_of_sept_4.php

[Scott]

Well, I appreciate being your whipping boy in the comments. And since it seems that ya'll are going to use me as the poster child for liberalism-gone-amok, I'd like to share a few things.

First, I don't own a $400k home in the area where I live. I live in a fairly run down 35+ year old duplex. I don't benefit from property tax decreases but do get stung when they go up (my rent stays the same when they go down and goes up with tax increases) or even get much of a say in the neighborhood assn. So if you're implying that because I'm a liberal that lives in the Zilker area and because I support affordable housing initiatives out of "self-interest," I think you're overly generalizing. I'm able to live where I do today because somebody, at sometime in the past, decided to put an affordable housing option in this neighborhood (they built an "enclave" of duplexes on the end of one street), so I'm a direct beneficiary of "affordable housing."

"Wow @ the post on political suicide. He thinks more housing won't reduce prices because trickle-down economics is bunk? The two aren't even related."

First, Dan, it was not me that first associated "trickle down" with housing. One need look no further than the first commenter here (M1EK). That's why I decided to look into the issue as I felt something didn't smell right. As far as I know, I may be the only person who has talked to 2 MBAs (one in real estate), city planners (as I work at the city and have friends over there), realtors and people whose opinions I trust (yes, AC, even a developer/contractor friend of mine) about "trickle down" in the housing market (it took me nearly a month's worth of research between the time I first received the comment from M1EK and when I put my first counterpost up). Every one of them disagreed with the concept of just adding supply brings housing prices down (M1EK's premise). And as shown recently by someone who I believe is probably the one member of our Council who understands development more than any other,

http://www.austinchronicle.com/gyrobase/Issue/story?oid=oid%3A394222

"But, affordability doesn't happen organically," McCracken says.

"It is untrue that the market produces affordability due to supply."

Therefore, 10% of VMU rental properties must be set at 80% median family income. Ten percent might not sound like much, but McCracken says the neighbors can set lower MFI if they wish, and the 10% reserve can double with city assistance, if the developer desires. "As density comes," he says, "we don't want to turn into San Francisco – a great urban environment for rich people."

That is exactly what my research produced and exactly what I posted about in my 2 posts on that subject. Now, we can certainly argue the means to achieve that affordability but I don't think it gets any more clear than "It's untrue that the market produces affordability due to supply." My posts on "trickle down" were an attempt to show that the housing market is more complex than just "add more house = magical Affordability!" and on that principle, I still fully stand behind what I wrote.

"There is the "developers are greedy pigs so it's OK to screw them" camp, exemplified by the guy at Political Suicide."

Nowhere in any of my posts have I ever made an assertion like that. In my posts, I go through great strides to not make bold assertions or generalizations for exactly the reason I'm calling you on it (as writing things like that point to extremist views and does nothing but put-off readers). I'm all for development in Austin but not in some forms (strip malls, etc) and I think that neighborhoods should have a say on how things are done where they live. If you read my post on the design standards, I was actually quite impressed by them and fully support what they are trying to do as I felt it was a good balance between inevitable growth, NA and developer/business owner concerns. So if you want to paint me as an extremist because I disagree with some your and your friend's points, I'm ok with that.

But what I would appreciate is the opportunity for rebuttal. Now, I can't say that you hold the same principles as I but, on my blog, if I saw that someone was getting called out in the comments like I've been, I would have sent them a polite email asking if they would like to respond. It's not like your's or my blog gets so overwhelmed by commenters that we lose track of the thread or get pummeled by off topic comments. I feel that just a common courtesy at this stage. When your blog becomes the next Daily Kos or Powerline, it will be understandable that you won't follow all your comments.

Anyway, I've enjoyed my reign as the "AustinContrarian Whipping Boy" and I look forward to many more posts where ya'll can demonize me further.

[Scott]

AC said:

"On corruption, I disagree. I haven't even heard rumors of corruption at city hall. I think corruption means trading bribes (or things of value) for votes. I don't consider lobbying and buttonholing by developers to be corrupt."

Sorry, meant to include this my previous comment as well. Unlike anyone else here, my job as Information Security Analyst for the city is to protect the city's information and that includes performing/assisting in investigations. Your definition of corruption is woefully inaccurate. Corruption is not just bribes and the stuff that makes the news, it also entails a myriad of other things. Our group is responsible for developing and, to some extent, enforcing the ethical information policies of the city. So I'm in a unique position to comment about this.

Is the city full of corruption? For an entity of its size and from what I know, it is an amazingly ethical organization from top-to-bottom filled with people who have a genuine interest in doing the right thing (btw, I used to work for the state government as well and I can tell you that, comparitively speaking, the city should be held as a role model on how effective government should be done internally). But in any organization of 10,000+ people, you will always run into some that have other motivations and priorities. So just because they don't make the front page doesn't mean that "corruption" doesn't exist.

[AC]

Scott:

I don't have time to make a complete response now (and promise to follow up), but I don't want this to fester.

For the record, I've never posted on your site because, last time I'd checked, you'd banned M1EK and were refusing to display his comments. (I know, you had a complaint that one of your comments didn't get posted to his site, and he said the moderator mistakenly dinged it, and . . .). I figure that if someone else's comments can be suppressed, so can mine, and I won't risk wasting my time.

As for your complaint that you should have gotten an e-mail -- I don't think I have an obligation to e-mail someone everytime he is mentioned in my blog. However, you'd been mentioned several times in a row and, in retrospect, I agree that you deserved an e-mail. I apologize for not sending one.

I'll follow up with a comment or new post to address our substantive disagreement.

[AC]

Scott:

One other point in response to your original comment. My statement about a guy with a $400,000 mortgage in Zilker was a statement about a generic person. I don't think the comment can fairly be read to refer to you. But in any event, and so there's no confusion, I don't know any personal details about you and wouldn't speculate.

In response to your comment on corruption, it looks like we agree that Austin is a relatively clean city. Putting aside my definition of "corruption," the point I should have made in response to Tim, and will make now, is that corruption requires that government permission be both necessary and valuable. In a perfectly free market, government permission is not necessary and there should be no corruption. We're not going to have a perfectly free market in housing, of course. But it seems to me that the temptation for corruption will be greater when government permission is more valuable -- i.e., more scarce. Thus, it seems to me (although I have absolutely no statistics to back this up), that the pressure for corruption will be greater the more tightly the city regulates the housing market.

[M1EK]

Scott,

One last thing from my end - if you assert that increasing supply while all else is held equal does NOT in fact result in lower prices than doing nothing, you're essentially taking a position which is ridiculous on its face. I suspect that the people you asked either got asked a different question than the one I paraphrase above, or were thinking of "yeah, but" additional constraints (i.e. things NOT held equal).

I really have no time for somebody who doesn't believe that at a basic level, the law of supply and demand is true.

[Fletch]

Now, I don't know my Spring tower from my Lofts on Shoal Creek, so I'm not sure that I can add anything to this, ah, debate, but I can see the argument that affordable housing quotas might not be an effective means of securing affordable housing downtown. The question then is what can the city do to provide housing for its low-income citizens? 1000 units from quotas might be a drop in the bucket, but it is still something.

Are "market-forces" really the answer? They haven't worked in San Francisco or DC, and they are not solving any problems here at the moment.

[AC]

Fletch, whether "market forces" are the answer depends on how you define "market forces."

If it means market-driven development, as constraind by the local land use regulations, then I agree that "market forces" have not made housing affordable in SF or DC and won't do it here.

But I think of "market forces" as the market driven development that would occur without the (sometimes) arbitrary constraints of our land-use regulations. Now I'm not some radical who opposes all zoning, but I do believe it should be loose enough to permit the market to satisfy demand.

SF and DC don't permit "market forces" to operate under this definition. In fact, SF might be the most restrictive city in the country. See the papers by Glaeser and Gyourko in the sidebar.