Austin Contrarian

An unintended consequence of the Stop Domain Subsidies' Charter amendment?

Stop Domain Subsidies' proposed Charter amendment to ban retail subsidies is fraught with unintended consequences.

Here's one:  The Charter amendment likely will shunt low-income residents away from mixed-use developments and into stand-alone residential developments.  Why?  Because the proposed amendment bars subsidies to developments that merely include a retail use, even if the retail use itself receives no subsidy.  The City thus will be unable to "buy down" the affordability of units in mixed-use developments that include a retail use.

A concrete example:

Back in 2006, the City gave Ardent Residential a zoning change to redevelop the Stoneridge Apartments on South Lamar into a 300-unit mixed-use development.  The developer agreed to make 10% of the units affordable at 80% MFI.  But the units being replaced rented for a lot less.  To quell the furor over the rezoning, Betty Dunkerly proposed using some of the City's affordable housing bond money to "buy down" 10% of the units to 50% MFI, a genuinely affordable level.  The developer and the City are squabbling over the "buy down's" price tag, but the City appears ready to honor its pledge.  (It has to spend its $50 million in affordable housing bond money somehow.)

I don't know whether Ardent has filed a site plan yet, but it has talked all along about including retail as part of the mixed use.  That was part of the development's attraction. 

Assuming Ardent still intends to include a retail use, then, the Charter amendment will keep the City from honoring its pledge to buy "deep" affordability for these units.  The Charter amendment will keep the City from buying deep affordability in any mixed-use development that includes retail.  The City will be forced to spend its affordable housing dollars on stand-alone residential developments, or perhaps "live-work" developments.

I don't see how this protects local merchants.  The mixed-use development will still be built, and it will still have retail; the developer simply will rent the units at the market rate (or 80% or 60% of MFI if it takes advantage of the VMU incentives).

One could argue, perhaps, that purchasing affordability in mixed-use developments is an expensive, inefficient way to provide affordable housing.  (I'm ambivalent about it myself.)  But it doesn't seem wise to me to silence that debate by Charter amendment.

I'm not making this filtering stuff up.

Here's how two economists describe the filtering process:    

Filtering.

If you don't understand filtering, you don't understand housing markets.  Because lots of people plainly do not understand filtering, here's my attempt at an explanation:

When property values rise, low-quality housing "filters up" to the high-quality housing sub-market.  The reason is that rising rents encourage landlords to invest more in the property.  When property values fall, high-quality housing "filters down" to the low-quality housing sub-market.  The reason is that falling rents encourage landlords to invest less in property.  The key in either case is that old housing costs more to maintain than new housing.

Here's the longer version:

Housing naturally deteriorates as it ages.  Stuff breaks.  Stuff -- expensive stuff like the roof -- has to be replaced.  Minor wear and tear accumulates over the years until the place is downright seedy.

Seedy, that is, unless the owner regularly invests in maintenance.  Every homeowner knows that.  It would be nice if the mortgage payment and property tax covered the cost, but they don't.  Those occasional, "extraordinary" expenses turn out not to be extraordinary at all.  And they are far more frequent for older home.  Thus, as a house or apartment ages, it takes ever more money to keep it in good shape. 

Every landlord with an old property confronts the same decision:  Should I spend the money to keep the property in top shape, or should I let it go?

Keeping the property in top shape allows the landlord to charge more rent.  But it also costs the landlord more in maintenance and periodic renovation, especially for old apartments.  What the landlord decides to do depends on the current market, his estimate of future demand, and about a million other things.  But we know one thing for sure:  A landlord is less likely to maintain an apartment in tip-top shape when the rent for tip-top apartments is falling.  Declining rents mean a declining return on the maintenance investment.  That spells less investment .

Without constant maintenance, apartments deteriorate from "tip top" to "slightly dilapidated."  Renters, sensible people that they are, are not willing to pay as much for bad quality.  Rents fall, and the apartments "filter down" into the pool of affordable housing.  

If you want more affordable apartments, build more tip-top apartments.  Increasing the supply of high-quality apartments lowers the rent for high-quality apartments, all else being equal.  Falling rents for the good units encourage landlords to let the older ones slide into the affordable sub-market.

On the other hand, if you want to raise the rents for older properties, then discourage the construction of new apartments.  Restricting supply will raise the rents for high-quality housing, including older, well-maintained properties.  Higher rents will encourage landlords to spend more on maintenance and renovation to move their properties from the low-quality sub-market pool to the higher-quality sub-market.

This is pretty basic supply and demand.  But some people just don't believe it.  I think there are three reasons.

First, apartment renovation usually coincides with new housing construction, and people mistake this association for cause and effect.  Condos and apartments get built during periods of rising rents.  Everyone understands that.  But the same rising rents give landlords an incentive to invest in renovations and upgrades.  We thus should expect new construction and apartment renovations to go hand in hand.  These are symptoms of the same market forces, not cause and effect.

Second, people mistakenly use what is happening to their apartment to extrapolate to the entire market.  The filtering process does not guarantee that every older property will become more affordable.  On the contrary, as rents rise, some old properties will be torn down and replaced with new, more expensive units.  The old units never get a chance to filter down.  But this is simply an example of the "filtering up" that occurs when rents rise.

The remedy for "filtering up" is more housing, not less.  If we halt new construction in order to preserve the existing stock of low-quality units, we guarantee that more of the low-quality units will eventually filter up.  We cannot predict exactly which units will filter up and which will remain affordable.  We just know that there will be more of the former and fewer of the latter.

Finally, neighborhood gentrification can blur things.  Gentrification is a complex process.  It typically occurs because other neighborhoods have become more expensive, pushing buyers and renters to what otherwise would be a less desirable neighborhood.  The increased demand raises rents, which spurs more renovation.  In other words, rising rents in one neighborhood can cause units in another to filter up.

Gentrification can also be spurred by falling crime rates, improved amenities (such as new parks or a decommissioned power plant), and by new investment in the area.  Sometimes it's just chance.  It is rare, though, that adding new housing causes a rise in rents.  In fact, new housing would not be built unless rents were already rising.  New housing is thus generally a symptom of gentrification rather than the cause.

Related posts:

1. Are luxury condos downtown good for Austin's housing market?  (Sept. 11, 2006)
2. Those high-priced condos will be great for families with children. (May 28, 2007)
3. Freeing up space for others. (June 7, 2008).

A couple of affordable housing statistics

I'm still digesting this Neighborhood Housing and Community Development report on affordable housing in Austin (pdf).  For now let me cherry pick two interesting statistics:

• Number of affordable multi-family units built under the S.M.A.R.T. Housing program since 2000:  5,966.  (p. 6)
• Number of multi-family units removed from the market since 2006:  3,000. (p. 11)

Two thoughts:

1.  I was surprised that the S.M.A.R.T. program has produced that many units; but

2.  an average production of 1,000 multi-family units per year is well below the replacement rate. 

I'm not knocking S.M.A.R.T. housing.  5,966 affordable multi-family units are better than 0 units, and there are other affordable housing programs (although the S.M.A.R.T. housing program is touted as one of the more successful ones).

But these statistics suggest that the S.M.A.R.T. Housing program can satisfy only a small percentage of the total demand for affordable housing.  Most people will have to look elsewhere.  S.M.A.R.T. Housing's real benefit is in directing affordable housing to desired (i.e., otherwise expensive) locations.

Housing + Transportation Affordability Index

Check out this totally cool site that maps housing plus transportation costs (plus a whole bunch of other statistics, like average block size) by census block group.  They use census data to estimate the average home and transporation costs as a percentage of median income. The map's creators' point is that those suburban homes are a whole lot more expensive when you factor in transportation  costs. 

I'm fuzzy on their methodology for estimating transportation costs.  I spot-checked the block groups around my neighborhood, and found big differences in transportation costs that I'm skeptical exist.  And bear in mind that housing + transportation costs may take a huge bite out of, say, a Pflugerville household's income, but they would probably be a mere nibble compared to the bite of a central Austin mortgage payment.

Still, this is the coolest thing I've seen in a while.  (I admit that I probably have a warped sense of "cool.")

H/t Smart Growth around America.

Condo conversions

One argument frequently trotted out against zoning for greater density is that it encourages the redevelopment of low-income rental.  But it is silly to believe that zoning can maintain the stock of affordable housing.  When rents lag behind home prices, owners will simply convert the apartments into condos. 

I'm aware of three condo conversions on South Lamar, one on Thornton (around the corner from my house), one off Oltorf, and one on South Congress.  There apparently are many more:

Last year, 824 apartments were converted to condos in Austin, from the downtown area to the suburbs. This year, 1,167 more units are expected to be converted in the Austin area, said Robin Davis, manager of Austin Investor Interests LLC, which tracks the apartment market.

That's a lot of low- to moderate-rental taken out of the market.  On a positive note, the converted condos are a lot cheaper than the new stuff being built.

I suppose Austin could take the San Diego/San Francisco/Berkeley approach of limiting condo conversions.  A saner approach would be to permit small infill projects that blend in with the neighborhood.  And lots of dense multi-family projects on transit corridors.  The stuff built today will be the affordable housing 20 or 30 years down the road.   

The McMansion ordinance as an anti-gentrification tool

The Organization for Central East Austin Neighborhoods (OCEAN) wants to drop the McMansion ordinance's guaranteed minimum home size of 2,300 sq. ft. for Central East Austin lots:

Over the years, Rudolph Williams has watched house sizes grow in Central East Austin. More and more, two- and three-story houses are replacing the one-story, 1,500-square-foot houses typical of the area.

Although the city clamped down on home sizes in proportion to lot sizes last year, he has been working to tighten the rules even more for the smaller lots in his area — those less than 5,750 square feet — as a way to protect the area's character, culture, diversity and history.

. . .

Currently, the rules say that on lots of all sizes, a property owner can build a residential structure that is 2,300 square feet or has a floor area that is 40 percent of the area of the lot, whichever is greater.

The neighborhoods organization wants to remove the 2,300 square feet allowance for lots less than 5,750 square feet. So on a lot that's 5,000 square feet, the biggest house could be 2,000 square feet.

The article implies that OCEAN's main concern is gentrification:

Limiting the size of houses on smaller lots would help reduce tear-downs of rental units, the primary affordable housing option for low-income people in Central East Austin neighborhoods, and force developers to build smaller, Williams said.

However, the change wouldn't be effective alone, Williams said. It must come with other protections from local government and school authorities, such as tax relief for renters and increased homestead protection for poor homeowners, he said.

"We're at a tipping point right now. Can we create a neighborhood where rich and poor can live together?" Williams asked. "Or will this be another gentrification story? Another Clarksville?"

Gentrification is a complex issue.  I don't want to tackle it here.  But if you think you need to adopt anti-gentrification measures, I question whether you should start by stripping equity from the small lot owners.

Given the prices in Central East Austin, the loss of 300 buildable square feet would probably be worth $10,000-$20,000 to the small-lot owners (lots with around 5,000 sq. ft.).  Eliminating the McMansion minimum would hurt them and no one else.  It would not penalize the owners of lots that have already been redeveloped -- i.e., the yuppies living in spanking new $300,000 homes.   

I haven't been to a single OCEAN neighborhood association meeting.  Perhaps the people who would be adversely affected by this uniformly support it (in the hope of lower taxes, for example).  But I'm always skeptical of plans that would put all of the burden on a small minority, particularly a minority that had the least to begin with.  Neighborhood groups aren't as homogeneous as they sometimes claim to be.  The City Council should do its due diligence this time:  Before ordering small-lot owners to fight gentrification on behalf of everyone else, it should make sure they are volunteers rather than conscripts. 

Note:  I inadvertently published an earlier, very rough draft below the fold.  (There wasn't supposed to be a "fold.")  Sorry for the gibberish.

Oh, I missed the final report

When I wrote about the Affordable Housing Incentives Task Force last week, I didn't realize it had submitted its final report.  (The task force's web site only had the draft report at the time.)

Here's the final report.

Disappointing.  I guess the draft recommendations would have produced too much new, permanently-affordable housing.

One of the draft's best ideas was to permit automatic up-zoning of multi-family property in return for "deep" affordability guarantees.  That is, a developer who set aside 10% of the units for 60% MFI would get to develop any MF-2 or denser property at MF-6 densities.

In English:  MF-2 property is limited to a density of 24 or fewer units per acre.  (It depends on the number of bedrooms in the units).  MF-3 has a slightly higher cap, and MF-4 and -5 even higher.

MF-6 doesn't have a hard cap.  It has minimum open space requirements (100 sq. ft.) per unit.  And it has height limitations and setback limitations.  But there is no pre-set density limit, even though there is a practical limit.  Depending on the height and setback limitations, an MF-6 property might hold two or three times as many units as an MF-2 property.

The draft report allowed a developer to redevelop low-density property as high-density property in exchange for reserving 10% of the units for families who make less than 60% of the median family income.

The draft report protected the neighborhoods by imposing hard height limits on up-zoned properties.  It also required developments to comply with neighborhood compatibility standards.  This was a good compromise: increased density + affordability in return for protecting neighborhoods from "inappropriate" mass and scale.

The best part of the deal, in my opinion, was that it would apply pretty much everywhere.  Any MF-2 or denser property, developed or undeveloped, would be eligible for denser development.  That's a lot of property.  There are a lot of 70s-era, low-density complexes out there.

Alas, it was too good to be true.

The final report limits this up-zoning entitlement to "greenfield" sites:  "sites that are zoned multifamily but have no developed housing units."  I haven't conducted a survey, but I'll wager there aren't a whole lot of large, completely undeveloped, multi-family sites in central Austin.  (Some people call these "meadows," although the more accurate term for many may be "flood plain.")

So between the draft report and the final report, most multi-family property was taken out of play.  And this particular recommendation lost any real bite.

Oh, if you want to know who fought to obstruct dense redevelopment, read the task members' draft comments here.  (The task force had affordable housing advocates, developer representatives, and neighborhood/ANC advocates.  If you can't tell who is who, the people complaining about the multi-family recommendation are the neighborhood reps.)

The Affordable Housing Incentives Task Force

The City Council got spooked by spiraling condo prices downtown last summer.  It did what city councils everywhere do when they get spooked:  it created a task force.  The Affordable Housing Incentives Task Force opened for business back in July.  As its name implies, the Task Force is working the incentives angle; it's leaving subsidies to the advocates and the city.

Here is the Task Force's draft report.

The Task Force has both affordable housing advocates and developers -- i.e., people who want more affordable housing and people who know the obstacles.  That's a good combination.  It's produced some good suggestions, at any rate.  For example, the draft report suggests automatically up-zoning low-density multi-family to high-density multi-family if the developer agrees to set aside 10% of the units as affordable housing.  The new project would have to meet neighborhood compatibility standards, but FAR requirements would be waived.  This would permit densification in neighborhood interiors, where it is needed the most.

The Task Force is spiked with ANC representatives.  They don't seem too excited about the relaxed multi-family standards.  I'm shocked. 

Interior vs. exterior space

We live in a small neighborhood of "urban homes" -- 1600 to 2400 sq. ft. homes on small (3500 to 4500 sq. ft.) lots.  We live close to downtown and have a large home by central Austin standards.  But to get this at Austin's prices, we had to give up a real yard.  That was a good trade for us.  We knew we wouldn't use a yard very much, and it would be a headache to keep up.  We care more about the interior space.   

Not everyone shares our preference.  That's fine with me.  But my neighbors obviously do.  And I've always thought there were probably lots of others who would make the same trade if they could.

Here's empirical evidence that our preference for interior over exterior space may not be that weird.  (h/t Matthew Kahn.)  These UCLA anthropologists followed 24 Los Angeles families around for four days to study how they use their house space.    Most of the them ignored their yards:   

Although the back yard is a purported center of family leisure, enjoyment, and privacy, the tracking data from Families 1 to 24 reveal limited uses of back-of-home spaces by family members, despite the fact that every sample included many weekend daylight hours and some afternoon and evening daylight hours, and the weather was generally mild and pleasant enough to be outside on most days. The most salient trend in the data is that 13 of the 24 families did not spend any leisure time (neither kids nor parents) in their back yards during the four days per family available for review. . . . In quite a few of these cases, no family member so much as stepped into the back yard. Sporadic activities in other cases were confined to non-leisure chores such as taking out trash or briefly feeding dogs or washing off chairs.

The yards seemed to function mainly as status symbols.  On the other hand, most of the families had converted their garages into storage rooms or extra living space.

The fact that most households in this sample––and millions visible throughout the U.S.—have converted their garages to spaces not focused on car storage signals a changing need of middle-class families. Families living in average-sized homes (1500–2000 sq ft), as most of these are in our sample, simply do not have enough living and storage space for all of their possessions, and they value garages more for these purposes than for housing cars.

It sounds like many of these families would be willing to trade exterior space for interior space, too.  Like I said, if you want a house with a big yard, that's fine with me.  I think Austin could use more neighborhoods like mine, though; there's probably plenty of demand, even among families with children.