Austin Contrarian

What's for sale in central Austin? (1/07 edition)

We all know central Austin is getting more expensive.  If you want confirmation, check out average home prices here or here. 

Here's a less scientific but perhaps more meaningful measure.  If you're looking for a house, what's out there for sale?

My search results (run on 1/29/07) are below.  Here are the parameters I used:  1400+ square-foot; single-family; active MLS listing; $300,000 or less.

Rationale:  1400 sq. ft. is a completely arbitrary dividing line, I admit.  I use it because it's the low end of what I think of as the "medium-size" house.  Certainly, singles, couples, and empty nesters may all be comfortable with a smaller house.  Households with, say, 4 or more members tend to prefer more space than this, though, so I use it as a rough measure of affordability for families. (Before I get flamed by all of you who are raising two or more kids in less than 1400 square feet -- I'm talking about typical preferences, not what is "necessary" or "appropriate" or "optimal.")

I know that $300,000 is not "affordable" under any conventional definition of that word.  On the contrary, I use that figure because it is roughly the upper bound for homes within the reach of even "upper-middle income" households -- those making $100,000 or so, which is approximately 80th percentile in the Austin metropolitan area.  This gives us a good sense of how little there is for the truly moderate income.

Here are the results:

South Austin (MLS areas 6 & 7):  There are three 1400+ square foot, single-family homes listed for sale for under $300,000.  None is larger than 1600 square feet.

North Austin (MLS areas 1B, 2 & 4):  Better.  There are 23 such houses (four between $179,000 and $200,000), most in the Crestview, Wooten and Highland neighborhoods.  One of these is a veritable McMansion at 2300 square feet.  Everything else is under 2250 square feet.

East Austin (MLS areas 3 and 5):  Best.  There are 53 such houses.  (This total includes a number of homes from the subdivisions bordering 183, though, which some people may not consider "central Austin.")

I intend to update these searches periodically to track supply.  Needless to say, I expect these numbers to get smaller.

Here's why there's no affordable housing in central Austin

It's simple:  No one has built multi-family rental housing in central Austin in years.

This isn't much of an exaggeration.  Outside of the Triangle, and some student housing in West Campus and on the periphery of UT, just a tiny number of units have come on line since the beginning of 2001.

Take all of south Austin, zip 78704.  The city demographer keeps stats on each multi-family project built in the city, dated by the date the site plan was filed.  (Open "Third Quarter 2006 Report" in the link; "multi-family" in this data means more than four units.) Let's count all of the multi-family projects that (1) had site plans filed after January 1, 2001, and (2) were actually built (since people can't live in site plans.)  There were only seven such projects in South Austin, with a total of only 167 units. 

This 167, though, includes condos as well as apartments.  Although the city data doesn't say whether a project is rental or condo, I know that four of these projects, with 135 units, are condos.  This means South Austin has had (at most) a measly 32 multi-family rental units site-planned and built since the end of 2000.

For the sake of comparison, south Austin had 9,811 multi-family units, mostly rental, in 2000 -- and that's excluding the student housing around St. Ed's.  (South Austin had 8,244 single family units.)  I'm not sure when apartment-building slowed down in South Austin, but by January 1, 2001, it had come to a dead stop.

Why the hoopla over land trusts?

Today's Statesman has a story on so-called "land trusts."  They're apparently being pushed as a solution to East Austin's affordable housing problem.  The standard land trust works like this:  the city buys the land under the house, the homeowner keeps title to the structure itself, the homeowner pays property taxes on just the structure.

I don't get land trusts, at least if the problem is high property taxes.  As I see it, it would be much cheaper for the City simply to waive the property taxes.

Some affordable housing resources

Here's a paper by a couple of economists arguing that affordable housing set asides have hurt southern California's housing supply.  (I'll bet that's true, but I think their analysis is pretty weak.  Here's a paper criticizing their conclusions.)  I point this out because they show (pp. 4-5) that relatively few affordable units have been built under these programs. 

Here's a paper prepared for HUD on affordable set aside programs nationwide.  Check out p. 6, which summarizes average annual production of affordable units in several major cities.  (Very few, at least in the most expensive places.)

Here's another paper prepared by HUD summarizing how municipal land-use regulations hurt  affordable housing.

Here's another paper by HUD examining the impact of federal regulations on affordable housing.  This paper is interesting because it shows that even seemingly trivial federal regulations (e.g., the Real Estate Settlement Procedures Act or energy-efficiency requirements for air conditioners) can have a non-trivial impact on affordability.

How to put affordable housing downtown

Here is today's Statesman article about the lack of affordable housing downtown. 

The article really poses two questions:  (1) "Should we have affordable housing downtown regardless of whether the market provides it?" and (2) "What's the best way to do it?"

The first question is debatable, but for present purposes I'll assume the answer is "Yes." 

So how do we get moderately priced housing downtown?  Although I've seen a lot of suggestions, they all appear to be variations on one of two strategies:

The first is affordable housing set asides or "inclusionary zoning":  Require the developer to sell or rent X% of the units at an affordable price, regardless of their market price.  Alternatively, allow the developer to pay the subsidy's cash equivalent into a City-owned affordable housing fund.  (These set asides are not mandated by ordinance, but are usually extracted by the City in return for a zoning variance of some kind.  They're a centerpiece of the new Vertical Mixed Use standards.)

The second is for the City to "buy" affordability by paying the difference between the market rate and the affordable rate.  For example, if a unit's market price is $200,000, the City might pay the owner $50,000 to market it as a moderately-priced $150,000 unit, with covenants limiting the resale price.  (I call $150,000 "moderately priced" because it's less than the City's median home price.)

The second is by far the better strategy, for a number of reasons:

1. Requiring developers to include affordable housing screws with future supply.  As I've pointed out here and here, when developers must set aside X % of their units at below-market rates, either fewer units get built or everyone else pays more.  Either way, homes get more expensive on average.  (Portraying the set aside as compensation for a "density bonus" doesn't change this fact.)
2. Someone has to bear the cost when affordable units are sold below market price.  Set asides disguise, but do not eliminate, that cost.  When the City pays, the cost is transparent.  This is important, because it forces us to ask the right questions.  E.g., How much is it worth to have affordable housing downtown rather than, say, a few blocks to the south or east of downtown? 
3. When the City pays, there's an incentive to put the affordable units in the right places.  It's a lot cheaper to put affordable units in a development where the units start at $200,000 than in a development where the units start at $500,000.
4. If the City pays, we might see more pressure on the surrounding neighborhoods to open up their neighborhoods to more affordable, multi-family housing.

Set asides are nevertheless the more popular solution.  The burden falls on the property owner (a very small constituency) or future home buyers (an unidentifiable constituency).  In other words, set asides have nearly zero cost politically.  Also, some very vocal entrenched interests benefit from rising average home prices.   

If the City's bent on subsidizing affordable housing downtown, I think it should auction off a piece of property.  Let developers bid for the right to build, say, 200 affordable units on the property.  (If it is impossible to build affordable units for less than the sales price, the "high" bidder will be the one who asks for the least amount of money.)      

This will be the most cost-effective way of providing affordable housing.  It will also minimize the difference between the units' market price and their predetermined "affordable" price.  This is important for avoiding three types of economic waste:  (1) A unit sold below market price may be "overdeveloped" -- i.e., it may include upgrades that cost more than they are worth to the buyer; (2) a unit sold below market price does not necessarily end up with the person who values it most; (3) below-market sales create the opportunity for arbitrage, which can be prevented only through costly monitoring.  An auction gives developers an incentive to minimize these kinds of waste. 

Although this strategy will probably end up costing the City less than any other "City pays" strategy, it's not free even if it is off-budget.  If the City could have sold a piece of property for $5 million, but instead gives it to a developer for free to build 200 affordable units, it has paid a $5 million subsidy.  (With these hypothetical numbers, the City's subsidy would be $25,000/unit.)  Still, I suspect this will get us the most affordable housing downtown at the least out-of-pocket expense for the City. 

A good description of how restrictive zoning screws with affordable housing

From Coyote Blog:

Step 1:  Progressives argue for having government restrict land use and implement tight zoning.  Step 2:  Housing prices skyrocket, enriching the elite and making it tough for ordinary workers to own housing.  Step 3:  Progressives decry that lack of affordable housing represents a 'market failure' that must be addressed with more regulation.  For example, builders in the SF Bay Area are required to sell X number of below market rate 'affordable' homes for every Y homes they sell at market rates.  Step 4:  Builders costs go up from the new regulations, further reducing supply and increasing prices.  And the cycle just repeats, as bad outcomes from government regulation are blamed on free markets, and used to justify more regulation.

This earns it a spot in my economics blog links.

Zoning is not rent control

The Statesman has an article today on the proposed redevelopment of the Stoneridge apartments off South Lamar, which I previously wrote about here.  The developer wants to tear down 141 low-income units and replace them with 300 more expensive units.  It would be the kind of vertical mixed-use development the City has been pushing for transit corridors.  The property is now zoned commercial -- the apartments are a non-conforming use -- so the owner/developer needs the property rezoned.

The Statesman portrays the zoning request as a choice between affordable housing and increased density.  Affordable housing advocate Heather Way apparently has the same view, stating that she supports the project "only if low-income families can benefit from it and only if it doesn't displace low-income families."  (Not surprisingly, Jeff Jack and Zilker Neighborhood Association adopt the same line, but I covered their opposition in my last post.)

I was surprised to see that neither the Statesman nor Way understands the difference between zoning and rent control.

Both assume that if the City refuses to rezone the property, it will remain affordable housing.  That's quite a stretch.  There are at least three things the owner/developer can do without Council permission, besides maintain the property as is:

1. Renovate the apartments and raise the rent. Suppose (i) the apartments rent for an average of $550/month; (ii) they could be renovated for an average of $30,000 each; and (iii) they would rent for an average of $850/month after renovation.  Then the renovation would cost $4,230,000, but would bring in an extra $507,000 per year in income, exceeding the $423,000 or so a reasonable owner would demand as a return on his investment.   
2. Convert the apartments to condominiums.  Several low-income apartments have been converted in the area.  Some are asking over $200 per square foot.  If you assume the average Stoneridge apartment would fetch $150,000 after conversion, the conversion would be worth $21 million minus the $10-12 million cost of conversion.  I doubt the apartments, as low-income housing, have a going value of more than $6 million or so.
3. Convert to commercial use.  Good shopping on South Lamar is scarce.  As is office space.  These properties would doubtless be lucrative if converted to either.

I don't know how all the numbers break down.  But I'll wager that Way doesn't either.  (Jeff Jack and the Zilker Neighborhood Association don't care.)  Given the demand for rental housing and condos in the area, it seems unlikely that these units will remain low-income housing for long.  The only way to keep the units cheap would be to enact some form of rent control (which is a bad idea, and which, incidentally, would also be opposed by the NAs.)

Put simply, the Council can't control whether the affordable units stay or go; it can only control whether more units can be built on the property.  If Council refuses to rezone the property, (i) we will lose an extra 159 housing units in the area; and (ii) we will have zero affordable units on the property rather than the 30 promised by the developer. 

I also suppose it's asking too much to expect the Statesman or affordable housing advocates to take the long view. If we permit developers to build to the density demanded by the market, the price of housing eventually will settle very close to the cost of construction.  This is as cheap as housing can get without a subsidy.  There will be more affordable housing for everyone, including those Way purports to defend.

Update.  The Council did the right thing and approved the rezoning application on first reading.  They did this despite (i) NAs' demand that 45% of the new units be reserved as affordable housing,  and (ii) genuinely emotional (if misdirected) appeals from several of the current Stoneridge residents.  Special kudos to McCracken who (diplomatically) chided the neighborhood activists for trying to impose onerous affordability set asides after supporting a 10% set aside in the VMU compromise.

When all else fails, plead for affordable housing

Here's an example of a neighborhood group misappropriating the cause of affordable housing in order to obstruct a dense multi-family development.

Jeff Jack, the president of the Zilker Neighborhood Association, has urged Austin's coalition of affordable housing advocates to oppose a redevelopment project on South Lamar.  (Download ZNA_letter.pdf)

The owner/developer wants to tear down the apartment complexes at 1500 and 1418 S. Lamar and replace them with a new mixed-use development.  The existing complexes have 141 units.  They would be replaced by approximately 300 units, doubling the density.  (City council approval is necessary because the property is not zoned for multi-family; the existing apartments are a grandfathered nonconforming use.)

Not surprisingly, ZNA opposes this project.  City staff and the Planning Commission have bucked ZNA (and bully for them).  Having failed to persuade Staff and the PC, ZNA is trying to rope the affordable housing advocates into doing its dirty work.

According to Jack, the 141 existing units rent for $405-$600 per month.  The new apartments will start at $890 per month, except for 30 units reserved for affordable housing.  Since it seems unlikely that Council will kill the project, Jack wants the developer to reserve 141 units as affordable housing:  "[W]e should be getting a 1 for 1 replacement for the existing affordable units in the new project." 

Here's my back-of-the-envelope calculation, taking Jack's proposal at face value.  We'll assume that the existing units rent for an average of $600 per month (the top end of the current rent), and that the new units would rent for an average of $890 per month (the starting rent for the new units).  Jack is proposing that an additional 111 of the new units (141 less the 30 planned affordable units) be rented at the current rate, a discount of $290 per month.  That's $32,190 less rent per month (gross) for the project as a whole.

Let's discount that $32,190 by 10% for the expected vacancy rate and another 10% for management fees and property taxes.  (We don't have to discount for maintenance, repairs, utilities, etc. because these costs don't depend on the amount of rent.)

This gives an expected decrease in monthly operating income of $25,752, or $309,024 per year.  Using a 6% capitalization rate (very reasonable for this market), that works out to a $5,150,400 decrease in market value.  Using a more conservative 8% capitalization rate, the loss of market value is $3,862,800.  (These properties are on TCAD's books at $3,204,000 -- certainly low, but this gives you a sense of the magnitudes involved.)

Thoughts:

1.  Council should approve this project outright and unconditionally. The developer's proposal will double the density of housing on a property abutting a key transit corridor.  It is exactly the kind of mixed-use development the City has been pushing.  ZNA's plea to save affordable housing should fall flat for this reason alone.

2.  The affordable housing bonds should make it easier for Council to brush aside Jack's appeal to affordability.  The City will soon be offering a lot more help to low-income families; it does not need to preserve affordability one development at a time.

3.  It is unfair to tax a single owner/developer between $3.8 and $5.1 million for 141 affordable units.  Affordability should be a shared burden.  That's the premise of the affordable bond package.

4.  Jack may genuinely care about affordable housing.  But volunteering to spend someone else's money doesn't prove anything. 

Why I'm not grinching out on the affordable housing bonds

M1EK has come out against the affordable housing bonds, as have others with whom I normally agree.  They argue that the city and neighborhood groups have created the affordability crisis through absurdly restrictive zoning; it's wrong to saddle innocent property owners with the cost of that policy, particularly when the problem could be cheaply fixed with an amendment or two to the land development code. 

Anyone who's read this blog knows that I fervently agree that Austin's zoning policies are the root of our "affordability crisis."  Still, I support the affordable bond proposition for a couple of reasons.

First, it will do some good.  The bond money will go for rental assistance, down payment assistance, and other badly needed programs.

Second, and more importantly, the affordable bond program will give the City Council the cover it needs to do the right thing on housing. 

Council will be asked to approve a lot of dense infill projects over the next few years.  Infill development means something's got to be torn down, and that something will often be cheap housing.  To the knee-jerk "progressives" out there, this is bad redevelopment.  You'll never convince them that the only way to keep prices down in the long run is to let supply keep up with demand.  Council members will be under enormous pressure to do something about affordability.  You can count on the neighborhood groups, who hijack the affordability cause whenever it suits their purpose, to keep affordability front and center.  (To my knowledge, ANC has not endorsed Proposition 5, which is significant considering its public handwringing over affordable housing.) 

Proposition 5 will allow Council members to say they support both dense redevelopment and affordable housing.  It will be easier for them to approve infill projects without being accused of hurting the low-income.  It will be particularly useful in turning back challenges by neighborhood groups to dense redevelopments.  It won't affect the outcome in every case, but I think we'll be a lot better off with it than without it.

Height limitations and affordability

I can't imagine anything more tedious than a debate over how to measure building height.  And does it really matter?

Apparently, it might matter a lot, according to the City's own office of Neighborhood Housing and Community Development.

The land use code's building height restrictions have to date been measured from "finished grade," or the bottom of the first floor.  A McMansion-related amendment to the code -- preliminarily approved by the City Council on August 31 -- requires that building height be measured from the lower of "natural grade" or finished grade.  Some developers have been building on top of jutting "pedestals,"  according to neighborhood activists, who wanted that loophole closed.

But, according to the office of Neighborhood Housing and Community Development, this change does more than close a loophole.  It means that some mid-rises will have to be a full story shorter, resulting in a "negative" impact on housing affordability.  In its own words (but emphasis mine):

The proposed change goes beyond closing the loophole and establishes the measuring point not at the first floor, but instead at the floor level of the basement adjacent to the lowest natural grade.  This means that some multi-family or mixed-use building now considered less than 60 feet in height and 5 stories tall would be considered more than 60 feet in height and 6 stories tall and thus not allowed under proposed height definitions.

This impacts affordability by reducing the number of units allowed.  For example, in the 50-65 foot zone of the University Neighborhood Overlay, NHCD preliminary review shows that this new definition would reduce the height for 8 buildings expected to yield 830 total units and 83 affordable units.  If the height is reduced by 1 story, then the number of units would be expected to decrease by 1/6 or 17%.  Given that a developer must meet revenue (rents/sales) projections to cover costs, the loss of overall units will reduce the number of affordable units.

This scenario would also apply in a Vertical Mixed Use development in commercial corridors, as the ordinance is currently envisioned.  Stakeholder support for an on-site affordability requirement in Vertical Mixed-Use is based on the current method for defining "height" in the Zoning Code and Building Code.   If the new definition of "height" were adopted, VMU builders would no longer be able to build four-story residential apartments or condominiums above a one-story concrete and steel first story and a one-story basement.

In summary, the proposed change in definition in "height" could reduce housing affordability in multi-family and mixed-use development.

(You can Download McMansion_height_limitations.pdf (1473.4K), which also has other backup materials, including letters from a couple of developers.)

Observations:

1. The recently enacted design guidelines represented a deal between neighborhood representatives and deveopers:  the developers got to build five story buildings in VMU overlay districts in exchange for affordable housing set asides.  The McMansion amendment might sabotage that deal.
2. I think affordable housing set asides are a bad idea for the reasons stated in earlier posts.  But if you think they're a good idea you should be troubled by this. 
3. Even apparently trivial zoning regulations can have an insidious impact on housing availability.

Councilmembers instructed the neighborhood reps and developers to work on a "creative" solution to this issue.  It'll be interesting to see whether the neighborhood reps are willing to compromise.