Austin Contrarian

Reason No. 4 to hate the McMansion ordinance

The McMansion ordinance will make the rest of us pay more in taxes.

Okay, okay, so this is not so high minded.  Still, money matters.  McMansions replace relatively low-value homes and, in the process, expand the City's tax base.  The rest of us pay less in taxes as a result.

Here's an example. Suppose Smith's got a cottage in Tarrytown with an appraised value of $350,000.  A developer comes along, buys the cottage from Smith, and tears it down.  He then builds a $1,000,000 house, which he sells to Jones.

At current tax rates, Smith's property tax bill is less than 10,000.  At the same rates, Jones' bill will be roughly $27,000, a difference of $17,000.  (The difference will be even greater if the taxable value of Smith's home is less than its appraised value.)

At first blush, it might seem like the City's $17,000 richer, but that's not quite right.  Each year, the City calculates the tax rate necessary to bring in the same amount of money as the year before (the "effective rate").  The City, theoretically, has a constant stream of revenue regardless of the tax base unless it raises taxes (which it can do without risk of a revolt as long as it doesn't exceed the "rollback rate.").  The City thus does not directly benefit from Jones' new house.

So who gets that extra $17,000?  Well, the rest of us.  Each of us pays just a tiny bit less because this one property is now worth a whole lot more.[1]

Even if the City raises taxes, the tax hike will be spread out over a bigger tax base, again saving the rest of us money.

Now I admit that Jones isn't going to save the rest of us a lot in taxes, probably just a few pennies each.  But the McMansion ordinance will discourage the construction of lots of McMansions.  That's the whole point of the ordinance.  The pennies will add up.

If you're underwhelmed by this point, think about it this way.  Below is a map of Austin prepared by the city demographer charting the average percentage increase in single family home values by zip code between 2000 and 2005. 

The color key didn't copy real well, but I can make my point with just two colors:  dark red means the single family homes in that zip code increased in value by more than 100%.  Yellow means that zip code's homes increased in value by 40-60%. What is notable is that zip 78702 -- East Austin -- saw the value of its homes shoot up by a much larger percentage than the value of homes in zip 78703 -- e.g., Tarrytown, Pemberton, Clarksville.  Assuming the number of homes in these zip codes remained relatively constant, this means that between 2000 and 2005, the average East Austin homeowner saw his property taxes increase by a larger percentage than the taxes of the average homeowner in Tarrytown, Pemberton Heights or Clarksville.  There might be some merit to the complaint of East Austinites that they're getting taxed out of their homes.

Property taxes are largely a zero sum game.  Relative value matters more than absolute value (at least, until the City starts bumping up against maximum tax rates).  If we want to ease the property tax burden on the average East Austin homeowner (or far South Austin homeowner, or far North Austin homeowner), then the average property tax burden on other homeowners must go up.  This is where McMansions help.  The people building McMansions are volunteering for a tax increase.  They're effectively pushing up the average value of homes in expensive neighborhoods by replacing modest (but expensive) homes with large (super-expensive) ones. 

Because of the McMansion ordinance, there will be hundreds of small homes in expensive neighborhoods that can no longer feasibly be upgraded to more expensive homes.  While some people think that's something to celebrate, each foregone opportunity leaves incrementally more of the tax burden on the rest of us. 

[1]It's counterintuitive, but your tax bill can go down even if your appraisal goes up.  If everyone else's property appreciates even more than yours, then your property will represent a smaller share of the total tax base and thus will have a lower tax bill -- that is, assuming the City doesn't raise the tax rate.

Correction.  I originally miscalculated Smith's tax bill.  I put $11,000 when it would be less than $10,000.  I've fixed that, and corrected the difference between Smith and Jones' taxes to $17,000.

Reason No. 3 to hate the McMansion ordinance

The McMansion ordinance is anti-density.

Austin has no real inner city.  Once you set foot outside of downtown/UT, you're in suburbia.  Bouldin, Zilker, Tarrytown, Hyde Park, Rosedale -- even Clarksville to some degree -- all have a suburban feel.  This is not by accident.  Each of these neighborhoods has been molded by standard suburban zoning tools like minimum lot sizes, minimum set backs, and height limitations.

Because it lacks a true urban core, Austin is not dense, even compared to Dallas or Houston.  (See my original post.)  With hundreds of thousands of newcomers expected over the next 20 years, Austin today faces a choice:  it can either grow denser or it can sprawl.   

Density means bigger buildings closer together.  It's what's shown to the right (click to enlarge).  While it is not everyone's taste, it is what a lot of people want, even expect, from their city.  A whole lot of people, judging from the evidence:  some of the most desirable cities in the country -- including San Francisco, pictured here -- are dense.

On June 8, our City Council firmly rejected density.  Instead of permitting larger structures bunched closer together on smaller lots, it adopted an ordinance that keeps lots large and houses small, short, and far apart.  It is a suburban straightjacket and the antithesis of density.

I'm stumped by these new aesthetic principles, "massing" and "scale," suddenly so dear to the neighborhood activists.  The houses to the right flout virtually every one of the McMansion ordinance's philistine restrictions. They're massive; they loom over one another; they're "too big" for their lots.  (I'll be they even cast shadows on their neighbors.)  But it's these houses, not Austin's comfortably spaced bungalows, that draw millions of jealous tourists each year.

"But we're not San Francisco," the neighborhood activist might say.  "Our neighborhoods don't look like this.  Houses like these stick out like a sore thumb in a neighborhood full of cottages."

Unless the City resorts to eminent domain, our neighborhoods can evolve only one house at a time.  If we want neighborhoods to grow denser, more striking visually and culturally, then we must be willing to tolerate some jarring mismatches during the transition.  "Friction," someone called it.  Our reward could be the emergence of a distinctly Austin style of density. 

The activists and City Council have decided it is better to embalm our neighborhoods than to risk real change.  I suppose we're entitled to keep the neighborhoods just the way they are.  But it's a shame.  And we certainly shouldn't congratulate ourselves as if we've done something special.

Reason No. 2 to hate the McMansion ordinance

The McMansion ordinance will drive families from central Austin.

It's common sense that large families tend to prefer large houses.  At least those are the houses they buy.  Just look at the "family-friendly" suburbs:  Between 2000 and 2006, the average new home in Circle C had 3,965 square feet; the average new home in Steiner Ranch, 3,915 square feet; and the average new home in the Great Hills subdivision, 4,065 square feet.  (Download NPA_Comparative_Data.pdf, compiled by the city demographer.)

Although I've got only one child, I understand this preference.  Space per capita matters; it determines how much you can spread out. A childless couple in a 1,600 square foot house has exactly the same amount of space per capita as a couple and two children in a 3,200 square foot house.

Give the family of four a choice between a 1,600 square foot house in Bouldin and a 3,200 square foot house in Circle C and see which it picks.  Circle C, more likely than not.  The family that prefers space will choose Circle C even if it wants to be close to Zilker Park and downtown Austin.  It will choose Circle C even if that means a long commute.  And it will choose Circle C even if it is the 1,600 square foot house that has the bigger yard.

If central Austin is to attract lots of families, it must have plenty of affordable large homes. 

The McMansion ordinance, of course, takes dead aim at "large" houses --anything bigger than the ordinance's paltry 2,300 square foot minimum.  It drastically cuts the number of places to build large homes, strangling supply.  The inexorable laws of supply and demand dictate skyrocketing prices.

It looks like prices already have reached the stratosphere.  On September 17, 2006, there were exactly three 2,500+ square-foot homes in central Austin listed on the Multiple Listing Service for $300,000 or less.  (Central Austin is more or less equivalent to MLS areas 1A, 1B, 2, 3, 4, 5, 6, and 7.)  I chose $300,000 because that is roughly the price a household making $100,000 can afford.  A $100,000-a-year family is hardly poor, of course; according to 2004 census figures, 80% of the metropolitan households make $100,000 or less.  The "interim moratorium" -- McMansion's precursor -- is just a few months old, and central Austin already has been put out of reach for most large families.

Central Austin, with its inventory of bungalows and cottages, will soon be inhospitable to all but the wealthiest families.  Average families will spurn it, abandoning it to the hip singles, childless couples and empty nesters.  There's certainly nothing wrong with being any of these. It is incomprehensible to me, though, that the City Council doesn't think large families deserve a place in central Austin too.  I know -- the City Council does not mean to drive families out of central Austin.  But it should be judged by the utterly predictable consequences of its actions.  The City Council could not have adopted an ordinance more hostile to large families if it had tried. 

Seven reasons to hate the McMansion ordinance: Reason No. 1

The city's holding a couple of public meetings tomorrow to educate the public about the McMansion ordinance.  The city must think it's time to let Austinites (or at least those who don't already own large houses in central Austin) know just how badly they've been screwed.

I know, I know, the debate is over; the neighborhood activists won this one.  The McMansion ordinance takes effect in two weeks.  It's time to stop grumbling about it.

Still, it's a terrible ordinance.  It will do long-lasting damage to Austin's housing market.  And I'm afraid we've got just a small window for repealing it.  Central Austin home buyers already are paying a McMansion premium.  Repealing the ordinance will wipe out that premium.  At some point, the cost to these home buyers will make an outright repeal politically impossible. 

So I've decided to start my own shadow public information campaign.  For each of the next seven days I'll post a different reason to hate the McMansion ordinance. 

Reason No. 1:  The McMansion ordinance treats average houses like over-size mansions.

The best thing the McMansion ordinance has going for it is its name.  "McMansion" is such a clever put down.  It evokes the nouveau riche, desperately trying to impress with starter mansions that are a caricature of good taste and style.  Who wouldn't support an ordinance intended to put them in their place?  (Other than the nouveau riche themselves, of course.)

But the McMansion ordinance is not narrowly aimed at over-size mansions.  By any objective measure, its main target is the average-size new house. 

What is "average"?  According to data collected by the National Association of Homebuilders, the average American home built in 2005 had 2,434 square feet.  (The median was slightly less -- 2,227 square feet -- but 42% of all new homes, a bare minority, were at least 2,400 square feet.) 

The McMansion ordinance limits new homes in central Austin to 2,300 square feet or less unless they are built on an "appropriately sized" lot.  To build the average American home in central Austin, you need a lot with at least 6,085 square feet.  There are thousands of lots in central Austin smaller than that.  (This lot size is within one standard deviation of the average lot size in most neighborhoods, based on TCAD data.  Download tcad_fars_summary_31.xls.) 

But the McMansion ordinance is actually even stingier than this.  The 2,300 square foot minimum -- pitched to the public as a guaranteed minimum for small property owners -- is not calculated the way we would do it if we were buying or selling a house.  When sellers and buyers talk square feet, they mean the area of the heated/air-conditioned living area.  A seller might get sued for fraud if he added the area of the garage or a second story porch to that total (at least without making proper disclosure).  The McMansion ordinance, however, includes in the floor area all but 200 square feet of an attached garage.  That is, the ordinance's real minimum for a house with a two-car garage (400 sq. ft.) is 2,100 square feet.  (Because the ordinance counts two-car garages against the floor area, it effectively functions like a tax on two-car garages.  I think this is an absolutely ridiculous policy given that 84% of all American homes built in 2005 had either a two- or three-car garage.)

Don't even think about adding a second-story porch or two-story interior space: second-story porches count against the floor area limit, and interior spaces with ceilings higher than 15 feet count double.  Thus, the McMansion ordinance's 2,300 square-foot minimum means a 2,300 square-foot house without "frills" like a place to park two cars, a second story porch, or a family room with tall ceilings.

The McMansion ordinance's effects are even more insidious when you consider the average new house size in many of our central Austin neighborhoods.  Some post-2003 average new home sizes (from the TCAD FARS spreadsheet):

• Zilker - 2,795 sq. ft.
• Tarrytown - 4,639 sq. ft.
• Hyde Park - 3,122 sq. ft.
• Rosedale - 3,264 sq. ft.

(The citywide average since 2003 is over 2,700 square feet.)  If you calculate the area as dictated by the ordinance, you must add at least 200 square feet to each of these averages to account for the likely two-car garage.  The minimum lot sizes required by the McMansion ordinance for these average new homes are (respectively, in square feet):  7,488, 12,098, 8,305, 8,660.  Each of these minimums is larger than the neighborhood's average lot size except in Zilker, where the minimum is only slightly smaller than the average.

All of this simply means that in many central Austin neighborhoods, the average new home can no longer be built on most lots.

An ordinance that strikes at the typical new home cannot honestly be billed as one targeting "McMansions."  A developer who builds a 3,200 square foot house in Rosedale or a 4,600 square foot house in Tarrytown is not catering to the extravagant; he's just building what the average new home buyer in these neighborhoods wants.  The developer knows what the City Council never cared to understand:  people prefer bigger houses today than when these older neighborhoods were developed.  And people who are paying $200,000 (in Zilker or Hyde Park) or $300,000 (in Tarrytown) for just the lot damn well intend to get their money's worth.  By outlawing the typical new home on thousands of central Austin properties, the McMansion ordinance is not protecting us from the wealthy fringe's poor taste; it is putting the average new home buyer's preference out of reach. 

P.S.  M1EK waged what at times seemed like a single-handed battle against this ordinance.  He's got good anti-McMansion posts, such as those here.