Austin Contrarian

The risk of home ownership.

In a column last week, Paul Krugman questioned whether it makes sense for the government to subsidize home ownership.  Krugman wasn't dissecting the mortgage interest deduction in particular.  He was asking a more basic question, "Do high homeownership rates on balance make us better off?" 

Widespread home ownership obviously has some pluses.  Home owners have an incentive to keep up their properties and neighborhoods, and they tend to demand better local government than renters. 

Krugman identified some disadvantages, too.  Home owners are less mobile than renters, which makes them less flexible during economic downturns.  More single-family homes mean larger and more distant suburbs, and thus longer commutes.   (He could have added that resources devoted single-family homes are diverted from other productive uses, such as new factories or start-up companies.)

But I think Krugman got this one wrong:   

[T]here’s the financial risk. Although it’s rarely put this way, borrowing to buy a home is like buying stocks on margin: if the market value of the house falls, the buyer can easily lose his or her entire stake.

Krugman is implying that we should worry about the financial risk of homeownership out of concern for homeowners.  I think we should worry about the financial risk of homeownership out of concern for cities.    

Homeowners are intensely risk averse.  The reasons are obvious:  (1) home owners tend to be highly leveraged; (2) their homes are by far their largest asset; and (3) a home is an illiquid asset.  If a homeowner has just 10% equity in his house, a modest 3% swing in the home price causes a 30% swing in the value of his largest asset.  And it's an asset that he cannot easily dump if things start looking bad.  (I suspect that home owners in "stepping stone" neighborhoods are the most risk averse of all.)

Because home owners are risk averse, they are "change averse."  They understandably are allergic to changes they reasonably believe will hurt their home values (such as a landfill or  homeless shelter moving next door).  But they fight other changes that at first blush one might expect them to welcome.  They often fight new development projects nearby even though the projects are likely to enhance home values.  "Likely" is not the same thing as "sure thing"; there is a chance the development will deflate rather than inflate home values.   (For example, homeowners may worry that a high-quality multi-family project will deteriorate over time to "affordable housing," a euphemism for a lower class of resident.)   Because it's hard to predict exactly how any given development will play out, risk-averse home owners tend to oppose chancy neighborhood development.

But this puts homeowners crosswise with optimal city development policy.  A big city has a highly diversified portfolio of development sites.  A growing city will have many prospective projects scattered around.  Sure, some of these projects will be busts, but more likely than not they will enhance value (provided they are subject to "reasonable" constraints).  Because a city is hedged against the risk of a single project going bad, it can trust that the odds will even out over time.  To maximize community welfare, it ought to take risks with development.  It should end up with more good projects than bad and more robust and flexible residential and commercial markets as a result.  , 

A high rate of home ownership within the city, however, stacks the deck in favor of homeowners.  Not surprisingly, the result is a city government that is less tolerant of risk than it ought to be.  High home-ownership rates encourage cities to hold development below the optimal level.

These are not the only instances in which homeowners systematically oppose optimal city policy.  Homeowners have an incentive to restrict new housing supply to prop up home prices.  Homeowners tend to insist that local development cater to their neighborhood rather than contribute to specialized, regional trading centers.   

Put it all together, and high rates of home ownership lead to inefficient land use policies.  This may be the most insidious effect of the government's encouragement of home ownership for everyone.

Sprinkler snitches.

Reason No. 73 to hate Austin's water rationing program:  It turns people into tattletales. 

Just raise the damned price already.  The pricing system doesn't have to be regressive.  Put the extra revenue and the money saved by eliminating the command-and-control system into something else.  (Anyone think we're spending enough on sidewalks?)

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).

VMU on South Lamar.

I write a bunch about everyone else's neighborhood so I ought to explain what happened with my neighborhood's VMU application.

I live within the boundaries of the South Lamar Neighborhood Association.  SLNA's VMU overlay district includes most of the properties on the east/southeast side of South Lamar from Oltorf to Ben White Boulevard.

My neighborhood association agreed to leave most of the properties within the VMU district.  It asked to opt out three properties on "iconic" grounds:  Matt's El Rancho, the Walgreen's/Taco Xpress site (guess which of these two was the icon), and the Broken Spoke (collectively, Tract 6 and 11).  I don't agree with this business of opting out favored establishments, but I didn't complain about it.  These icons are not going anywhere and they'll be able to get VMU later if they want it.  I didn't feel like wasting my energy on a purely hypothetical debate which I would have lost anyway.

I did disagree with two of my neighborhood's other recommendations.  First, it asked to opt out all the properties between Bluebonnet and Kinney Road (Tracts 4 and 5).   Second, it asked to opt out of the parking reductions and relaxed dimensional standards across the board.

Our disagreements boiled down to this:  The neighborhood leadership wanted to opt out the properties between Bluebonnet and Kinney because they back up to single-family homes.  I did not, and do not, think that's a good enough reason, particularly when the tracts include a half-abandoned car lot and a shuttered brake-repair shop.  (To be fair, there are some pretty useful businesses on this stretch, including an AM/PM animal hospital which has accepted several large donations on behalf of my cat.)

I also disagreed with the leadership on opting out of the reduced parking and dimensional standards, particularly for the tracts south of Manchaca.  These tracts include the giant strip mall at Ben White and other tracts isolated from residential properties.  I didn't think there was even a colorable argument that the parking reductions would cause any problem on these tracts.

Somewhat surprisingly, the Planning Commission voted to opt out only the "iconic" tracts and to apply the reduced parking/dimensional standards across the board.

City Council followed the Planning Commission's recommendation on first reading.  I thought that was an important signal to other neighborhoods (particularly Zilker) that tracts will not be opted out merely because they are adjacent to single family homes. Alas, on second and third readings last Wednesday, Council opted out Tract 4, the properties between Kinney and Iva.  There was intense neighborhood opposition to VMU on this tract, and the leaders apparently lobbied Council members (or at least Brewster) between first and second readings.

The map shows the final disposition of the tracts.  The VMU tracts are bordered in green and the opt-out tracts in red.

This was not a perfect outcome.  But, all in all, we ended up with a good VMU district.

N.B.  I should add that my neighborhood revised its recommendation between the Planning Commission and City Council hearings.  Its revised recommendation was to opt out only the "iconic" tracts and tracts 4 & 5, to apply the parking reductions/relaxed dimensional standards to the tracts south of Manchaca (more or less), and to exempt the properties north of Manchaca from the relaxed dimensional standards (more or less).

Council caves to Allandale.

As I've explained before, the real point of Austin's Vertical Mixed Use ordinance is to open up more property to multi-family development.  There is precious little land set aside for that purpose in central Austin.  Neighborhood interiors are reserved for single family -- aside from the occasional small multi-family complex -- and most property on commercial streets is set aside for commercial uses.  The VMU ordinance aims to fix that.  Adding the "V" designation to a property on a "core transit corridor" opens the property to multi-family development, and fairly dense multi-family at that.

Neighborhoods traditionally have fought new multi-family developments.  Nothing incites the townsfolk to march on City Hall like a proposed up-zoning for a large multi-family project.  The VMU design guidelines and "mixed use" components aim to fix that.  They are sweeteners to make the bitter multi-family pill easier to swallow.

For some neighborhoods, though, they are not sweet enough.  Their pathological hostility to multi-family housing -- even multi-family housing plopped down on a 30,000-vehicle-per-day transit corridor -- simply cannot be softened by incentives.  They will fight multi-family as hard as they can, regardless of the design standards, regardless of the compatibility standards, and regardless of the new mix of retail the developments promise.

Allandale is one such neighborhood.  Given its hysterical reaction to the Northcross Wal-Mart, this should be no surprise.  But its VMU application was a real gem.  Its eligible VMU tracts included most of Burnet from North Loop to Anderson, and all of Anderson from Mopac to Burnet, 2.51 miles of eligible linear frontage in all.  Allandale's initial application, however, asked to opt out almost all of its eligible tracts.  It volunteered just two tracts:  Northcross, which it knew would not be redeveloped as VMU any time soon, and a tract off Northloop already designated for mixed-use.  Moreover, it asked that any development that managed to slip through be limited to 12.5 units per acre, a ridiculously low density for multi-family.  I characterized Allandale's application as a "temper tantrum" over Northcross.  But perhaps it was just that deep-seated hostility to multi-family.  As one Allandale resident wrote in opposing VMU in her neighborhood:  "I own a home directly behind one of the proposed tracts and prefer to have a warehouse in my backyard than an apartment building."

Duplex update.

I spoke with a local AIA architect in order to get a better grasp of last night's amendments to the McMansion and duplex ordinances.

Some good news and some bad news (or some bad news and some good news, depending on your perspective.)

The duplex ordinance amendment was not as dire as I had feared because of changes to the ordinance originally proposed by the Task Force.  As I discussed here, the Task Force had recommended that the common wall between two duplexes be perpendicular to the front lot line.  This essentially would have mandated that all duplexes sit side by side or on top of one another (the latter, an unpopular choice), thereby banning duplexes on long, narrow lots.

The ordinance language as enacted, however, omits the perpendicular-to-the-front requirement and permits the common wall to be articulated in 4-foot segments.  A skilled architect can use this provision to fit a longer common wall (two times as long) within the same amount of space.  This will allow duplexes to be placed front-to-back on a long, narrow lot.  While the lot might not have enough space from one side to the other for a straight common wall, it might be wide enough for this articulated common wall.

The neighborhood types wanted to eliminate this "zipper" provision because, I assume, they don't want duplexes aligned from front to rear.  City staff pushed for the zipper provision, which made it into the version adopted by Council.

Good.

The "bad" relates to basements.  Basements that meet certain requirements do not count against the maximum floor-to-area ratio.  One of the requirements is that the basement be below a certain "grade."  The Task Force recommended (and Council approved) a requirement that the basement be below both "natural grade" and "finished grade."  Others (including the AIA) wanted to stop at "natural grade."

Here's the issue, as explained to me:  Requring a basement to be below natural grade provides sufficient protection.  Natural grade is the land's undisturbed state; a developer can't build a "pedestal" by pushing dirt around to sneak in an above-ground third story.

But requiring that the basement also be below "finished grade" precludes a "walk-out" basement.  Even if the basement is below natural grade, if you make a cut in the natural grade to create a separate entrance to the basement, you are now below the "finished" grade.  This means that "walk-out" basements will not be eligible for the FAR exemption.

I don't think basements are very common today because of their expense, so I'm not sure how big a deal this is.  However, they may become more common in the future as developers and homeowners turn to them for otherwise verboten floor space.  This amendment will preclude their use as separate apartments.

Don't mess with my pico.

Is the salmonella-tainted tomato "scare" over?  The New York Times reports:

Six new cases of an unusual form of salmonella linked to eating raw tomatoes have been confirmed in New York City, in addition to a previously known case, the Department of Health and Mental Hygiene said on Wednesday. In addition, Suffolk County announced that a 26-year-old West Babylon man also contracted the strain of salmonella from eating tomatoes at New York City on May 27.

Maybe I have an undue attachment to pico de gallo, but I was upset when my restaurants pulled tomatoes off the menu.  I was cheerfully willing to accept the tiny risk of encountering Mr. Salmonella.

There have been 383 cases of tomato-related salmonella reported since April.  Even if all the cases occurred in April, that's just 12-13 cases a day.  By contrast, 6 billion pounds of fresh tomatoes* are consumed each year by 300 million Americans spread over a market area of 3 million square miles.  I would be flabbergasted if only a couple handfuls (literally) of the tomatoes consumed each day were contaminated with some bacteria.  Fresh produce always has a chance of being contaminated with something.  It's an extremely small chance, though -- I imagine it is zero, to five significant digits, even when there is a confirmed "outbreak."  My chance of ending up with a contaminated tomato is still practically indistinguishable from zero.   

When the FDA detects an outbreak of salmonella, it ought to investigate.  We ought to work hard to get tainted food out of the system.  But there will always be some bad stuff out there no matter how hard we try.  Don't mess with my pico unless there's a real epidemic.

*20 pounds of fresh tomatoes per American per year times 300 million.

The duplex vendetta.

Someone must have decided that the City is "soft" on duplexes. That's the only conclusion one can draw from an ordinance that the City Council is scheduled to consider tonight.  This ordinance will make it next to impossible to build dupexes on long, narrow lots.

Duplexes are one of the last affordable options for central Austin. The McMansion Task Force nevertheless did its best to discourage them by drastically curtailing the allowable footprint and mass of structures on central Austin lots.

But the McMansion ordinance apparently didn't do enough to dampen duplex construction.  Architects and developers are still managing to fit duplexes on narrow lots while complying with the McMansion ordinance's strict "building envelope" and floor-to-area ratio limits.

We should be saying, "Bully for the architects and developers."  Instead, the Residential Development Regulations Task Force (a/k/a the McMansion Task Force) has proposed redefining "duplex" to require the units to sit either side by side or on top of one another.  Developers will no longer be permitted to put one unit at the front of the property and one unit at the rear.

(Two units technically form a "duplex" when they share a common wall or floor/ceiling along 50% of the building's depth.  Today that depth can be measured either from the front to the rear of the lot or from one side of the lot to the other.  The ordinance will mandate that the common wall be perpendicular to the front lot line.  In other words, the units must sit side by side or be stacked, which is more expensive and less desirable to prospective owners/tenants.)

It is impossible to put duplex units side-by-side without a sufficiently wide lot.  Consider a 60-foot lot.  With, say, 10-foot side setbacks, that leaves just 20 feet of width per unit -- and the code-mandated garages/carports alone will require almost all of that space.  (Just in case someone could manage to sneak in a garage and front entrance, though, the Task Force is also recommending that the front entrance have a "porch," presumably to leave less room for the garages/carports.)

The Austin chapter of the American Institute of Architects has politely pointed out that this ordinance is a bad idea.  It put together some nice diagrams illustrating the proposal's impact, which I am putting below the jump.

Visitability.

Betty Dunkerly's so-called "visitability" ordinance (pdf) is on the June 18 Austin City Council agenda.  I don't know whether Council will actually consider it on Wednesday but since I haven't weighed in on this ordinance before, I thought I'd take what may be my last chance.

This ordinance actually has little to do with "visitability."  Visitors don't need light switches or outlets at a certain level; they don't need thermostats or breaker boxes at a certain level; they generally don't need lever door handles.  Reinforced bathroom walls won't do them any good unless handrails are mounted on the walls -- and the ordinance doesn't require handrails.  A 3-4" threshold step at the front door is not an insurmountable obstacle, even for wheelchairs, with a little help.

Most people who support this ordinance instead argue that these are equitable accommodations to disabled homeowners or will permit us to "age in place."    

I think most of the proposals are pretty bad ideas.  A few are good ideas.  My take on the specific proposals is below the jump.

One general point first.  Don't confuse the economic justification for these proposals with the justification for public-space accommodations.  There is a big difference between the two.  We all bear the cost of accessibility accommodations in public, commercial spaces.  However, that cost is spread over a large group of people; each of us bears a tiny share of the total.  And since these are public spaces, we can be confident that some mobility-impaired visitors will benefit from them, and will benefit greatly.  A cost-benefit analysis is still necessary to justify the mandates, but we can be confident that there are large, positive numbers in the "benefits" column.    .

This isn't necessarily true when the City requires accessibility improvements in private homes.  If a home is occupied by someone who does not need the modification, then the money invested in it is simply wasted.  That's a significant amount of waste if, say, only 1 in 20 homeowners needs the modification.  It's a significant amount of waste even if only 1 in 2 homeowners needs the modification.  (Many people won't need these even if they "age in place."  Even then, requiring these investments before they are needed imposes an opportunity cost.)

Mandating improvements in private homes thus can be justified only when the improvements are much more expensive to retrofit than to install during construction.  Even then, the cost-benefit calculations are more difficult because the improvements often impose a much higher cost on people who don't need them.