Cortright: The High, High Price of Affordable Housing

Joe Cortright who writes for City Observatory has corroborated what I’ve been saying for quite some time now: the non-profit housing industrial complex produces subsidized housing very, very inefficiently.

The costs are substantial. In San Francisco, one of the largest all-affordable housing projects, 1950 Mission Street, clocks in at more than $600,000 per unit.  That number isn’t getting any lower: new units in that city’s Candlestick Point development will cost nearly $825,000 each, according to recent press reports. Brown’s point is that at that cost per unit, its simply beyond the fiscal reach of California or any state to be able to afford to build housing for all of the rent-burdened households.

You can and should read the whole post here.

Locally, I’ve pointed out that two projects, one built on Beacon Hill and the 12th Avenue Arts project on Capitol Hill produced 200 units of housing for a total cost of $92 million dollars, or about $460,000 per unit. Taken by itself, the 12th Avenue Arts project produced 88 units for $47 million or $534,090,91 per unit. To give you a sense of how ridiculous this is consider this townhouse for sale in the Greenwood neighborhood in Seattle:

That’s right. For roughly the same price that the non-profit complex produced 200 units, that cash could have bought those 200 families three bedroom homes, free and clear with no debt. Done! Imagine a household just being given a house or if the funding was used to purchase existing assets rather than using the money to buy pricey land, high cost labor, and lots and lots of transaction fees. The system used to produce free standing subsidized housing is grossly inefficient but very politically powerful.

What makes this worse, is that here in Seattle, the non-profits are now strong arming the City to impose a fee scheme to wring money out of the private development of housing to fuel their excesses. Mandatory Inclusionary Zoning (MIZ) is being deployed because the non-profit costs are skyrocketing. Far from being some kind of Bargain, MIZ is nothing more than an extortionary scheme to raise the funds for ridiculously expensive housing.

Ironically, the townhouse in Greenwood will be taxed and the only way to pay for those taxes is to raise the price of the house. That means that incrementally, all new housing will go up in price. While it may not seem important to many in town, those incremental boosts mean some families will not be able to complete financing. And some projects won’t get built. And many, many more people will be faced with fewer choices. The real toll is the households who might want to buy but won’t be able to, so they’ll stay in an apartment that would be affordable to someone else. This stacking effect of deferred purchases, fewer apartments and houses, and increasing demands means even higher prices and sustained scarcity.

And every candidate for Mayor supports “higher developer fees.” I’ll have more on the Mayor’s race tomorrow.

 

 

 

From HUD: MIZ Produces Few Units, More Study of Costs Needed

This was originally a follow up e-mail to the Housing Affordability Response Team (HART) I posted yesterday

PS I wanted to share this article, Producing Affordable Housing in Rising Markets: What Works? for what it’s worth.

Along with a critique of Inclusionary zoning it also calls for more study of costs and production, especially of government supported programs.

A better understanding is needed of why existing state and local programs have produced only modest amounts of affordable housing and whether these programs could be redesigned to be more productive. Better data on output are therefore essential. State governments, affordable housing advocacy and research organizations could be useful allies in collecting and disseminating data. Not only do they have more resources than many local governments, they could play a valuable role in standardizing data reporting. Prior research has focused mostly on how program design impacts output. Equally important is an understanding of the political dynamics of both local and state programs.

Not long ago, at a collaborative meeting on reducing infrastructure costs associated with water, we heard from an architect who designs for non-profit housing developers and found out that his frustration with infrastructure requirements is similar to our own. The costs that are being imposed throughout the economy are often well intended, but also frequently redundant. For us, that means raising prices, for non-profits it means fewer units.

We can trace the “modest amounts” cited in this article to regulatory overreach. The architect noted that the City of Seattle’s Office of Housing issues the grant of funds, while another City Department demands funds for redundant infrastructure in the six figure range. For example, a non profit agency is successful in getting a grant from the Office of Housing, those funds are paid out to a project, then the funds end up paid back to another Department, Seattle Public Utilities, in the form of new and expensive water mains or combined sewer overflow for wider public benefit. Challenging this makes no sense for the project managers, especially when the City is the source of funds. “Why would we make trouble with our funder,” the architect said.

This is common throughout our system of funding non-profit housing and there has been zero effort by the City or the Washington State Finance Commission to at least surface this as a serious problem nor to address these kinds of costs as aggressively they have in seeking more money. So far, we’ve been alone in asking to reduce housing costs and choke points for production. Further study of these costs and eliminating them would help all housing production, everywhere and address many of the issues the HART is grappling with. And as the article points out, state level government is uniquely positioned to do this through studies like the one we’ve proposed in the Senate budget.

Tax payers are wearing out, and so are consumers of housing. Smart Growth Seattle simply can’t allow the costs of these gross inefficiencies to be transferred to the private sector and ultimately to home buyers and renters. That will lead to higher prices and more regulation and higher prices. Notwithstanding the politics and personalities we should — we must — work together to account for these costs and eliminate them across the housing economy.

McGinn In Again: Maybe We Have a Chance on Slowing, Stopping MIZ

Former Mayor Mike McGinn is running for Mayor against incumbent Mayor Ed Murray. The current Mayor has stubbornly clung to the concept of Mandatory Inclusionary Zoning (MIZ), a scheme that requires the inclusion of rent restricted housing in every new housing project. If a project doesn’t include rent restricted housing, then it must pay a square footage charge to the City which in turn funnels that cash to non-profit housing developers, who in turn will build ridiculously expensive subsidized housing in several years. This won’t do anything to lower over all housing prices, in fact in will increase them as projects rationalize the additional costs by raising their prices. The Mayor and his staff have called this Mandatory Housing Affordability (MHA) and it was the product of a “Grand Bargain” between Vulcan’s lobbyists, a lawyer that charges non-profit housing projects for legal advice, non-profit developers, and Councilmember Mike O’Brien.

What did Mike McGinn say about the so called Grand Bargain in his announcement speech yesterday?

That is why housing costs, like our budget and taxes, must also be a priority. I commend Ed Murray for asking stakeholders to bring forward their best ideas to address housing. HALA – the Housing and Livability Agenda – has some good ideas in there. But ideas are not enough. If you want public support, the public has to be involved. You can’t tell them that a bunch of people in a room have made a “Grand Bargain” when the people most affected – the public – didn’t have a seat at the table. I’m reminded of the old proverb – if you want to go fast, go alone. If you want to go far, go together. And we have far to go.

If elected, immediately upon taking office, I would launch true neighborhood driven planning across the city. Invite everyone – those who think we’re growing too fast, those who think we need to build more housing fast. Homeowners, renters, builders. And let’s have it out.

Let’s take this apart. First, it was pointed out to me by someone that when McGinn says, “the public” he doesn’t necessarily mean us, hardworking builders who build single-family, low-rise, and apartment housing. That is, perhaps he’s pandering to angry neighbors who simply don’t want any more growth at all, and certainly don’t want any additional density even if it comes with an exaction on all new housing for subsidies. Is McGinn send a dawg whistle message to embittered neighbors in Wallingford, for example, that want to grind all new housing development to a halt?

Maybe. But lets’ consider the second paragraph.

McGinn sounds like he might simply be hitting pause on the whole mess of MIZ outside Downtown and South Lake Union. Maybe if he gets elected, “immediately upon taking office,” MIZ gets shut off. That’s exactly what we’ve asked for. Second, he’s sounding a similar call to one I’ve made before, and that is go back to the promise of neighborhood planning 20 years ago when there was a real Grand Bargain struck between single-family neighbors and the need for more growth in already dense areas. This is something we would likely support since it makes the angry neighbors promise to support growth in areas already zoned for density in exchange for leaving single-family, single-family.

Who knows. But based on the plain reading of these two paragraphs I am hopeful. I have had many, many differences over the years with McGinn, someone who I’ve known well and personally for over a decade. I’ve also supported his work at the Seattle Great City Initiative, working as a volunteer and paid staff, and I contributed to his first and re-election campaign. Once McGinn got over months of turmoil starting his term, his staff was very responsive and we got answers and more certainty about what the executive branch was up to. We didn’t always get what we wanted, but we at least got clearer signals, and certainty matters in development.

On the other hand, McGinn has demonstrated an annoying me-too drift to the left that I find worrisome. I think he likes being associated with the cool kids and the socialists and social justice crowd that is so hopelessly confused about economics and doesn’t seem to want to understand how housing actually works. McGinn is smart. He gets how the economics of housing works. He also gets politics. And the politics of Seattle is deeply and deliberately self-defeating, promoting the notion that taxing and adding costs to housing somehow punishes developers and helps poor people. It doesn’t. Can he appeal to those people rhetorically, but support the creation of a process and policy that leads to more housing, lower prices, and, as he put it, saving us from being San Francisco? I don’t know. Only time will tell.

First There Was HALA, Now There’s HART: Will it Be Different This Time?

The red light on the dashboard of state government is flashing. There is a growing worry about housing prices at that level of government as well. While Mayor Murray set about to create a high profile committee to wring hands about the “crisis” of housing prices, the State of Washington has taken something of a quieter approach, creating something called the Housing Affordability Response Team or HART. The group was convened to respond to a letter from Governor Inslee to take a look at what is driving up housing prices and impacting affordability. I was hopeful the HART would lead naturally into our request for a budget proviso to take a hard, objective look at housing costs in the state. However, I think now the HART is becoming a state level HALA with the next meeting being a voting meeting about specific recommendations. My guess is that there will be a lot of good or interesting ideas offered: and then the ones that generate money for non-profits will end up getting all the attention and will drive future legislation. I sent the email below to the chair of the Committee Peter Orser and HART member Svenja Gudell. 

At the end of that e-mail I closed with this sentence: “During the HALA process I made the mistake of not standing in the road or at least on the side of the road waving my arms. I didn’t raise enough of an alarm then, and so I’m doing what I can now. Thanks for taking my concerns seriously.” 

Hello Peter and Svenja,

Price is a funny thing; get out of its way, and price will tell you all you want to know about a market and people in it, what they want, where, and how and whether suppliers can meet that demand. Price tells the story that almost every other data just hints at. Yet politics dictates that when some constituencies are paying too much or too little, we must intervene before we understand how the complex relationships between buyers and sellers resolve, and too often we make things even worse.

When we try to wrestle price into submission and use qualitative, socio-political normative standards to be sure one group doesn’t pay too much or another too little, we end up creating perverse incentives, and often, inflation. Add to this aesthetics, transportation, and a host of other utilities and disutilities we wish to manage for various real or perceived benefits, and you have a real mess. I think we saw that on Thursday and I think my example demonstrates the real damage done when data is misused, misapplied, or misunderstood.

I’d ask that the Committee keep first principles as your measuring stick for any and all proposals you consider.

  • Does the proposal add or reduce costs to housing? By how much?
  • Does the proposal generate new money for subsidies? How?
  • What is the corresponding data point or points for the proposal?
  • What is the measurable impact of the proposal on a current housing related problem?
  • Will the proposal positively or negatively impact consumer-housing prices? How?

For example, if I suggest direct cash payments of levy dollars to defray the costs of “cost burdened” households (i.e. if a household at 30 percent of Area Median Income is paying $235 above 30 percent of their gross monthly income, just deposit that amount in it’s bank account each month) I’d express it this way:

I think if the HART is going to entertain a grab bag of proposals, it needs to be very diligent about being accountable. If I put Mandatory Inclusionary Zoning  (MIZ) on this table, it would be impossible for anyone to support it because it would plainly show that the intervention of mandating performance or fees in lieu would firstly increase overall housing costs and prices, and it wouldn’t correspond to any data point that is relevant to us (e.g. reduction of the number of identified “cost burdened” households).

The HART won’t have much creditability with the people I work with and for (or among the legislature, press, and wider community) tif it does not acknowledge these points and seek better analysis if an answer can’t be had by an outside objective review. This is why we advocated for the proviso for the JLARC study in the Senate budget. I’ve attached that proviso along with proposed merge of that proviso language with a similar provision in the House budget. We need a study of how the costs we’ve added to housing production are impacting its price and why.

As I’ve said before, we’re not recognizing price for what it does best: send signals. I understand that politics doesn’t allow us to use the economy as a real time experiment in supply and demand; we want to be sure nobody is harmed that shouldn’t be, and those that should, are. But when we distort the housing economy with interventions intended to fix prices for some at the expense of others, we end up creating more problems.

And when, like Goldilocks, we try to make everything in housing production, “just right,” we can’t even figure out and agree upon what’s buildable land.  All land is buildable within the limits of engineering and financing. When we attenuate that envelope we add costs and thus limit supply which increases price. Examining all the ways we’ve done that makes good sense because it would help us debate the real quantitative impacts of our values rather than trying to impose them on the market and blame others for the outcome if it doesn’t work out.

If I could, I’d make every member of the HART and every planner in the state read Hayek’s The Use of Knowledge in Society (or watch this segment from The Commanding Heights about the so called German Miracle), a very brief essay that, I think, clears the head on what we can know and what we can’t using data. In the end, this is not about the ‘A’ in the HART it’s actually about price. I hope that the HART will build that into the essence of whatever it produces and recommends going forward.

I suppose I run the risk of being dismissed as a free-market kook. Oh well. The truth is we’re at a critical moment; we can either step back and consider what regulation has done and is doing to housing production or we can add more in hopes that it will somehow work if we keep doing it. Unless we’re careful, we’re going to increase the suffering of the people with the least resources in our economy regardless of the sincerity of our motivations.

Roger–

Follow Up E-Mail to Councilmembers Herbold and Johsnon on MIZ Vote

Councilmembers Herbold and Johnson make back to back statements in the video I’ve featured above. Those statements start at roughly the 54:40 time signature on the video. 

Hello Councilmembers Herbold and Johnson,

I have a great deal of respect for both of you. And I agree in an odd way with statements you each made before yesterday’s (Monday) vote on MIZ.
However, I also think what you each said should make you support hitting the pause button on MIZ.
First, I couldn’t agree more with you Councilmember Herbold that it simply doesn’t pass the red face test to have a 2 percent inclusion rate in Downtown and South Lake Union while the rest of the city is exposed to a higher rate. It’s not consistent or fair, especially for builders I work with and neighborhoods neither of which were at the bargaining table when this deal was made. I said that to you in your office a year ago. I’m sorry that only myself and Councilmember Sawant are the only ones who agree with you.
Second, I think you’re wrong Councilmember Johnson; we’ve had lots of time to consider the impact of 5 percent inclusion and we know it’s a horrible idea and makes projects infeasible, especially for sale low-rise and townhouse projects. Don’t listen to me though, read the two Sightline posts authored by Dan Bertolet. We know it doesn’t work elsewhere just like you suggest that it “would have a negative impact on the building of residential.” Of course it will, just like it would have downtown.
What we know is true is that the message you sent on Monday is that some neighborhood developers with lots of pull downtown and at City Hall get a lower rate of inclusion and more certainty. Vulcan knows they can pay and play at 2 percent. I think MIZ at any rate is going to increase overall housing prices for very little in return. But you’ve proved my point by killing Councilmember Herbold’s amendment. It’s impossible to quantitatively justify opposing her amendment while supporting 5 percent (and higher) everywhere else based on feasibility. You can’t do it and be consistent. What we have is, as Councilmember Herbold suggested, is a deal that can’t be justified based on a fair value exchange, but rather an exchange of political clout.
On the other hand, what was validated by the vote is that higher rates of inclusion do have a negative impact. You both likely disagree about that. But you can’t have it both ways, suggesting that higher rates impact housing production in some place and not in others. And we have the numbers of Sightline to back that up. And, I guess, on Monday, the Council for that moment agreed with that notion too.
I know you’ll probably hand wave this email. But again, I trust you both. I think you’re smart enough to know this doesn’t make any sense, for different reasons, but still it doesn’t. And while I don’t agree much with the 25 percenters in the neighborhoods, they know that a rate that high is likely to kill development. So do I. And I think the concept of higher rates of fees and inclusion do hurt housing production.
I’d ask, once again, that we resist the urge to do this citywide; please support turning this into a voluntary program outside of Downtown and South Lake Union and see how many developers participate. It won’t be many. But at least you’ll have some data, and were it works more housing. Better yet, support an expansion of programs like MFTE and vouchers that would rapidly leverage development going on right now and levy dollars. We’d be much better off putting money into cost burdened households bank accounts this year, than making them wait for a subsidized unit 5 years from now
The legal implications are also clear; the City does not have a coherent voice of math on the supposed value exchange of requiring performance or fees in exchange for FAR. In some places the dial has been turned down, and in others the dial has been turned up and for reasons that have absolutely nothing to do with lowering housing prices or addressing the fundamental concerns people have about where they can find a place to live; in other words, the requirements have no nexus or proportionality.
Roger–
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