The Disconnect: Will Lowering Costs of Housing Production Mean Lower Prices?

It’s obvious to most people that when there is scarcity of something its price goes up. When there is an abundance of a product it goes down. But when it comes to housing, the disconnect between what’s obvious and deep bias against new development and change was brought home to me. In a meeting last week about housing costs and how they contribute to slow down supply, I made the case, enthusiastically, that regulatory burdens slow production, create uncertainty, and incentivize larger, bigger housing units. This, I said, is true of all housing whether for profit or non-profit housing; the difference with market rate housing is that the price goes up, while non-profit housing burns more dollars and thus makes fewer units. Either way, regulation has got the housing supply chain in a choke hold. But why do people resist the notion that reducing costs will result in lower housing prices? Because: “If costs go down, developers won’t lower prices, they’ll just get more profit and housing prices will stay the same.”

This is nothing shocking. Most people, I think, believe this to be true. If a water main extension is required by regulators, for example, and that extension adds costs, then, presumably, those costs will end up in the price. If that doesn’t happen, and the builder can avoid the water main extension with fewer, larger units, then the price of those units will be higher. The point is that costs have a big impact on price because they impact how much housing can be produced. But what difference does cost make if supply and demand are the twin ruler of price? It’s called competition.

If 1000 people appear on the scene to buy 100 units of housing, we know that they will bid up the price. Those with more money will offer more to the seller and those with less will end up “priced out.” But what if we produce 900 units? And what if those units are built with extremely expensive materials. Would it matter? Wouldn’t there be an equilibrium in supply and demand? That is, even if the 900 units were made of solid gold, wouldn’t they drop in price because supply matched demand?

The problem is the nature of how housing is built and financed. I had to bring up the term “invisible hand” and I acknowledged that it’s something that progressives and liberals don’t just bristle at but reject with the conviction of Jesuit priest. Housing builders don’t build housing first, then determine what the price per unit will be. They have to take into account costs and what they and their lender think would be acceptable to buyers in terms of price. If the 900 units were so expensive to build that no lender believed they could get their money back, then the 900 units wouldn’t get built. The demand is there, but producing the units needed just doesn’t make sense. Nobody wants to go broke making them and lenders don’t want the risk of building units that just won’t sell or rent.

This is how higher costs reduces supply and thus keeps supply in this oversimplified version. In this case think of the units not as made out of gold but simply regulated to a point at which the price in fees, fines, taxes, design review and other impositions and exactions means that recovering the costs pushes the price way up. Then, while the units might not be made out of gold, they will be expensive and thus have a higher price. They might even sell as “luxury units;” and there would be fewer of them, say 450.

Now, let’s take our example one step further. Let’s say that a local official and his government saw what regulation was doing to supply and thus to price. In spite of other efforts, there are still 1000 people looking for 1000 units, but there are only 550, and the price is high enough that there is lots of pain in the economy, included “rent burden;” people paying a big percentage of their income in rent.

So this leader decides to back off a bunch of rules, regulations, and fees. Suddenly the costs go down. More players enter the market. They’ve seen the high prices of rents and housing and they figure they’ll get a piece of those high prices in the form of profit. Lenders know, however, that when more supply gets on the market, maybe even excess supply, that rents could drop, so they’re more conservative. Still, they lend and building ensues. On an individual project level, builders get their financing and get started. A project here and there start construction, and often the work is right across the street from some of the 550 units.

When the supply of housing hits 1000 units, suddenly everyone has a shot at housing. About 300 of the remaining 450 get into a unit. But the price is still too high for 150 people. They just can’t afford it. Now some of the builders are losing money; they have vacancies. There are people who need the unit. They offer less than the rent. The builder lowers his asking price. Other people hear about this and lower their offer. Throughout this silly simple and unrealistic market, suddenly those demanding housing have an advantage. And, since the costs is lower, another player comes on the scene and builds 50 units of housing and she prices them even lower. Her vacancy is zero and she’s still paying what she owes and has money left over. Meanwhile, the other guys are hearing from their renters that they’re not happy.

I know, I know. That’s too simple, and maybe I lost track of my math. But the point of the simple example is that when costs are lowered, a barrier is dropped to enter the market. Individual builders don’t look at the whole picture and neither do lenders. They look at what’s in front of them: will this project work given what we think people can and will pay and are we asking too much or too little. This process works it’s way through the economy every day, slowly, surely, and yes, mostly invisibly until overall prices adjust. What regulation does is impose a limit to what can be financed and produced. When we think of prices we of course know that is a quantitative indicator of how much supply there is relative to demand; but we also have to consider the factors that limit production.

I’ve said it before, but it is worth repeating: greed is a character trait, not a business model. Price is a guessing game and a negotiation. Sure, someone out there might produce the same units as they did before a program of regulatory relief, lower their costs, and then charge the same amount. But as production goes up and competition ensues, that person will find themselves with increased vacancies.

Again, even with numbers and data, most progressives and liberals in Seattle will scoff at this. “Yeah, right. We’ll let them get away with lower costs and they’ll just laugh all the way to the bank.” However, we know that doing what we’re doing isn’t working. And if we keep the barrier high, we do add costs that have to be absorbed somewhere, and that means higher prices and consuming more subsidies. It’s why Mayor Ed Lee of San Francisco has said, “The time for excuses, delays and bureaucracy is over” and issued the Executive Order embedded below. Are we going to wait until we’re another San Francisco? Or can we get this order issued here  in Seattle soon?


On the Radio: Weld, Spontaneous Order, Growth, and Journalism

Years ago, when I was running a City Council campaign, I arrived to the campaign headquarters to find the candidate with a draft letter to the editor. Some story in the paper was not to his liking, and he felt he needed to set the record straight. I told him that I was pleased he’d gotten his thoughts and emotions on paper. “Now,” I said, “You can crumple it up and throw it away.” After some back and forth he did. What I knew early on, almost by instinct, is the best way to keep a bad story going is to talk about it, and the worst way to get a good story is to argue with reporters. For the most part, the press really is trying to get the facts right and tell a story that is interesting to its audience. But the press, like the Mayor or City Council, is a powerful institution and can profoundly shape the public discourse on an issue. A recent story on KUOW was an example of reporting on growth that is factual, compelling, and helpful of the discourse.

I like Joshua McNichol’s story, The Man Who Steals Houses in Seattle, because it got the facts right about that challenge builders face with vacant buildings. It’s a subtle point, but one that, I think, comes through in the story: builders would rather have housing occupied than vacant. What makes this difficult is the regulatory regime at the City that drags out the permitting process and ties demolition to getting a building permit. When getting that permit is uncertain, demolition is uncertain too. Add to this the City’s unhelpful Tenant Relocation Assistance Ordinance (TRAO) which creates more hassle, paperwork, and uncertainty when notifying a tenant that their current residence is going to be demolished. The TRAO problem isn’t paying assistance to qualified tenants, it’s the chance that some hiccup in the process or an overzealous regulator will hang things up right at the time the bulldozers are ready to move.

Second, I appreciated the interesting confirmation of the beauty of market forces in the story. I’ve written about Friedrich Hayek before, and the story about Greg and his efforts to take advantage of vacant buildings for shelter is a classic example of what Hayek called “spontaneous order” and economist Adam Smith called the “invisible hand;” the tendency for people to spontaneously solve problems on their own without mandates or fiats from government. Greg even talks about what he’s doing, improving properties and keeping them organized and clean, as a kind of “invisible hand.” What Greg is doing is illegal, but he’s found the animating principle behind Weld Seattle, which is taking the notion of improvisational shelter legitimate. Weld is creating a housing option for people coming out of jail, setting the up with employment, and offering building owners waiting for demolition a solution for the hazards of having a building sit empty.

Finally, the story isn’t yet another “greedy developers empty housing that could be used by the homeless” story. In contrast, the story shows the complexity of the issue, with builders and developers wanting people in their buildings, people in the community jumping in on their own to repurpose buildings, the legal complexity of both, and the potential of a solution that is both legal and beneficial. This just hasn’t been the norm in reporting of growth in Seattle. Usually, the story is confirmatory about new housing to respond to growth being “a problem” or “an impact.” It’s not, it’s a benefit. However, there will be discomfort associated with it. Empty houses sitting that way for months or even years is one of them. It’s something we can solve together if everyone just stops and thinks for a while. If it Weld had not appeared as a solution when it did, I’m almost sure we would have had some legislation proposed by Council to force builders to house people in their vacant buildings.

When we talk about “the news,” we’re really talking about narrative, a story. Today, in our region and especially in Seattle, the story that is told is about someone making lots of money at our expense; building lots of new things to create jobs and housing for people not like us and coming from far away. Our lives, the story goes, is being made worse by all this turmoil and someone else needs to pay for it and it should slow down and stop. The press reenforces this story every single day in big and small ways. True, an old lady might lose the loading zone in front of her apartment building to a bike lane, but that’s part of bigger, positive shift toward supporting people who want to stop driving. But when the Seattle Times reported that story it focused on a sad picture of the lady and how she might be killed walking to the end of the block to get picked up by her family.

It takes a lot of work to change this mindset. Yes, being a boom town comes with some inconvenience and discomfort. Telling that story in a sympathetic way requires solutions like Weld so there is a story to tell, but it also means doing what I told my candidate years ago never to do: complain when stories are bad. But we also should heap praise when the press gets it right. We’re all in this together and there is a big difference between seeing the press as an enemy and seeing them as an important part of the solution. But if they don’t hear other voices how will they know when we think they’re doing a good job or a bad job? If they were going to tell the story differently we have to criticize when they get it wrong, offer alternative and factual story lines, and then be appreciative when they tell a better story.


Durkan’s Housing Plan is About More Money, Not More Housing

Jenny Durkan has a housing plan. While it touts microhousing as part of the solution and supports the notion of vouchers (just helping people with their rent now) as being more efficient that building $500,000 units in 5 years, it still is missing the fundamental point: we have a housing scarcity problem, not a public funding problem.

The weaknesses in the thinking behind this are likely because Durkan got very little input from market rate developers who build the bulk of housing in Seattle. The best place to look in this plan is in the “how” part, especially how it would be funded.

Here’s my quick reaction. First off, It’s silly to fund microhousing when you could just make it legal again. Durkan proposes building 1000 units of microhousing, but at the height of the microhousing the market produce twice that in a single year. Councilmember O’Brien’s legislation killed it off. Check out this graph from the smart guys at Sightline:

​The language in Durkan’s mircohousing proposal is muddy. Does she mean tiny homes for $10,000 as a temporary fix? Does she mean congregate microhousing? It’s not quite clear. But microhousing and concentration of homeless people in neighborhoods has been widely and deeply resisted. It’s hard to understand where she’ll get the political support for microhousing all by itself, but offering it as a permanent structure and an alternative to homeless camps? That’s sure to raise the angry neighbors ire.

More reaction to the funding portion.

  • Increasing the commercial linkage fee on city-owned land when disposed to the market.

This is inherently inflationary. If you want small local businesses to keep their locations, this is likely to add costs to their rents and to make moving and upgrading more difficult. Raising the price of commercial property will raise it’s rents. What “city-owned land” are you planning to sell? Any numbers behind this? Why wouldn’t the City simply build housing or do long term leases or other partnerships to utilize the land. Councilmemer Sawant proposed using City debt capacity to build on City owned land but that idea but it was rejected by the bureaucracy. Why not bring that idea back and fully study it.

  • Create a fee for landlord licenses. Seattle has a Rental Registration and Inspection Ordinance that requires landlords to register all rental housing units in Seattle, as well as pass a health and safety inspection. Jenny will ask for a reasonable fee of $100 associated with this license every five years.

Again, I’d like to see the numbers. It’s not a nominal charge if you are talking about a charge per unit. Again, this is inflationary and will add the rent burden already rising. Legally, it looks a lot like a tax and would be, therefore, illegal.

  • Medicaid waiver funds. Medicaid waiver funds can be spent on housing if it is a one-time cost. Jenny will work with the King County Accountable Communities of Health to advocate for part of this funding to pay for the micro-housing construction.

This is interesting but I doubt you’ll find a way to use Medicaid funding for capitol costs. Also, you’ll likely face opposition from the safety net providers who are very much depending on Medicaid funding for primary care services at a time when other federal funding is in jeopardy.

  • Jenny has said that she will use revenue from city income tax funding, which totals about $140 million per year, to lower regressive taxes and she intends to keep that promise. But given this emergency, she will also use a portion of that funding to pay for the rent voucher program.

This isn’t going to happen, period. Along with being unconstitutional, Cities simply can’t levy taxes — on anything — without legislative authorization. You should know that as an attorney.

Durkan’s plan has a lot of ways to spend money but very few that will actually result in more housing production. Helping pay people’s rent now, however, is a great way of efficiently helping people with a cost burden. We’d support looking more into that idea. Taxing rental housing will just raise rents and probably an illegal tax. We’re not getting an income tax without legislative approval, period.

Durkan should talk with people who produce housing across Seattle, not just non-profits who build under a regulatory regime that recklessly consumes scarce subsidies or by trying to squeeze money out of the production of market rate housing.

Sawant: Performance Artist, Not a Wonky Policymaker, and The Stranger Loves Her

Very few people in town have noticed the odd behavior of socialist Councilmember Kshama Sawant when it comes to the infeasible, inflationary, and illegal program of Mandatory Inclusionary Zoning (MIZ) being inflicted on the city through the so called Grand Bargain — the notion that we can make housing more affordable by taxing the production of it. On the pro-housing (“mostly,” he says) side only Michael Eliason, a local architect, has consistently challenged Sawant on her passive support of protecting single-family zoning on Twitter. I have noted that Sawant got bored with the idea of using the City’s bonding authority to build publicly owned housing on City owned land. When that idea was shot down by eye-rolling City staff, she shrugged and went to another rally. Now the champion of no-growth Seattle, John Fox, is calling out Sawant as well in a recent post about her lack of enthusiasm for the no or slow-growth agenda calling that lack of support a “gaping hole.” 

The post is worth considering because many who support growth and more housing have been frustrated by Sawant’s mostly successful efforts to complicate the lives of landlords and make rental housing more expensive. I say that because that’s all her measures have done. The first in time legislation she passed accomplishes nothing for people who have less money to spend on housing, all it does is create a new protected class: people who show up first. That group now gets the same protection from discrimination as people of color or born in other countries or people who are gay. It’s a nonsensical requirement that was all about Sawant appearing to lead an effort that would smash the corporate monster and help the little guy. It does neither, adding more hassle for land lords and renters and virtually assuring that the brogrammer who Sawant and her friends think are snatching apartments, is likely to win since he’s sure to get to an apartment first since he has a smart phone, a car, and software. The single mom who teaches preschool who shows up second? Too bad!

Now, the no and slow growth crowd is growing impatient with Sawant because she has seemed to all at once embrace protection of single-family zoning but also supported the real corporate rip off, MIZ.

Sawant and SA have avoided challenging the Mayor’s Housing Affordability and Livability Agenda (HALA). While calling for an increase in the mandatory housing requirement–the number of units developers must set aside as ‘affordable’–she’s nevertheless praised HALA’s city-wide upzones even though areas slated for the greatest increased density also contain the city’s highest number of minorities and low-income people.

Fox also complains that when she could have opposed the upzones, “Sawant purposely did not show up for committee discussions” and points out that her “new renter effort sidesteps these critical structural issues that get at the heart of inequality in Seattle, and thus diverts attention from necessarily addressing them.” He goes on to suggest that her theatrical efforts like first in time, “then arguably she and her movement are making the problem worse.”

Now, Fox is wrong about growth and confused about builders and developers. We had a long talk after our radio appearance and I explained most builders and developers in town are not demanding more zoning or more FAR. What they want is certainty and to be able to build what they are already legally permitted to. Just look back at Gary Cobb’s heartfelt cry about being slowly permitted out of business. Cobb doesn’t want goofy increments in height that cost more and come with a fee attached. He simply wants to be able to build what the code says he can, but he’s being blocked by rules and neighbor inspired hang ups in process that make even that impossible. Forget about upzones.

But what Fox gets right about Sawant is this:

Ironically, Sawant is catering to development interests she rhetorically disavows. It’s hypocritical and hurts most low-income and working people and especially communities of color.

True. The MIZ scheme will do nothing but cause market rate housing to climb in price, putting out of reach of more and more people and that squeeze is worst for people with less money who are disproportionately people of color.

And I think he also gets right why: The Stranger. Fox points out that The Stranger has swallowed the Grand Bargain whole and gone back for seconds, a fact I pointed out in their Regrets issue.

I regret The Stranger abandoned its usual skepticism for back-room deals in its reporting of the “Grand Bargain,” a scheme in which large downtown developers pay a fee but provide no on-site affordable housing. (Meanwhile, small-scale builders elsewhere have to produce 6,000 units with extra construction costs and rent restrictions that are not offset by the value of the Grand Bargain’s proposed upzones.)

I’d note that I have received zero calls from The Stranger’s news department to comment on the issue since that was published. I think I may have hurt their feelings. Sad!

But, over time, it’s becoming clear that Sawant is not a typical politician, not because she is a socialist, but because she doesn’t have a lot of interest in the nitty gritty details of policy. Neither do her colleagues when it comes down to it, but at least they make an effort to try and understand what they’re doing, even when specifically told that it won’t have the effect they think it will. Sawant, like Donald Trump, doesn’t make policy she gives performances. Once the rallies and speeches are done, the votes are taken, and she can hilariously call her colleagues corporate stooges (after they ALL vote for her legislation) then the episode is over, credits roll, and she moves on.

I can’t really explain The Stranger’s embrace of the deal struck between a few big time attorney’s and lobbyists for Vulcan, the Mayor, and the non-profit housing industry. Is it lack of curiosity? It’s hard to know. But The Stranger has a tremendous influence over a significant chuck of voters. As I pointed out, that influence caused, I think, Jenny Durkan to offer to pay for everyone’s college for two years. But when you put together Sawant’s general lack of interest in the details and her big time reliance on The Stranger to motivate votes, I think Fox more or less has spotted the signs and the symptoms and part of the cause.

Apparently, Sawant made a tactical decision not to tick off the well-heeled corporate-backed urbanists or the zealously pro-density Stranger and its readership, for fear of undercutting her reelection chances in her 3rd District. Doing so makes her look more like a typical Seattle politician than her actively cultivated persona as a principled advocate for racial and economic justice.

Yep. And oddly enough, what Vulcan and the Chamber of Commerce failed to do by throwing money at Sawant’s opponent in 2015, they have accomplished by getting The Stranger’s buy in to the Grand Bargain. Talk about strange bedfellows.

Tim Burgess: New Mayor Has Mixed Record on Housing

If you want to read a well written if really long article on our new Mayor, Tim Burgess, check out Hayat Norimine’s article on him, “Is Consensus Gone After Tim Burgess?” I’ve known Burgess for a decade. He spent a fair amount of time in the offices adjacent to the ones taken by The Great City Initiative run by Mike McGinn during the 2007 campaign. Burgess was at my wedding in 2009 at Saint Mark’s Cathedral, and I interviewed to be his legislative aid when my final stint with Councilmember Steinbrueck ended in 2007. We’ve had much correspondence over the years and as many agreements as disagreements. I believe that Burgess is a man who truly has dedicated himself to public service. However, I see him not so much as the conservative on the Council who graduated to Mayor but as the public servant transformed by his times.

I’ll never forget getting an e-mail in February in 2012 from Councilmember Burgess.

Hi, Roger. We haven’t spoken in a long time, but I just read your Publicola piece on election money. I think an equally significant factor is that people like you and others don’t affirm Council members when they do step out and lead on growth/density issues.

Where we’re you when I tried so hard last year to add just one more floor in Pioneer Square? We had the votes until the other side weighed in. When there was no counter argument offered my colleagues collapsed and I pulled back rather than suffer a defeat for the density position. Where we’re you when I led the Roosevelt effort which resulted in a strong win for concentrated density?

You and others need to point out the victories and those leading the way if you intend to strengthen the backbone of local officials. Make sense?

I responded.

C’mon Tim.

Really. Do you want me to go back and link to the several posts I did praising you?

Shall I go on. I am an admirer of your work on this issue. That I have not praised you lately is no indication of that admiration going away.

And if you feel lumped in I am sorry.

He wrote back soon after.

OK, you score one.  Of the three links you provided below I had only seen the one about Publicola’s winners and losers.  I just read the other two.  Thank you.

I guess I’m frustrated by the slowness of the massive land use bureaucracy which just keeps slogging away.  We may finally upzone North Beacon Hill in March or early February.  And I have failed again this year to persuade DPD to start corridor planning along Rainier Ave or Aurora; “we don’t have the funds for that.”

But I am working on getting an elementary school in South Lake Union as part of that upzone; schools being key place anchors.  Creating magnetic places is sooooo very important for all the reasons you know and I just wish we would get our butts in gear!  My apologies for pouting.

Later, on microhousing, I sat in the front row and gave dagger eyes to Burgess when he said something like, “some people say that what we’re passing will cause harm to microhousing. Those people would be wrong. This will help microhousing.” I was not happy, especially since a reporter showed me an email from Mayor Ed Murray threatening a veto because that’s exactly what the legislation would do. So I let the Councilmember know my thoughts.

Hi Tim,

I think in all my years (about 20 now) of watching politics and politicians talk about legislation they’ve passed, your statement at the end of the microhousing hearing last week is right at the top in terms of it’s studied denial of what you actually did.
It would have been one thing to have acknowledged that this legislation would change things, perhaps resulting in fewer units (which is what the Chair and your central staff would affirm), but quite another to bet even more of the Council’s credibility by saying, as you did, that this will “allow more.”
You said that you hoped that a there wouldn’t be “a few [that] characterize our actions as somehow limiting options” for housing. I think you know that this DOES exactly that. To state publicly the opposite is truly disappointing and I think doesn’t reflect well on you, your role as Council President, as an elected official, and frankly as a community leader.
We spent many hours explaining why this legislation limits options and choices not just for our members, but for future residents of our city. You weren’t listening. And to try to get in front of what is sure to be lots of criticism by many people, you attempt to inoculate yourself by simply denying the facts (and repeating over and over that “this is good legislation.”)
Apparently, however, one of the “few” you mentioned, is the Mayor. He obviously has been listening.
I’m actually embarrassed by the familiar tone. I never refer to elected officials by their first name. But I felt familiar enough with Burgess to convey that message to him using his first name. I shouldn’t have done that. But the Councilmember responded in a good natured but disdainful way.
Sorry, Roger, we disagree completely on this issue and I’m very comfortable with that. Remember last year, everyone told us that if we changed incentive zoning in SLU we would cripple development. Right.
I had to point out that..
Well, I don’t mind disagreement either. It’s at the heart of our process. But when you cite SLU and IZ the facts tell a different story.
“Given the historic low participation rate in IZ under its existing encumbrances, it would seem obvious that increasing the requirements for affordable housing will only tip the scales further toward non-participation, in which case zero affordable housing is produced. When the toll is raised, the gains made from the projects that still opt in to the Program will be offset by the increasing portion of projects that decline. And this inherent “diminishing returns” aspect of IZ is why it should never be expected to have a consequential impact on Seattle’s affordable housing needs.”
What I don’t feel comfortable with is ignoring the facts for political expediency.
Minimums sizes on micros, downzones of the low-rise capacity, and more and more fees won’t hurt profits –that’s not the point– it does hurt the person with less money to spend on housing because of each of things means higher rents and less supply and choice.
Perhaps you’ll take a different approach on the impact/linkage fee.
Glad to make our case there if we can.
I could go on. However, my point is that Burgess has always been engaged at the heart of housing issues and he has taken the time to respond to me honestly and seriously and with candor. He’s a good man and a worthy public servant who I believe takes his job very seriously.
But we’ve hardly seen eye to eye on housing. And I don’t think that he was as strong as he could and should have been in opposing — not just politely balancing — the wacky and out of sync performances of his colleague Councilmember Sawant. I know that I tried working with Sawant, offering to partner with her to push for edgy legislation to find a way to free up surplus City owned land to build housing. She listened, but it didn’t fit her narrative to work with a capitalist. And, in the end, I think she got bored of the wonkiness of the issue.
I can imagine the frustration Councilmember Burgess must have felt trying to deal with the emotional intensity of Sawant’s followers. But owed it to all of us people actually trying to make policy to do more. I feel like in the end, he was changed more by the tide than he shaped that tide. We needed consensus builders for more rational housing policy but it seemed like Burgess caved to many of the proposals offered by Sawant, even, at one point, passing a resolution in favor of rent control handing Sawant a victory.
I think Burgess was made for this moment, however. It’s almost as if this is his moment. I absolutely trust that he’ll put the city’s interests first, not his own legacy, during his 71 days as Mayor; and this I think will assure that he’ll legacy will end up being one of integrity and public service. I hope he doesn’t prove me wrong.