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The Affordable Housing Crisis
Housing policy has become yet another flashpoint in these highly polarized times. Much of the controversy swirls around President Donald Trump’s nomination of Ben Carson, a distinguished neurosurgeon, as Secretary of Housing and Urban Development. HUD operates a wide range of subsidized federal housing programs that impassioned critics of his nomination are sure Carson will dismember. His chief vice in their eyes is his lack of direct experience working in the housing area. In a real sense this is a mixed blessing. On the one hand, these programs must be managed—and, ideally, by someone competent and somewhat knowledgeable in the field. On the other, his greatest strength is that from an outside perspective he understands that many of these programs must be cut back or shut down. There is some overstatement in the charge that HUD is a socialist program. But there is much truth to the claim that many of its programs have seriously aggravated housing difficulties around the country, especially for the most vulnerable groups.
The key challenge is to choose the correct path for housing reform. Many of Carson’s critics think the proper line is to require new developments to save a proportion of units for low-income residents, which will ensure, they claim, “that economically diverse neighborhoods and housing affordability will be preserved for generations to come.” The implicit assumption behind this position is that government agents have enough information to organize complex social institutions, when in fact they are slow to respond to changes in market conditions and are often blissfully unaware of the many different strategies that are needed in different market settings. No one wants to say that governments should not lay out street grids and organize infrastructure. But they operate at a huge comparative disadvantage when it comes to real estate development on that public grid.
Far superior is an alternative view that I have long championed. The first thing to do is to abandon the assumption that there is a systematic market failure requiring government intervention. The second is to remove all barriers to entry in the housing markets, so that supply can increase and prices can fall. These barriers are numerous, and include an endless array of fees, taxes, and permits that grant vast discretionary authority to local officials. A removal of these burdens will allow us to harness the private knowledge of developers who will seek to work in those portions of the market that hold the greatest profit opportunities.
The critics often fear that developers will look to build only mansions and high-rise towers to satisfy the endless desires of the millionaire class. But that hyperbole ignores every relevant feature of an unregulated housing market. Most critically, as costs of housing construction and maintenance go down, developers are able to offer lower-priced units to people of more limited means. Prices are kept low by new entry across the full spectrum. Some developers will move quickly into the luxury market, but others, knowing of the potential glut, will move into other market niches in different neighborhoods where they can secure the highest rate of return. And once that is done, the expanded supply will provide more opportunities to lower-income tenants.
Yet as matters stand, there is good reason why developers gravitate to the higher end of today’s highly regulated market—because they cannot absorb the high fixed costs of planning, permitting, and construction for smaller projects. As demand surges in highly desirable supply contracts, the result is always the same. Equilibrium prices march steadily upward, leading local activists to cry for a new round of subsidies, restrictions, and reforms, all of which start the cycle over again.
One highly controversial program is Measure S, which is on the ballot in Los Angeles. As the Los Angeles Times—a fierce opponent of this ballot initiative—notes, “Measure S would impose a two-year moratorium on all real estate projects that require a General Plan amendment, zone change or increase in allowable height.” One LA project that would be forced to stop would house homeless veterans and other low-income folks. Nor should that consequence come as a surprise. The reference to amendments and zoning changes cuts far more deeply than it appears, because under modern land use law, modifications of existing ordinances, often called “contract zoning,” are routinely necessary to get a deal through. The way it works is the initial zoning laws are set in a highly restrictive fashion. The developer then has to come forward with a package of benefits for the community as a way to secure a more favorable zoning classification. By blocking renegotiations, Measure S freezes everything, virtually assuring a mass developer exit from the market. The preexisting process already is a huge deterrent to development, which started its relentless decline after the 1950s with the onset of strict zoning regulations.
The bad ideas for housing regulation do not end with blanket moratoria. Indeed, the most popular approach nationwide does not directly limit the amount of new housing that can be built. Instead, it embraces “inclusive zoning” in which the developer is forced to set aside some fraction of the total number of units as designated affordable housing units. As one might expect, the worse the underlying situation, the more stringent the matching requirements. Thus, this past December, Portland, Oregon, unanimously approved its “Historic Inclusionary Housing Program” that requires all developments of twenty or more units to designate 20 percent of these units as affordable. Look for a lot of 19 unit projects. Earlier in the summer of 2016, San Francisco, whose zany housing policies have no known limitations, raised the ante when its voters approved Proposition C. Prior to its adoption, developers had three options: Set aside 12 percent of units for affordable housing; build some units off-site; or contribute to an “in lieu” fund to enable the City to take on new projects. Proposition C raises the ante by insisting that the projects have 25 percent on-site housing; 33 percent off-site housing; or that their developers pay a commensurately higher fee.
This program is reasonable insofar as it imposes less stiff requirements for the on-site units than the off-site ones. These are usually more expensive to construct. And, ironically, they are less desirable to low-income tenants who cannot afford to live in high-price areas. It is just for that reason that a recent op-ed in the New York Times by financial journalist Eric Uhlfelder called for a “new fix” for affordable housing that requires the imposition of an annual luxury tax “on new high-end condos and rentals.” As Uhlfelder notes, this proposal essentially eliminates the difficulties of in-kind contributions. But it is hard to see why it should make a dent in the underlying supply problem. Generally speaking, the elimination of two options will not improve the position of the developers. Instead, it becomes absolutely critical to know which of these new construction projects will be covered by the luxury tax and which will not. If the line is announced in advance, a City will find itself in the odd position of insisting that new construction meets its parameters, as developers seek to gain permits under the radar. If the rate, moreover, is set incorrectly, the entire scheme could fail for want of takers, sending the city’s program back to square one.
One way to avoid this difficulty, now under active consideration in Los Angeles, is for developers to pay a so-called “linkage fee” on all new commercial and residential housing, which can then be used to remedy the chronic undersupply of affordable housing. The program here, however, could—in combination with the city’s new project moratoria—put all development into paralysis. One clear improvement over both the Uhlfelder and Los Angeles proposals is to sever the link between new affordable housing programs and any special tax on new real estate development, by funding all local affordable housing programs out of general revenues. That switch in emphasis means that a specific tax is less likely to wreck a specific segment of the housing industry. It will also provide a modest political check on the willingness of local governments to dedicate funds to affordable housing programs, given popular resistance to overall tax increases. That just might switch the political balance in favor of the liberalization of the notorious zoning codes that have stifled new construction in the first place.
But even these are really stopgap measures. All taxes deter development. Market liberalization increases it. Folks like Uhlfedler are explicit that they resort to these schemes because they expect a Trump administration to cut back on federal subsidies, which I regard as a welcome counterforce to unsound HUD programs. So it is back again to Ben Carson, whose real comparative advantage is that he has no historical connection with the dysfunctional public housing world. But Carson does grasp the dangers of “mandated social-engineering schemes,” and appreciates the risks of “unintended consequences” of various social interventions. Hopefully, when he takes over HUD, he will bring with him a broom that will sweep clean much of the detritus that currently exists.
As Carson has noted, one of his first targets will be the multiple Obama programs that grant HUD funds to affordable housing that is built in wealthier neighborhoods. Apart from the endless paperwork these “fair housing” programs require, they also depart from Uhlfelder’s observation that most local housing activists would prefer to use government grants to fix up housing in areas where low and moderate-income people actually choose to live. Any decision by Carson to scrap the rule would be a vast improvement for housing markets, as lower administrative costs would lead to higher levels of local development.
The so-called housing experts all sign on to the general mission of HUD to deal with the various ills of housing shortages, but none of them have the slightest interest in the market solutions that could improve the overall situation. To make the point more clearly, market solutions do not include letting developers steamroll small property owners through eminent domain abuse, or allowing local communities to pass restrictive zoning and permitting requirements that are intended to block low-income housing. Rather, the correct answer is to stop eminent domain abuse, to peel away layers of regulation, and to cut out the extensive network of government grants that impose strings on how housing can be built. Perhaps Carson does not know much about the current programs. But if he puts the necessary reforms in place, he will have no need to master the details of endless federal, state, and local regulations that have created the affordable housing crisis in the first place.
Published in Economics
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The last administration was the worst in history at interfacing with those who are trying to supply housing. Whatever comes of the Trump admin will be an improvement no matter how lousy it is.
My opinion is based on 2 patients of mine who own a 5000 person company that is in this business as their main purpose.
There are few things the Federal government has gotten more wrong than housing. Housing is among the most organic emergent things that happens to human developments. We zone, we restrict we subsidize, we craft, push and none of it, none of it is better than just leaving things alone. At the Federal level it is simply impossible. The feds should get out. Carson is a brain surgeon he may want to use a scalpel where a chain saw would better.
Zoning laws are probably the most restrictive followed by the building code. If you cannot use your land for what you want, it becomes useless. Zoning is segregation. Municipalities call it the “master plan”. You live here, work there, shop in the shopping district, etc. It is sterile planning, and compartmentalized living. The elites love it. They like to live in gated subdivisions next door and across the street from like minded and status neighbors. The step down subdivisions are for the working couple. The have a quarter acre lot with lower minimum s.f. requirements and roof pitches, and maybe they can have a shed out back and a swing set. The last is the older neighborhood, or the separate, non subdivision property. They are the freest and exhibit the most diversity.
Subdivisions are anti social creations. In a little town, you may still find a local doctor or dentist that lives next door to a working man, bowls or hunts with him, and is a friend, neighbor and doctor.
One thing I noticed while bicycling in Alabama, roughly in the Auburn-Wetumpka area, is that there is such a mix of types of houses next to each other along the same road – shacks alternating with more opulent homes. There were gated communities, too, which seemed to be quite uniform inside, but outside of those I had never seen such a mix elsewhere.
Democrats have a saying about it, though, about it representing a different type of racial segregation than we have in the north. I can’t remember quite how their saying goes, though.
This is an overstatement, don’t you think? When we live close together there are necessarily restrictions on what we use our land for, because the way one person uses his land limits what his neighbor can use his land for. Zoning doesn’t make land useless, though it does limit the uses.
There are degrees and types of zoning, though. I tend not to like zoning that is more like central planning, but not all zoning is like that.
I live on land that is zoned agricultural, where lots have 5-acre minimum sizes. There is quite a bit of latitude on what gets built on those lots, though if someone wants to run a business on his land, and it involves auto traffic, that requires a variance, which requires approval from neighbors. I haven’t heard that anyone chafes under this. I was willing to sign a petition when my neighbor wanted such a variance for his auto-body shop. It’s not close to my house, and is not a nuisance.
BTW, in land zoned residential in our township there is a big controversy involving backyard chickens. A pro-chicken Republican got elected supervisor on Trump’s coattails, and it’s not working out well. I have friends on both sides of the controversy.
You should write about this.
(Perhaps relatedly, my husband, in his childhood, knew a man elected to weed commissioner on the pro-weed ticket. Here “weed” does not mean marijuana.)
I have been thinking about writing an article about it. The only things that hold me back are a) general laziness and b) the fact that friends are involved. Because of the latter, I need to be careful about how I describe it.
Is pro-weed something like pro-chicken? Does it involve people who chafe under restrictions of what they can grow on their property?
Lightly fictionalize if you need to, to protect your friends – we’d rather have you write while protecting your friends than not. And take the time you need to be careful – chickens are a perennial topic.
I think running on the pro-weed ticket meant promising to cut the weed commissioner’s budget, and make fewer meddlesome inspections to check for weeds. Something like that.
Not really. Residential and commercial are very different. Closer proximity to others require some sort of consideration for your neighbor.
Where zoning is critical concerns business. The zoning review boards can be crap shoots. A friend of ours met with the city zoning planner and his assistant about opening a car lot on a piece of vacant land next to a commercial building he planned on buying. They were enthusiastic and said they saw no problem. After he bought it, and went for the formal review, everyone voted it down, including the two that told him there would be no problem. They said they don’t want another car lot in town. His property, as a business owner, is useless.
Subdivision covenants are a layer of zoning: s.f., roof pitch, no sheds, fences, swings, etc. Sub can veto the house you want to build, don’t like the looks.
Can’t build a garage bigger than your house in the area I live in. Can’t put up a pole barn on 40 acres. Can’t put a house trailer on 10 acres in a township of a few hundred people. Can’t leave your camper outside more than 2 weeks, even on the 10 acres in the rural area.
Ag is the best zoning in Michigan too. I’m guessing here the business property would have to be re-zoned or a non conforming use designation.
A lot of townships and small cities use consulting city planners in my area, and most of them have just about the same zoning regulations. I can just about guess the requirements from place to place. The garage issue rankles homeowners more than businesses. It used to be common that people in rural areas (up north) would buy land, put up a garage that they would stay in on weekends, and when they retired or could move, built the house. Can’t do that anymore.
Chickens reminds me of Tawas, Mi. They had a big issue over them a few years ago.