Affordable housing for the rich and the failure of zoning bonuses

In the past I have not been kind to affordable housing programs. I have a lot of deeper problems with them that I’ll get to in a minute, but I think the extraordinarily high upper income limits on some of the projects are indicative of the broader problem of the essentially arbitrary and random (literally – they’re usually decided by lottery!) nature in which they’re doled out. In a way, even when the beneficiaries are blatantly undeserving, everybody wins – politicians get votes, and affordable housing advocates get paid. Everybody, that is, except market-rate renters, but when’s the last time they ever voted somebody out of power for sabotaging their interests?

Even with an upper income limit of $192k for the affordable units, they still can't sell 'em

Anyway, your latest affordable housing outrage story comes from New York City (where else?) – specifically 138th Street in Harlem, where the 73 units at Beacon Towers are almost all under contract, and Curbed claims that most of the remaining units are income-restricted “up to $192,000″!!! Oh yeah, and they can’t even find enough people who qualify.

Which brings me to another point: the Beacon Towers are not towers, and are certainly not any kind of beacon. They’re eight stories tall, and considering we’re talking about new construction in Manhattan, I’m going to take a wild guess and say they built right up to the zoning envelope. The immediate neighborhood is a mix of turn-of-the-century five- and six-story walkups (but little in the way of even cornice lines), some post-war towers-in-a-park-style buildings that reach up to 15 (!!) stories, along with a smattering of parking lots and other woefully underused lots. As Robert Fogelson wrote in Downtown, the New Yorkers of 1900 fully expected that by 2000, the whole island of Manhattan would be a river-to-river block of commercial skyscrapers. Perhaps that was unrealistic even if there had been no zoning code, but I bet they’d be shocked to know that a hundred years into the future and we’re still building 8-story buildings in Manhattan.

To be sure, bad zoning laws and not affordable housing mandates are to blame for the fact that taller buildings aren’t allowed in America’s most desirable city. But wasn’t this something that affordable housing was supposed to alleviate? Urbanist boosters of the mandates often tout “density bonuses,” or allowing developers to build a little more in exchange for subsidized units, as a way of eking out a little more density from the zoning code. Clearly that didn’t work in this case.

In fact, back during the 2005 Chelsea rezoning, affordable housing advocates were actually successful in getting the district’s allowed density reduced, “in order to provide more incentives for developers to apply for higher density under the inclusionary housing program.” In other wards, completely subverting the original voluntary “density bonus” idea. I suppose it was inevitable – the “density bonus” concept was forged by planners as a way of achieving their goals by enlisting the support of affordable housing activists, but they failed to recognize that the whole scheme is really just an incentive for affordable housing activists to push for downzonings. After all, they are ideologically disinclined to trust in market mechanisms, and certainly don’t care about increasing the market-rate housing supply, which often comes in the form of new luxury construction.

Anyone else know of other instances of this happening? Is it systemic, or are most affordable housing advocates not that cynical? (…or do the zoning committees stop them?)

When “affordable housing” is just a random middle class housing subsidy

Affordable housing and inclusionary zoning are complicated subjects and it’s hard to sum up all my thoughts and objections to the schemes in one post, so I’m going to take the death-by-a-thousand-cuts approach. Today’s installment: income eligibility levels.

Now, the stated intent of affordable housing set-asides has always been a bit unclear to me. The cynic in me thinks it’s just a way for politicians to buy votes with public money by essentially randomly redistributing from the many (market-rate renters and buyers) to the few (the lucky handful to win the lotteries for coveted subsidized units). The stated motivation, though, seems to range anywhere from a combination of helping the poor find housing to having a little bit of housing diversity, even if that “diversity” means upper-middle class alongside upper class.

In my experience, though, the programs end up overwhelmingly fulfilling the latter goal. The latest example I’ve come upon, which doesn’t seem too out of the ordinary, is from a project called Tivoli Square in the Columbia Heights neighborhood of  DC, which looks like it’s associated with the big development corporation-driven DCUSA project (As an aside, DCUSA was basically a huge urban mall in what was an obviously gentrifying neighborhood. The city ended up spending a large amount of money on a parking garage that now mostly sits empty, and they’ve been having trouble renting the retail spaces set aside for local businesses. It’s also architecturally pretty ugly, and houses way more national chains than the rest of the neighborhood. Politicians hail it as a success, but in my opinion it’s the worst thing to happen to Columbia Heights since urban renewal.)

Anyway, the zipcode’s median household income in 2009 was $57,393, and the project had a 20% set-aside for some combination of low- and medium-income. The upper limit for “low income” ranges from $50,000 for a household of one to $71,450 for a household of four, and the upper limit for “medium income” ranges from $68,750 for a household of one to $98,250 for a household of four. Oh yeah, and those limits were from 2005 and are probably a few thousand dollars higher now. And on top of that, public employees, who have better-than-average job security, medical benefits, and retirement plans, often get first dibs (along with local residents) on these sorts of things.

I guess it could be worse – in New York City you can keep your rent-stabilized/controlled apartment until you make $175,000/year and the rent on your apartment reaches $2,000/month (that’s the reduced price, not the market one!). The State Assembly just passed a bill to extend the limits to $300,000/year and $3,000/month, which absolutely astounds me. The Republican-controlled Senate won’t let it go that far, but rumor is they’re willing to let it rise a bit in exchange for property tax caps in the suburbs and upstate.

A question for the blogosphere: How much affordable housing is enough?

The developer will be losing money on 540 out of 1,240 units in "Gotham West"

The developer will be losing money on 540 out of 1,240 units in "Gotham West"

Reading about a new ultra-luxury Far West Side rental project going up where over 40% of the apartments are going to have controlled rents (“affordable housing”), I’d like to pose a question to supporters of affordable housing mandates in the planning blogosphere (which includes pretty much the whole planning blogosphere): How high is too high?

I’d also be interested to know why exactly the developers included so much affordable housing. I’m pretty sure there’s no program that requires that much affordable housing (the 80/20 state program obviously only requires 20%), but I think commenter Alon Levy is probably right when he suggests that various subjective review processes pressure developers into including more subsidized units than the government officially asks for.

Tom Duane, a State Senator, has some testimony up on his website about the project that gives us a look into the mind of what seems to be a typical (at least for New York City) affordable housing-type NIMBY. Back in 2009, when he gave the testimony, the plan was for 50% of the 1,200 units to be kept at below-market rents “permanently,” but even that wasn’t enough for Duane. He was upset that “only” 40% of those units will have two or more bedrooms, and also wanted the amount of commercial space scaled back from two floors (i.e., an FAR of 2.0) to just one (1.0 FAR). Oh yeah, and he doesn’t like the 31-story tower and he wants the developer to really promise not to transfer the unused development rights elsewhere.

Obviously, I oppose setting aside this much of new developments for affordable housing. People tend to think of different segments of the real estate market as distinct – how on earth could limiting the number of rich people on Far West Side make prices rise in Bed-Stuy? – but they are inextricably linked. You might not shed a tear for the 20-something banker who won’t get his Hudson River view, but when he then decides to buy in, say, Brooklyn Heights, the higher housing prices are going to have a ripple effect throughout the borough, pushing the envelope of gentrification further and further, until finally the knock-on effects reach places that the Far West Side 2o-something banker who got priced out of the Far West Side would never dream of living.

I know most of the planning blogosphere disagrees with my analysis, so my challenge to you is this: How high can you go with affordable housing mandates until the effect they have on market-rate rentals is no longer worth it? Does this 40%+ project seem like too much to you, or do you think NYC should go even higher? And do you think the city should set a limit and stick with it, or is it right to let whoever reviews these projects to use their discretionary power to nudge developers into including more than is required by statute?

(Also interesting to note: The 10th Ave. & 41st St. 7 train stop nearby, which was cancelled, was estimated to cost $500 million. The net present value of the hit that the developers are taking on these of these subsidized units must be close to $1 million each. At 540 subsidized apartments, it seems that the money spent on affordable housing in this one project could have covered the entire cost of the extra station at 10th Ave., or at least a significant chunk of it.)

What favelas can teach us about America

Anthony Ling, an excellent Brazilian blogger who also happens to be an avowed market urbanism, gives us an interesting look at the politics and economics of low-income housing in Brazil:

In Brazil there is a vast regulation defining what are the minimum requirements to have a building approved by local authorities. The most common example is probably the Building Codes set by each city, but specific details imposed by planning, environmental and building departments of each city are added to the equation. The recently created Performance Standard also follows this same path, being enforced nationally.

The explanation given to establish this regulation is the legal guarantee that every citizen will have a minimum quality of living. However, those who study public policy understand that the passing of a law does not miraculously create high standard buildings accessible to all and, like many other laws, produces effects opposite to those desired. The lower standard building prohibition does just that: tough regulation prevents entrepreneurs from building accessible housing for the poor. This results in government spreading the idea that entrepreneurs think only about attending the high class, and transforms itself as the hero that will build millions of popular houses, as [Brazilian Pres. Dilma Rousseff] did with the Minha Casa, Minha Vida [My House, My Life] program.

I think this has a very close parallel in modern American cities with inclusionary zoning and affordable housing mandates. In Brazil, the government creates a housing shortage by having unrealistical building safety standards (which ironically, as Anthony explains, encourage slums that are completely unregulated) and then swoops in and acts plays the savior with its own housing projects. In America, the government creates the shortage through sprawl-forcing zoning codes.

But unlike Brazil’s public housing, our politicians instead use rent control (rebranded as “inclusionary zoning” or “affordable housing”) to supposedly bring down the high prices that they unknowingly created. This is great for the lucky few who manage to get apartments (often middle-class public employees), but it acts as a further constraint on supply for the vast majority of renters and homebuyers, who have to buy market-rate housing, and sends prices even higher. The voters, who are just as economically illiterate as their elected representatives, then clamor for even more affordable housing, and the cycle repeats itself, resulting in ever higher housing prices.

The American planning profession has mostly learned its lesson about parking minimums and low-density zoning (at least in theory), but they remain stubbornly in favor of the density taxes known as affordable housing. Come to think of it, I can’t think of any progressive urbanists who have come out against inclusionary zoning and affordable housing mandates (with the exception of Matt Yglesias). Can you?

If it moves, tax it; if it keeps moving, regulate it; if it dies…

I apologize for the lack of posts for the last few days – I just moved to DC (a few blocks north of H Street, right by Gallaudet, if anyone’s curious), and I have yet to begin another rewarding relationship with Comcast. But, I’m here at work (I started interning at Reason magazine today), and I’ve got some free time, so I wanted to post this excerpt from Fogelson’s Downtown (I’m almost done!) that illustrates perfectly the shift from the second to last phase of Reagan’s joke about government, as applied to housing policy:

If neither public authority nor private enterprise could overcome the obstacles to urban redevelopment on its own, perhaps they could overcome them by working together. Or so the downtown business interests and their allies hoped. The trouble was that public authority and private enterprise were not used to working together. Through the mid nineteenth century public authority had routinely joined forces with private enterprise to stimulate economic development. But later this practice gave way to what might be called, for lack of a better term, an adversarial arrangement. Under this arrangement, public authorities granted private companies a franchise to build and operate the street railways, gas systems, and other public utilities other than the waterworks. They also regulated these companies. Under the watchful eyes of the courts and state legislatures, public authorities regulated the building industry as well. They established fire zones, drafted building codes, imposed height limits, and formulated zoning regulations. They also granted building permits – and, at least in theory, inspected everything from elevators to fire escapes.

This adversarial arrangement was the subject of a nationwide debate in the early twentieth century. Some Americans attacked it as one of the principal sources of corruption in cities. Others defended it as the most efficient way to promote private initiative and still protect the public interest. On one point, however, both sides agreed – this arrangement was only workable if private enterprise was eager to take on the project. But after World War I private enterprise had virtually no interest in building low-income housing, at least not under the existing building codes and other regulations that, in the eyes of the builders, made it all but impossible to earn even a modest return on capital. And by the late 1930s private enterprise had little or no interest in building anything, not even high- and middle-income housing, in blighted areas. What discouraged buildings, Alfred Bettman told a Senate committee, was blight, a disease that is “something less visible, more subtle, deeper, than the mere age or structural obsolescence of the existing buildings,” a disease so insidious that it does not respond to conventional remedies, a disease that is rapidly spreading all over the country.

Given these circumstances, advocates of urban redevelopment concluded that the adversarial arrangement would have to be abandoned. What sense did it make to follow a regulatory approach if there was nothing to regulate? Instead of imposing regulations, local officials should offer inducements. One was to give urban redevelopment projects a long-term partial exemption from property taxes. Another was to use eminent domain to make it easier and less expensive to assemble large parcels of real estate. Both inducements were discussed in many cities; and in some they were made available. But with a few exceptions – the most conspicuous of which was Stuyvesant Town, a middle-income housing project built by the Metropolitan Life Insurance Company on eighteen square blocks of lower Manhattan – they did little to encourage private enterprise to rebuild the slums and blighted areas.

New Years link list

Behold, your first link list of 2011!

1. The automobile may officially in decline (very good article!).

2. Interesting parallels between China and its HSR intellectual property disputes and post-WWII Japan and Korea. More here.

3. Fred Barnes writes a stupid article for the Weekly Standard (“The road to hell is paved with bike baths”), and Jarrett Walker responds with a treatise on “coercion” (“We are the libertarians!”).

4. I forget that although rent control has been thoroughly discredited in the real world, NYC developers are still grappling with it. Vornado and another developer had to shell out tens of millions to break the rent control grip on a Central Park South building they bought, with 15 rent controlled tenants receiving payouts of around $1.5 million each.

5. Vancouver is loosening its grip on the street food market, while Stephen Goldberg is trying to create a one-stop shop for getting NYC restaurant permits/licenses/certificates/inspections.

6. The market-defying schemes that liberals come up with would be amusing if they weren’t so horrifying. Read here as they puzzle over why excess luxury condos built in NYC during the boom couldn’t easily be used as affordable housing (Vancouver redux), and watch out for the part on the third page where an organization called “Right to the City” advocates “using eminent domain to seize vacant residential buildings and turn them into affordable housing.”

7. Niagara Falls’ decades-long megaproject failures. The article ends on a positive note, citing federal money for a new train station and grants for a wine bar and a concert hall, but I wonder if anyone in Niagara Falls ever bothered trying to loosen up the parking restrictions and maybe upzone a few blocks.

Why I don’t like inclusionary zoning

Inclusionary zoning is a hot item among urban planners today, and is often seen as a solution to residential segregation and high housing costs. Exact implementations vary, but the general idea is that developers of multiunit housing projects are encouraged to set aside a certain percentage of their units, generally raging from 10-30%, but sometimes even more, as “affordable housing” units. In other words, some proportion of the units are under rent controls to the point where they must be rented (or sold) at a loss by the developer. Sometimes the schemes are voluntary and give developers density bonuses, sometimes developers can pay a fee instead of setting aside units. The exact proportion of units that must be set aside and loss developers take on each unit also varies. As you can imagine, I’m not in favor of this system, but it’s a complicated issue, so this is going to be a long article.

Inclusionary zoning is a relatively new concept, first implemented in the 1970s, to combat the growing problem of residential segregation of classes and races, whose origins are interesting and, I think, germane to the conversation. I generally see two explanations given by proponents of IZ for why segregation and unaffordability arose in the first place: market forces and zoning (or, as they call it, exclusionary zoning). Quoteth a law review article:

Affordable housing has always been a problem in the United States. Cities and towns originally engaged in forms of discrimination through exclusionary zoning to exclude low-income residents.

Of course, this is only true if your history begins in 1930. But from the mid-18th century to the turn of the century, America underwent a tremendous urban population boom fueled by railed transit and a massive immigration wave from Europe, and the housing stock adjusted just fine – there was no affordable housing problem. On the zoning front, as well, the author is wrong: aside from the regulation of mass transit, there were very few zoning limits before New York City’s 1916 code.

While proponents are right that traditional zoning is indeed “exclusionary,” the name “inclusionary” always struck me as a little funny – you’d think the opposite of zoning out poor people through density requirements would be not zoning out poor people through density requirements, but instead IZ is essentially a form of rent control. Rent control proper acquired a nasty reputation, and deservedly so – economists, regardless of their political persuasion, are united in their opposition in a way that you rarely see. But unlike traditional rent controls, inclusionary zoning is only applied to a portion of the units, and therefore isn’t as much of a burden on landlords. Furthermore, because the landlord still has some tenants paying market rents, they may have less of an incentive to let their buildings degrade to the point of literal collapse.

Proponents claim that inclusionary zoning an effective way to create affordable housing and income/racial diversity in otherwise segregated neighborhoods, but I see many negative unintended consequences. The fundamental problem that I see is that while it definitely benefits those who are lucky enough to get affordable units (i.e., those with the most experience with the welfare state, who know how to work the system), it has negative net consequences for every single other person in the housing market.

The negative effects on fellow building dwellers are obvious: they will have to be charged higher rents in order to compensate for the loss that developers will almost surely be taking a loss on the affordable units. While they theoretically could just forgo profits and break even, mandates are only implemented in high-cost markets in the first place, where 30% of the median income (or lower) is almost never enough to cover the expenses of even a unit with cheaper appliances and internal finishes. But new construction is almost always built for the rich, so people have a hard time sympathizing – although this is a mistake, considering the ripple effect on prices throughout the metro area.

I think this concept of new construction vs. existing stock is worth dwelling on for a moment. One of the tenets of inclusionary zoning is that affordable housing should be “built.” But this is actually a pretty big departure from how housing for the poor has traditionally been done in America; as commenter jrab once put it, “Apparently rich people’s old housing is no longer good enough for poor people.” Which brings me to perhaps the most important point when it comes to rich people’s housing: it has enormous knock-on effects for the poor. Someone who can’t afford real estate in Manhattan is going to go to Brooklyn in search of new neighborhoods to gentrify, which will ultimately raise prices for the middle and lower classes. Expanding housing options for the wealthy brings benefits to middle class and poor renters and buyers in the form of less competition for market rate housing, which is where the vast majority of them will be living.

There is one possible exception to all this, and that’s when inclusionary zoning is voluntary and accompanied by density bonuses. In this case, the alternative is that the extra density simply doesn’t happen. But even here, there are caveats. For one, the long-term alternative is rarely no development at all. The affordability issue eventually became so much of a problem in Pennsylvania that the courts eventually forced municipalities to upzone for density – something I will contrast to New Jersey later on, when I discuss empirical evidence. Furthermore, while IZ may originally be intended as only a “bonus,” it quickly becomes the norm, and no upzoning is allowed without it. The DC area Coalition for Smarter Growth, for example, has called for IZ in a GGW article in an area where the alternative was upzoning without the IZ requirements – clearly there are many who are interested in IZ as an end in and of itself and not just a politically palatable way to increase density. And in fact inclusionary zoning is itself sometimes a barrier to community support for dense development, as wealthy white neighborhoods rebel against the idea of poor people in their midst – a problem that AvalonBay, which specializes in dense development in hard-to-enter housing markets, faced on Long Island. If IZ were only used to push through density that wouldn’t otherwise happen, I might not be so hostile to it, but that rarely seems to be the case.

In the end, though, a priori and theoretical arguments can only get you so far, and you have to look at the empirical data. Unfortunately, statistical analysis is very difficult given the confounding factors. For one, places that implement IZ policies are disproportionately wealthy and desirable and already have very stringent land use restrictions – affordable housing mandates don’t happen in isolation. Furthermore, they vary widely in scope. Plagued with statistical insignificance, these econometric analyses are not definitive either way, but here’s a sample of a few published recently:

  • Bento, et al.’s 2009 analysis found that California cities with IZ shifted the proportion of units in favor of multifamily units, but it appears that California jurisdictions place a bigger IZ burden on developers of single family units, which is the opposite of what I usually see throughout the US. They found little evidence that housing starts were affected, but they did find that developers were passing costs onto consumers in the form of higher housing costs. The authors note, though, that the study was conducted during the housing boom, which could explain why housing starts were not affected.
  • Schuetz, et al.’s 2010 analysis found that suburban Boston experienced higher housing prices and fewer starts as a result of IZ during times of appreciation, whereas the San Francisco metro area experienced higher prices but not fewer starts during appreciation and lower prices during “cooler regional markets.” Magnifying booms and busts doesn’t sound good to me. The authors also note the prevalence of “de facto” programs – which I assume are similar to how NYC and Vancouver squeeze developers in an ad hoc way for concessions and amenities – which can complicate analyses.
  • Another paper by Shuetz, et al., published 2009, discusses the variation in IZ policies, and points out that Washington, DC exempts small projects and those in low-density areas. This means that buildings of expensive homes in ritzy, suburban-like neighborhoods in NW are not subject to the same kinds of costs that dense multifamily structures are.
  • Mukhija, et al. (2010) find that IZ works to a modest extent in providing affordable housing, without negative effects on the supply of market-rate housing. They come out strongly in favor of mandatory programs with density bonuses, but recognize that the bonuses are often unpopular with current residents. Like all other authors, they lament the poor quality of data available for analysis.

Ultimately, though, all of these studies suffer from the issue of finding good controls. I have, however, found one “natural experiment” that I believe overcomes this issue quite well: the case of the Pennsylvania and New Jersey suburbs of Philadelphia. The Philly metro area spans both states, and indeed in 1970 both had housing stocks that were very similar in terms of the mix of single-family and multifamily units. But the two states’ supreme courts took very different approaches to the issue of the dearth of affordable housing. New Jersey adopted a mandatory inclusionary zoning program through the Mount Laurel doctrine, whereas Pennsylvania gave developers what’s known as the “builder’s remedy” – essentially allowing them to override anti-density zoning regulations, but without the affordable housing mandates and subsidies of IZ (which reminds me – inclusionary zoning, on top of all its market impacts, often costs the government money). The two systems were compared in a 2004 paper by James Mitchell which is summarized in Jonathan Levine’s excellent Zoned Out, but here’s the abstract of the original article:

The municipal zoning process in the United States has come under increasing attack as a tool to create and maintain suburban socioeconomic homogeneity by mandating sprawl-producing single-family detached houses at the expense of less costly townhouses, apartments, and mobile homes. Beginning in the 1970s, the Supreme Courts of the neighboring states of Pennsylvania and New Jersey addressed municipal exclusionary zoning in different ways: Pennsylvania empowered residential developers to compel municipalities practicing exclusionary zoning to authorize market-rate development of all types of housing, while developer empowerment in New Jersey was conditioned upon inclusion of low- and moderate-income units. Using aerial survey and housing census data over a 20-year period, this article finds that outcomes by housing type over a 20-year period in Pennsylvania municipalities around Philadelphia were more diverse than those in adjacent New Jersey municipalities.

The fact that the result confirms my viewpoint may have biased me into thinking that the experiment is better than it is, so I encourage any pro-IZ people who think they’ve found better evidence to prove me wrong.

Finally, I’d like to point out that discussion of “inclusionary zoning” and “affordable housing” suffers from serious framing problems. Like “compassionate conservatism” and “enhanced interrogation techniques,” it’s hard to argue against something with such a nice-sounding name. Sometimes the language and idea of affordability and inclusion is even co-opted by developers using politics to argue for their harebrained eminent domain and massive public subsidy schemes – Atlantic Yards developer Bruce Ratner won ACORN’s support for the project by giving them millions and the right to manage the affordable housing units that were to be constructed.

Anyway, I apologize for the length of this post and the lack of editing and clear organization – inclusionary zoning is a beast of an issue, and I figured it was more important to put my thoughts in writing rather than to wait until I found a manageable way to deal with the topic without just writing whatever came to mind. But, there you have it – this is why I don’t like inclusionary zoning.