How “inclusionary” are market-rate rentals?

In metropolitan Baltimore, a family of four making $73,000 in 2024 qualifies for 60% AMI affordable housing, where it would pay $1,825 per month for rent, utilities included. A third of new market-rate three-bedroom units in Baltimore are rented at around that level.
Baltimore is typical, as it turns out. In most U.S. metro areas, a substantial share of rentals constructed since 2010 were, in 2021 and 2022, affordable at 60% of AMI… You can also check out maps showing rentals affordable at 80% and 120% of AMI.

The ACS data don’t let me distinguish market-rate from subsidized rentals, so these include LIHTC and other subsidized rentals. Those, however, can’t explain away the core result, and the data don’t show the bifurcated market that some people imagine, with a huge gap between market and deed-restricted rents.

The post Market Affordable appeared first on Market Urbanism.

First, government raises the cost of housing through a wide variety of regulations- some justified (e.g. building codes necessary for safety), some not-so-justified (e.g. exclusionary zoning).   These regulations, by raising the cost of housing, effectively take money from all households.  And because these restrictions aren’t based on ability to pay, they are especially painful for low-income households.  Public housing and similar programs, rather than being a subsidy to the undeserving poor, are merely compensation for this act of plunder.

Second, even if the United States abolished zoning tomorrow, it might take decades for housing supply to increase enough to bring rents down.  So in the interim, lower-income households would still be suffering from the effects of zoning, and would deserve compensation just as much as they do under the status quo.

Third, even if the United States abolished zoning and similar restrictions tomorrow, public health and safety might support certain restrictions that nevertheless increase the cost of housing- for example, some basic safety protections in building codes.  It seems to me that as a matter of justice, government should not be forcing people into homelessness,  so government should subsidize housing in order to make up for the costs imposed by even the most legitimate regulations.

Finally, even if there were no housing-related regulations at all, the cost of land would create a floor under housing costs, which means some people would be homeless without government support.   So if homelessness creates harmful social externalities of any kind, you might want social policies that prevent such homelessness.

The post Two cheers for subsidized housing appeared first on Market Urbanism.

One long-forgotten housing option is residential hotels; a century ago, most renters lived in hotels and shared space with short-term tenants.  I just read a book, Living Downtown, about the rise and fall of residential hotels.  Rather than discuss them in detail I refer you to my amazon.com review.

But here are two general thoughts:

1. one reason Airbnb has been controversial is because it mixes long-term and short-term tenants.  But in the first half of the 20th century this was a common mixture.
2. Until the 1920s, residential hotels were so unregulated that they included a wide range of places, from luxury hotels to vile flophouses where there was not even a mattress to sleep on.  But this mixture allowed even tramps to avoid sleeping on streets as they do now.

The post Living Downtown: A Great Book for Market Urbanists appeared first on Market Urbanism.

During his last days in office, former Representative Jason Chaffetz must have forgotten he is supposed to be a fiscal conservative. His recent comments that members of Congress need $2,500 stipends to afford housing in DC reflect a complete ignorance of both the reasons for high housing prices and the best ways to lower those prices. Instead of treating the symptoms of skyrocketing housing prices, policymakers should be striking at the root: rent control, height limits, and burdensome zoning restrictions that discourage development.

All of this turns on basic economics. Markets drive prices of goods and services down, but only if they are competitive. In many cases, existing interests try to prevent others from entering markets in order to protect their own bottom lines. Zoning regulations are often manipulated by interest groups, who hope to limit the allowed uses of land within a city and prevent future developments. Zoning essentially fixes the amount of available housing by discouraging developers from building more housing, ultimately driving housing prices up.

Academic research places much of the blame for high housing costs on zoning––and this isn’t just limited to a single city or state. Edward Glaeser and Raven Saks of Harvard and Joseph Gyourko of the University of Pennsylvania examined Manhattan’s housing market estimate that new construction costs for housing are only about $300 per square foot, but that square foot tends to be rented out for $600, twice the cost at construction. Glaeser, Gyourko, and Saks write, quite intuitively, that “this would seem to offer an irresistible opportunity for developers.” But it’s zoning regulations that prevent developers from coming in to build more homes (which ultimately lowers housing prices), despite market incentives. Even though there is a deafening clamor for more housing, as evidenced by rising prices, building takes so long in many big cities like DC, San Francisco, and New York, so prices simply continue to balloon.

The ramifications of high housing prices hit the entire economy. A paper released in May by Chang-Tai Hsieh and Enrico Moretti, two economists with the National Bureau of Economic Research, concludes that housing constraints like zoning have lowered aggregate economic growth by at least 50 percent from 1964 to 2009. By making it more difficult to move resources like labor between cities, zoning hurts the United States’s competitiveness in a major way.

High housing costs hurt everyone, but they actually hit those in need the hardest. Researchers at the Mercatus Center have documented how onerous zoning laws hurt the poor, who spend relatively more on housing than richer households. These regressive rules also follow the trend of most regulations and primarily reflect the preferences of high-income people, since they have the time and resources to play a part in crafting the laws. Economist Diana Thomas notes that this is how regulation redistributes wealth from lower-income to higher-income households. Many people, on both sides of the aisle, are unaware that zoning laws play such a role in keeping families entrenched in poverty.

Rent control, which attempts to provide affordable housing to the poor by limiting how much can be charged for rent, isn’t helping either. Rent control is common, despite a clear consensus among economists that it does not help provide affordable housing. In a 2012 poll of some of the most respected economists in the US 81 percent disagreed or disagreed strongly that rent control, “had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.” To add perspective to the statistic, no one strongly agreed and only two percent agreed, and the rest either had no opinion or were uncertain.

Price caps like rent control generally lead to shortages and rarely help those they are meant to. In this case, it makes investing in housing unattractive for developers because they can’t expect to recoup the costs of building. This creates a shortage of housing and ensures prices never fall. Worse still, research shows that rent control not only deters building projects, but also discourages landowners from investing in home maintenance. The decision facing landlords is simple: if a nicer home or apartment can’t be used to attract higher rent, why spend time repairing the units? This problem is compounded by the lack of alternatives for renters – with nowhere else to go, they have to settle for poorly-maintained apartments and lower standards of living.

Perhaps the main limit on housing supply in DC is the height limits imposed by Congress in 1910. Building heights allowed in DC are based on the widths of the street they are on with the highest cap only allowing buildings to be 160 feet tall. DC is a growing hub for professionals and as more people try to enter the city, they bid up housing prices. As the New York Times reported in June, even those with large budgets are struggling to find homes. Real estate prices for the average house in Washington has ballooned 40 percent since 2009.

It’s not just housing prices, but hotels that are more expensive in DC than the average city. Scott Beyer, a writer specializing in city planning and land use issues, reported in 2016 that the nightly hotel room rate in DC is more than twice that of other cities. All this, Beyer notes, is largely rooted in the height restrictions created by Congress.

DC’s height restriction is meant to protect the character of the city, but there are areas available for development that would not detract from the city’s personality. It’s certainly true that having a New York City-esque concrete jungle lining the National Mall would not be ideal. Beyer, for example, notes there are many areas south of the Mall that might benefit from height limit changes.

Access to affordable housing in cities is crucial for the poor. Since urban areas usually contain the best and highest paying jobs, having access to cities means having access to the means to improve their own lives. That’s part of the reason comments like Chaffetz’s should induce a collective eye roll. It’s simply not good policy to subsidize housing for the rich and connected when the poor face steep housing prices. This is especially true because the root of the problem is something Congress can fix itself, unlike most zoning problems. Efforts should be made to liberalize zoning regulations, reform DC’s draconian height restriction, and cut back rent controls so developers have the ability––and the incentive––to build additional housing.

Josh T. Smith is a Master’s student in economics at Utah State University and works as a policy analyst for Strata, a public policy research center based in Logan, Utah.

The post Congressional Housing Subsidies Won’t Lower DC Housing Prices, But Liberalizing Zoning Will appeared first on Market Urbanism.

flickr image via bobjagendorf

This post was originally published at mises.org and reposted under a creative commons license.

It’s no secret that in coastal cities — plus some interior cities like Denver — rents and home prices are up significantly since 2009. In many areas, prices are above what they were at the peak of the last housing bubble. Year-over-year rent growth hits more than 10 percent in some places, while wages, needless to say, are hardly growing so fast.

Lower-income workers and younger workers are the ones hit the hardest. As a result of high housing costs, many so-called millennials are electing to simply live with their parents, and one Los Angeles study concluded that 42 percent of so-called millennials are living with their parents. Numbers were similar among metros in the northeast United States, as well.

Why Housing Costs Are So High?

It’s impossible to say that any one reason is responsible for most or all of the relentless rising in home prices and rents in many areas.

Certainly, a major factor behind growth in home prices is asset price inflation fueled by inflationary monetary policy. As the money supply increases, certain assets will see increased demand among those who benefit from money-supply growth. These inflationary policies reward those who already own assets (i.e., current homeowners) at the expense of first-time homebuyers and renters who are locked out of homeownership by home price inflation. Not surprisingly, we’ve seen the homeownership rate fall to 50-year lows in recent years. 

But there is also a much more basic reason for rising housing prices: there’s not enough supply where it’s needed most.

Much of the time, high housing costs come down to a very simple equation: rising demand coupled with stagnant supply leads to higher prices. In other words, if the population (and household formation) is growing quickly, then the housing supply must also grow quickly — or rents will rise.

Moreover, where the housing gets built is a key factor. We cannot speak of housing supply for an entire metropolitan area. Metro areas are composed of a wide variety of employment centers and neighborhoods. The mix of employers and workers varies from place to place depending on tolerable commute times, local industries, and geography.

In an unhampered market, of course, as rents rise, housing developers will respond by building more housing where it’s needed most — and thus potential prices are highest. Rents will then fall in those areas and developers will stop building housing — or build in other places — until rents rise again. Or, in response to rising rents, current homeowners will turn their homes into boarding houses. Others may build so-called mother-in-law suites over their garages. The number of ways to expand housing is actually quite long.

But, as everyone who’s ever tried to do any of these things knows, we most certainly do not live in an unhampered market. In fact, the production of housing is one of the most regulated and micro-managed industries in the industrialized world.

City planners control what sort of housing can be built — and where — through zoning and land-use laws. These central planners tell us where housing must be single-family or multi-family. They tell us if you’re allowed to rent out one of your bedrooms to a non-relative. They tell us if you can build an auxiliary housing unit on your property.

With so much government planning at work, the effect has been rising home prices and a higher cost of living. And again, those who suffer the most tend to be those with the lowest incomes.

This is then made even worse by “urban renewal” schemes in which privately owned low-cost housing is bulldozed by governments to make room for trendy shopping districts or for government-owned or subsidized housing.

The Rise of Zoning and Land-Use Laws

Prior to the rise of widespread zoning laws — which became especially popular after the Second World War — housing production was far more responsive to market demand. In areas where there was a housing shortage, many families rented out rooms to what was a booming industry of boarding houses in the nineteenth century and early twentieth century. Residential hotels were popular among the elderly and those living alone.

Over the past 100 years or so, thanks in part to control-freak Progressives who demanded “communistic” boarding houses be shut down, cities began to take over as planners who decided what sort of housing people were allowed to live in.

Over time, this newfangled method of central planning has become immensely popular, and we can no longer say that city planners and local governments are forcing their vision on a disgruntled and resistant public.

Government Controls on Housing Are Very Popular

Indeed, in many areas, it is the private-sector homeowners who most demand that every new townhouse, every new apartment building, and every new storefront be controlled, evaluated, and ultimately controlled by government bureaucrats.

Modern outer suburbs in most metro areas are notable for extremely detailed zoning. But even in traditionally more laissez faire inner areas (laissez-faire in terms of zoning) communities have been moving toward even more stringent zoning laws to prevent diversity and decentralization in land use.

We’ve all seen it at work over and over again in many of these older inner suburbs: A landowner realizes the housing demand has increased in the area and attempts to put a four-unit building where a single-family home once stood.

Naturally, this change will create more housing, bring down rents, and, of course, allow a private-property owner to exercise his rights as an owner.

But, in many cases, the private-property owner quickly finds he has no such rights.

The neighbors, who don’t want to live near a row of townhouses or have more cars parked on the street will protest to the city government, demand a zoning hearing, and fight to ensure that only a single-family unit is allowed on the lot. In many cases, they’ll use the increasingly-popular tactic of “downzoning” in which people who earlier bought property with the hope of developing it later will be robbed of their property rights. They’ll be told: “sorry, that thing we once said you could do with your property — you can’t do that anymore.” This is done so that the community’s other residents can maintain the status quo in that neighborhood until the end of time.

At the same time, employment continues to expand in nearby commercial areas, so employees — instead of living in inner suburbs — must move further and further outside the urban area and commute on taxpayer-funded roads.

Nor is this problem limited to what many view as primarily residential areas. Even on major thoroughfares, nearby residents will protest new apartment buildings because they are believed to be unsightly, or will create more local traffic, are are simply something different they don’t like.

The “solution” in this case is to shift traffic somewhere else — to the suburban freeways, for example — and shift the cost to statewide taxpayers who now must foot the bill for extending infrastructure ever further outward.

In all these cases, one group of voters uses the power of government to force costs onto some other group of voters in some other area — and onto the workers who must live further and further from employment. This is all done to save the “character” of the neighborhood. But it’s really done because many homeowners have no qualms about using the power of the state to prevent other property owners from using their own property as they see fit.

The Band-Aid: Subsidized Housing and Inclusionary Zoning

Often, many residents who fight tooth and nail to prevent any increases in housing density or creation of more housing are the same people who say that “something must be done” to make housing more affordable.

Having caused the shortage of housing in places where people actually want to live, our “progressive” advocate for low density and exclusionary zoning may then attempt to sooth his conscience by advocating for a small number of subsidized housing units nearby. Or, he may demand “inclusionary zoning” which mandates that developers set aside a certain percentage of all new units as “affordable” units with legally-imposed limits on how high prices can go.

This, of course, does precious little to solve the problem. The subsidized units that get built are usually very small in number, and only get built after years of winding their way through the zoning and approval process. The inclusionary zoning tactic is even worse because the mandate for low-rent units discourage developers from building anything at all in that jurisdiction.

Thus, new production of housing continues to fall behind regional population growth, and rents and home prices continue to rise.

We Need More Housing of All Types

The solution to this is more housing. Not more “affordable” housing and not necessarily more “high density” housing. Housing, after all, is extremely heterogeneous. Indeed, two identical houses built a block apart are not the same — thanks to differences in location. But types of housing vary widely in nature. There are high-rise apartment buildings, single-family homes, duplexes, boarding houses, and townhouses.

Which is the best type of housing to build in any given location? Thanks to the immense diversity of renters, homeowners, locations, neighborhoods, and unit types, no person can say. In fact, it’s impossible to know the answer without allowing property owners and consumers to function within the marketplace. Property owners will attempt to build housing where they feel it will best satisfy market desires. Consumers will attempt to move where housing best suits their desired lifestyle.

City planners would have us believe they can figure this all out ahead of time.

They can’t.

Nor should we trouble ourselves with mandating that builders create housing that caters to low-income houses. The problem isn’t too little low-income housing, per se. The problem is too little housing overall.

After all, for every new unit built — even if it’s a luxury unit — the housing supply increases, prices will fall ever so slightly, all else being equal. Over time, the cumulative effect of new units built for a wide variety of price levels will be to bring housing prices down overall. As new luxury units are built, the wealthiest renters and homeowners will tend to move into newer and fancier units. The older now-less-demanded units will fall in price making them more affordable to lower-income buyers and renters.

Today’s luxury units are tomorrow’s affordable housing.

Unfortunately, thanks to the continuing role of government in housing production, attempting to meet the needs of renters and buyers continues to be an exhausting quest to deal with an endless assortment of ordinances, mandates, regulations, and plans. The current planners don’t want more housing. The government planners only want a certain type of housing. Meanwhile, the renters live in smaller and smaller units, and drive further and further.

But there’s one thing of which we can be sure. “Capitalism” will be blamed for it all.

The post How Governments Outlaw Affordable Housing appeared first on Market Urbanism.

Inclusionary zoning allows a few people to live in desirable, new construction buildings for much less than market rates. But it also carries with it a slew of perverse consequences. Because it’s a tax on construction, it reduces supply. Inclusionary zoning also leads developers to build higher-end buildings than they would otherwise, further squeezing out lower- and middle-income tenants.

While inclusionary zoning makes life easier for a few middle- and high-income residents lucky enough to secure below market-rate units in expensive cities, it also contributes to the regulatory mess that constrains housing supply in general. This in turn drives up the cost of housing. The effects of these supply constraints fall hardest on low-income residents who can least afford artificially high housing costs. By placing further constraints on housing markets, inclusionary zoning makes it so that resources dedicated to providing housing for the truly needy don’t go as far as they could in a less regulated market. Subsidies to middle-income residents come with the unfortunate side effect of making it more difficult for non-profits and government programs to make housing accessible to the truly needy.

Recently I presented on a panel at Chapman University on the future of housing in Orange County. Our panel highlighted the tensions between housing programs designed to help low-income and homeless households and those designed to help middle-income households. While my talk focused on regulatory barriers that make housing unaffordable for people across the income spectrum, Maria Cabildo — a former non-profit developer for low-income housing — talked about her experiences building housing for the homeless and very-low-income families.

Maria pointed out that market-rate housing is too expensive for minimum wage earners in every single county in the country. In expensive markets, policies designed to subsidize housing for middle-income people drives prices even farther out of reach for low-income families. Inclusionary zoning makes it so that the limited local, state, and federal funds available for low-income housing can provide fewer units of housing.

In an effort to prevent some of his state’s housing markets from becoming walled-off to anyone but the very wealthy, Governor Jerry Brown is unfortunately following other policymakers by supporting inclusionary zoning. His most recent housing plan advocates for reducing regulatory hurdles to housing construction, but also advocates for inclusionary zoning to help residents making up to 80-percent of their area median incomes. In many prosperous California markets, households making 80-percent of area income are middle- or high-income households by any standards. Median income is over $62,000 in Los Angeles, $85,000 in Orange County, and $107,000 in San Francisco. Subsidizing people making 80-percent of these incomes will be a popular policy among those lucky few who receive the subsidies, but it would only exacerbate the broader housing affordability challenges in the state by adding further constraints to housing supply.

Americans making salaries that put them squarely in the middle class should not need subsidies to afford housing. When they do, it’s a signal that housing policy has gone badly wrong. Liberalizing land-use regulations is the only solution to addressing the problem of housing that’s unaffordable to people making middle income salaries. Addressing the problem with inclusionary zoning is a kludge that fails to address the underlying causes of insufficient housing construction, and only worsens conditions for a city’s most vulnerable residents.

Many people find it hard to believe that expensive new apartments and condos will bring down prices in already expensive markets. But supply increases are in fact resulting in lower prices in the country’s most supply-constrained markets. Recent data from Portland, Seattle, and New York show that allowing more housing construction actually does lower rents. When San Francisco permitted a mini-building boom in 2016, Bay Area rents fell over the course of the year.

Attempting to make housing affordable to middle-income people with targeted policies is a losing game. Land-use liberalization is the only way to achieve broad-based affordability in markets where middle-income people struggle to afford housing. Inclusionary zoning not only fails to provide enough units to make a substantial difference in housing conditions, but it also hampers government and non-profit efforts to supply housing to the truly needy.

The post Conflicting Affordable Housing Policies appeared first on Market Urbanism.

The people who live in coastal urban cities tend to be a pretty liberal bunch. We’re leading the country on minimum wage laws, paid sick leave, climate change mitigation, and a host of other important issues. We care deeply about equality of opportunity, and we’re willing to invest our time and money to advance that effort—even if the people we help don’t always look like us or come from the same neighborhood, state, or even country. I’m proud to count myself among their number.

And then we turn to housing. Maybe it’s just because we’re doing great on so many other fronts, but when I look at our inability to solve the housing crisis in places like San Francisco, New York, and Washington, D.C., I’m left feeling nothing but depression and hopelessness. It’s all the more frustrating because unaffordable housing might be the most important economic problem facing residents of liberal U.S. cities, and we’re perfectly, comprehensively, and unmistakably blowing it.

Rents rose faster than incomes in more liberal, coastal U.S. cities, while incomes rose faster than rents in more conservative cities such as Houston and Atlanta.

The causes of this failure are too numerous to ever fully enumerate in a single blog post, and, admittedly, some are out of the hands of cities themselves. But I don’t want to be too forgiving—state and federal policy plays a role, for example, but liberal U.S. cities are also typically located in liberal U.S. states, and federal policy applies equally to all, including the cities that have managed to remain affordable. There’s also the impact of global capitalism on a few world class cities, but it’s hard to feel genuine pity for places where foreign investors are willing to dump billions of dollars. Boo-hoo.

At it’s heart this is a problem of liberal governance and/or policy, and we need to face it head on. We can’t blame this on someone else. It’s our fault. There really is something inherently flawed in the way we’ve approached housing policy for the past several decades (at least), and I would argue that it comes down to a kind of cognitive dissonance on three key issues. In the following ways, our policies just don’t align with our stated ideology:

Quick disclaimer: “Liberals” are not a monolithic group, and these views won’t be representative of every individual who identifies as liberal. That said, in my experience they are fairly representative of many if not most liberal city residents that I have met and discussed housing policy with. Your mileage may vary—though I doubt it will by much.

With that disclaimer out of the way, I’d like to get into some detail on these three policy/ideology disconnects, and why they’re so harmful to the goal of broad-based affordability in our cities.

PRO-ENVIRONMENT, ANTI-DENSITY

Cities have a reputation as dirty places. All those people, buildings, cars, pavement—it’s an environmental tragedy, right? Many well-meaning liberals seem to have taken that view to heart, and for decades have wielded environmental protection laws to keep buildings small and relatively spread out, and populations as low as possible—all in the name of preserving the environment.

But on a per-person basis, dense urban centers absolutely crush the suburbs on environmental-friendliness. We have smaller homes, often with shared walls, floors, and/or ceilings, all of which helps to reduce heating and cooling costs. We’re more likely to walk, bike, or take transit when we get around. And we share may public amenities, like parks, libraries, and roads, with many more of our neighbors. The map below is just one example of the environmental impact of dense housing, showing just how stark the difference in household carbon emissions is between the dense boroughs of New York City and the suburban communities that surround it.

Average annual carbon emissions per household in the New York metro area. Dense, “dirty” New York City produces about half as many emissions, per household, as the “green” suburbs beyond. Image from Berkeley’s CoolClimate maps site.

The real problem here is that housing is never just a question of “build” or “don’t build.” It’s “build here” or “build somewhere else.”And if you live in a coastal U.S. city, somewhere else is usually way worse for the environment. People don’t disappear just because they can’t move to our cities; they move to the suburbs of Texas, where housing continues to be produced in abundance and, as a result, costs have stayed reasonably low.

Opposing development on behalf of the environment is essentially “greenwashing,” and we need to acknowledge it for the lie that it is. It’s an environmental crime, not a triumph. We don’t celebrate the environment by moving into its midst and paving it over.

In many metro areas, household emissions in the suburbs are roughly double those of city households. Another way of putting that: In terms of environmental impact, each time we turn away a person from our green, efficient cities, we’re effectively cloning them and shipping them off to the suburbs of Texas to do twice as much harm.

PRO-IMMIGRATION, ANTI-MIGRATION

Sticking with the “global thinking” theme, consider the different approaches that liberals take to immigration into our country versus migration into our cities.

On the one hand we offer our full-throated support for liberalizing federal immigration laws and creating paths to citizenship for undocumented workers. We do so because we recognize that immigrants add value to our country, that at our core we are a country of immigrants and this is a source of strength and resilience, and that most immigrants are simply moving here in search of greater opportunity, which we can all appreciate.

On the other hand, when a person wants to move to any of our thriving coastal cities in search of greater opportunity—whether they’re citizens or not, rich or poor, immigrant or migrant—well sorry, pal, but we’re all full up. We understand that the United States is a symbol of hope and aspiration for people around the world, and we welcome immigrants to our shores with open arms, but only so far as the borders of our city. If they want past this border, they’re gonna have to earn enough to displace a poor person, because we’re damned well not building any new housing for them to live in.

The timing is ironic, in a way. As we look with scorn upon Donald Trump and his plan to build an impenetrable wall between the U.S. and Mexico, we’ve erected a wall around our cities—no less effective for its invisibility—to protect existing residents from the invasion of “outsiders.” Our country is open, but our cities are full.

Wrong for the U.S.-Mexico border, but okay for cities. We shouldn’t complain about people coming to our country with different cultures and values, but it’s okay in our neighborhoods. Photo from World Tribune.

To be clear, none of this is intended to equate the challenges faced by new residents (many of whom contribute to gentrification, if unwittingly and unwillingly) to those of poor immigrants or families at risk of displacement in coastal U.S. cities. The issue is that we’re pitting new residents against old ones when 90% of the problem could be resolved by simply building enough new housing to accommodate all comers.

We’ve allowed mostly wealthy, mostly white homeowners to dictate our future and leave us fighting over the scraps of the housing market, even as their homes each increase in value by tens or hundreds of thousands of dollars each year. We debate how to raise a few billion dollars for affordable housing on the backs of new residents—enough to build a couple thousand low income homes, maybe—while the value of single-family homes in Los Angeles County alone have increased by $500 billion over the past 25 years.

We’ve been convinced that the built environment—not the people who inhabit it—is what makes a community; that neighborhood integrity is about the character of buildings, not that of our neighbors. This is not a liberal ideal. Rather than turn these people away, we need to recognize that new residents are just people like us, looking for a better life and new opportunities. Adding enough new homes so that they can find somewhere to live is a very small ask. We have to stop acting as though the subjective value of “neighborhood character” (which has always been and will always be a moving target) is of equal importance to the hard economic realities of unaffordable housing, inequity of opportunity, and homelessness. The latter issues are clearly of greater importance, and if you’re willing to sacrifice them at the altar of “neighborhood character” then you need to take a moment and seriously question your commitment to progressive, inclusive values.

PRO-EQUITY, ANTI-HOUSING

Some of you may remember the hub-bub in 2014 over Thomas Piketty’s book, “Capital in the Twenty-First Century,” which examined wealth inequality in Europe and the U.S. over the past few centuries. It was an absolute blockbuster (for an economics book), showing that the share of income coming from returns on capital was increasing over time, which was bad news for those of us who don’t earn most of our money on stocks, property, or other capital investments (i.e., most of us). It was a rallying cry for liberals around the developed world.

What you may not have heard about was the critique of Piketty’s work by a 26-year-old MIT graduate student named Matthew Rognlie, who basically said that the issue isn’t so much capital in a general sense, but housing in particular. In other words, the growing value of housing relative to other assets (as well as labor income) is responsible for almost 100 percent of increasing wealth inequality in the Western world. The below chart shows the share of income from capital, with and without housing included.

When you look at capital income as a share of all income, the gains of the past 40 years essentially disappear when you remove housing from the equation. In other words, almost 100 percent of the increase in wealth in equality can be attributed to housing. Chart from Brookings.

The reason housing is growing as a share of capital income is because housing has become so much more expensive over the last few decades, especially in coastal U.S. cities. Home and property owners are raking it in. We have a system in which relatively affluent residents in our cities each own a hugely valuable capital asset—their land and the home that it sits upon—which is appreciating at nearly double-digit rates each year, while everyone else just gets to pay more for rent, forever. So long as housing production and vacancies stay low, that trend will continue. There is a wealth inequality crisis afoot, and liberal cities are its greatest perpetrator. San Francisco is the vanguard of this movement: the most liberal city in the U.S., and one in which it is nearly impossible to afford unless you are very rich (enough to afford $3,000/month rents or $1 million homes) or very poor (and therefore eligible for a small number of subsidized housing units). It’s a “poor door” masquerading as a city, and the rest of us are on the same trajectory.

The outcomes of our housing policies fly in the face of our ideology. For those in need, we support providing supplementary income, health insurance, educational support, and other social welfare programs—and then we erase their value by making our cities too expensive for those most in need of these benefits. Either low income residents can’t afford to live in the city at all, or the cost of housing is so high that the value of the benefits is exceeded by the added cost of rent.

By doing essentially nothing but letting things happen, conservative America is kicking our ass at providing opportunities for low income and working classes to build wealth and get ahead. Cities like Dallas, Phoenix, and Atlanta have managed to stay affordable by simply allowing housing to continue to be built as their populations grow, and the result is that people keep moving there. As someone in his early 30s who is wondering how I’ll ever be able to buy a home and build wealth for myself, I see the appeal. And that sucks, because I have no interest in living in any of those places. There will always be a premium to be paid for living in a great city, but the premium in our coastal cities is far beyond reason.

Atlanta skyline. A city with less economic opportunity than many coastal cities, but where owning a home or paying an affordable rent is still within reach to moderate-income households.

For those earning in the $30,000-$60,000/year range, owning a home in a place like Los Angeles or New York is completely out of the question. All these households have to look forward to is to either find a rent controlled unit and hold onto it until they die, or forever face the uncertainty of a rental market where rates can increase 2, 3, even 5 times faster than their incomes. And good luck saving any money for retirement in the meantime. These are not real options; they’re an ultimatum.

So, this is the paradise we’ve built across the liberal cities of the United States. Are we proud? I’m not. We’ve walled off our cities to those of lesser and greater means, making pathetic, often subtly racist or classist arguments about “character” and “culture.” We’ve destroyed any possible opportunity for low income and working class households to build wealth in the same way as their affluent neighbors, or displaced the poor households so that they’re no longer neighbors at all. We’ve enabled the sprawling environmental destruction of cities like Phoenix or Las Vegas by failing to provide alternative, more desirable sites for new housing. We have failed, abjectly—and we’re too blinded by our own biases to change the course.

But hey, at least our hearts are in the right place.

The post The Disconnect Between Liberal Aspirations And Liberal Housing Policy Is Killing Coastal U.S. Cities appeared first on Market Urbanism.

Like oil and water, exclusionary zoning and Inclusionary Zoning don’t mix

Inclusionary Zoning is an Oxymoron

The term “Inclusionary Zoning” gives a nod to the fact that zoning is inherently exclusionary, but pretends to be somehow different.  Given that, by definition, zoning is exclusionary, Inclusionary Zoning completely within the exclusionary paradigm is synonymous with Inclusionary Exclusion.

What is Inclusionary Zoning?

“Inclusionary Zoning” is a policy requiring a certain percentage of units in new developments to be affordable to certain income groups.  Sometimes, this includes a slight loosening of restrictions on the overall scale of the development, but rarely enough loosening to overcome the burden of subsidizing units.

Many cities, particularly the most expensive ones, have adopted Inclusionary Zoning as a strategy intended to improve housing affordability.  Often, demand for below-market units are so high, one must literally win a lottery to obtain a developer-subsidized unit.

Economics of Exclusion

We must first acknowledge the purpose of zoning is to EXCLUDE certain people and/or businesses from an area.  Zoning does this by limiting how buildings are used within a district, as well as limiting the scale of buildings .  These restriction cap the supply of built real estate space in an area.  As we know from microeconomics, when rising demand runs into this artificially created upward limit on supply, prices rise to make up the difference. As every district in a region competes to be more exclusive than its neighbors through the abuse of zoning, regional prices rise in the aggregate.

Since the invention of the automobile, and subsequent government overspending on highways, sprawl has served as the relief valve. We’ve built out instead of up for the last several decades and this sprawl has relieved some of the pressure major metropolitan areas would have otherwise felt. In fact, it’s worked so well–and led to the abuse of zoning rules for such a long time–that exclusionary zoning has become the accepted paradigm. Zoning is the default flavor of land use policy, even for those concerned with affordability.

A Typical Pattern of Interventionism

During the last century, interventionist policies were enacted to try making cities more livable.  With good (and often bad) intentions, politicians enacted strict zoning codes, demolished entire neighborhoods for urban renewal, and built public housing projects and highways in their place.  As with all massive top-down interventions, there were unintended consequences, which took the form of segregation, sprawl, auto-dependency, disinvestment in rail transit, and more recently, long commutes and gentrification.
Instead of acknowledging the failure of past intervention, and abolishing them, new interventions are patched into the system.  This is because new vested interests have emerged that thrive in the interventionist paradigm, and resist change (NIMBYs).  It’s easier to add to the patchwork of intervention in an attempt to alleviate symptoms, than it is to address the root cause: the initial intervention.

This is exactly what Inclusionary Zoning is–yet another layer of intervention.

What does Inclusionary Zoning actually do?

Despite the nice-sounding rhetoric, “Inclusionary” zoning still exists in the exclusionary paradigm.  In the exclusionary paradigm, where the supply of new space is capped well below what the market demands, so called “Inclusionary Zoning” serves three purposes, which do nothing to alleviate the root cause of housing crises:

Wealth Transfer:  These policies increase the supply of below-market rate units through a one-for-one decrease in the supply of affordable market-rate units.  In essence, this is a transfer of wealth from middle/upper-middle class persons to lower/lower-middle class persons, who are often winners of lotteries.  Since inclusionary zoning does not alter the overall supply/demand equation, it does not relieve overall housing prices.  Since the upper-class will always have the means to outbid the middle class and even benefits from the appreciation of their property, Inclusionary Zoning only serves to transfer wealth from the middle class.

Burden upon Supply of Housing:  Inclusionary zoning is effectively a tax on new development by forcing providers of housing to fund the cost of the wealth transfer.  This cost burden increases pressure on the supply of new housing, which actually hampers affordability in a market.  Since it only burdens developers of housing, Inclusionary Zoning lowers the value of land to potential housing developers, giving non-housing uses an advantage in bidding for land, further hampering the supply of housing.

Social Engineering:  Inclusionary Zoning forces a mixing of incomes, based on a paternalistic hypothesis that diversity of incomes is good for an area.  I am sympathetic to this view, and subjectively prefer to live among diverse income earners. However, there are compelling arguments that income integration has problems of its own.  I don’t pretend to know whether integration is for better or worse, but I’d rather see it done organically, through filtering than through top-down coercion.  Even if top-down coercion is to be used to redistribute wealth, I’d rather see it done through vouchers or guaranteed minimum income for reasons beyond the scope of this piece.

Displacement

Displacement is a real problem.  Strong social networks have formed in poor neighborhoods, which suffered from decades of planning and progressive policy.  Rapid gentrification, induced by exclusionary zoning, can be hugely disruptive and severely detrimental to the livelihood of society’s most vulnerable.

Because of decades of exclusionary policies, housing supply in desirable areas has not adjusted to accommodate newcomers who now flock to urban neighborhoods.  As a result, the influx of urban residents often choose to outbid longstanding residents of poor neighborhoods.  Instead of loosening zoning in desirable neighborhoods as they should, politicians loosen zoning in vulnerable neighborhoods, exasperating the displacement problem.  This has the potential to swiftly disrupt vibrant social networks, which are vital among the poor.

These residents are victims of exclusionary policy, and a case could be made for reparations by the cities who enforced exclusion on behalf of privileged neighborhoods. They are not the victims of the gentrifiers, or the developers serving the desires of newcomers.  They are the victims of exclusionary zoning, at the hands of planners and the cities who have enforced them for decades.

Unfortunately, the individuals who advocated for exclusionary zoning cannot be made to pay restitution to the displaced victims.  The best we can do is demand governments pay reparations to the victims displaced by exclusionary zoning policy.

Proposing a compromise

If you want to have effective Inclusionary Zoning, where housing providers fund wealth transfers and social engineering programs, you first need to end the exclusionary regime.  If a city chooses to burden the suppliers of housing with the cost of inclusionary zoning, it should not be implemented until exclusionary zoning is removed.  Cities who stand by their commitment to Inclusionary Zoning should first remove limits on the scale of new development, especially in desirable areas.  Most importantly, this should include all restrictions on the size of units.  Inclusionary Zoning policies should also base requirements on a metric other than number of units.  In most cities, the number of “affordable” units is a percent of total units, incentivizing developers to build large, expensive market-rate units instead of the more affordable market-rate units they’d otherwise build.

Further, cities should publicly accept responsibility for creating the housing crisis and make amends by making a “displacement payment” in reparation to long-term, low-income tenants displaced by new developments.  The total payment to the displaced should be reasonable, covering moving expenses and a certain amount of money to cover higher rent in a new situation.  As a compromise, I would even be willing to concede that cities may require developers to match the displacement payment to displaced long-term tenants.

Such a policy could be enacted at the state level if cities are unwilling to take responsibility for their self-induced housing crises.  Forcing a city to make the displacement payment to displaced long-term tenants will put the pressure on them to actually address the problem where it needs to be addressed: by removing exclusionary zoning.  An abolition of exclusionary zoning would enable development in desirable locations, removing the pressure to displace lower-income neighborhoods.  At that point, Inclusionary Zoning can more feasibly achieve the social engineering goals of its advocates.

In the end, patchwork policies will do nothing to solve affordability, until exclusionary zoning is abolished.  Only through abolition will Inclusionary Zoning be able to achieve anything close to its intended goals.

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