Austin Contrarian

Stuff on land trusts

Here's info on the Burlington, Vermont community land trust.   I haven't had time to wade through it yet, but did note that the trust retains a repurchase option as an affordability guarantee.  Also, the lessee promises to live on the property at least six months a year. 

Here are some Burlington land trust homes for sale.

Here's the federal definition of Community Land Trusts.

Here's an overview of HB 525, Eddie Rodriguez's Homestead Preservation Act.

Two more.  The text of HB 525, which took effect last year.

Report by Austin City staff on community land trusts.

Why the hoopla over land trusts?

Today's Statesman has a story on so-called "land trusts."  They're apparently being pushed as a solution to East Austin's affordable housing problem.  The standard land trust works like this:  the city buys the land under the house, the homeowner keeps title to the structure itself, the homeowner pays property taxes on just the structure.

I don't get land trusts, at least if the problem is high property taxes.  As I see it, it would be much cheaper for the City simply to waive the property taxes.

An example.  Let's suppose Homeowner Harry has a house with a fair market value of $150,000, split $50,000 to the structure and $100,000 to the land.  For the sake of simplicity, assume Harry owns the house outright.  Further assume the land's share of his property tax bill is $3,000.

At the end of the year,  Harry has enjoyed one year of occupancy in his house, and his bank account is $3,000 lighter.

Now suppose the City buys the land from him at $100,000, but lets Harry stay rent free.  Harry takes the $100,000 and invests it at 7%.  Then, at the end of the year, Harry has enjoyed one year of occupancy in his house, but his bank account is now $7,000 richer.  His net cash position has improved by $10,000.  In other words, the land trust is equivalent to a $10,000-a-year subsidy for Harry.  (This, incidentally, is exactly the cost to the City.)

But if property taxes are the problem, Harry doesn't need $10,000 a year to stay.  He only needs $3,000, or, say, $4,500 for his entire tax bill.  (Even that's overgenerous -- Harry was paying some taxes before his property began to appreciate.)  The City has "overpaid" Harry by $6,000 or more.  The rest of us would be better off if the City just gave Harry $3,000 or $4,000 per year.

If the goal is to discourage residents from moving, on the other hand, land trusts certainly ought to do that.  Consider Harry again.  Let's say Harry decides to move to an apartment.  He takes a look at Apartment A, which rents for $10,000 per year.  Suppose that, before the land trust sale, Harry would have been willing to pay $10,000 per year for Apartment A, but not a dollar more.

After the land trust sale, Harry will spurn Apartment A.  If he did rent Apartment A, then at the end of the year he would have $3,000 less cash in hand than at the beginning of the year -- $10,000 rent minus $7,000 investment proceeds.  He would be in exactly the same position he was in before the land trust sale, and out his $10,000 subsidy.  Harry effectively would have paid $20,000 for this $10,000 apartment.

In order to move, Harry would have to find some place that rents for $10,000 per year less than he would be willing to pay.  E.g., a place where he'd be willing to pay $20,000 but would be charged only $10,000.  There won't be many opportunities like that.  Harry will stay indefinitely, more than likely.  So will his neighbors.  In economic terms, the City will have provided a consumer surplus so great that it can't realistically be matched by any other market opportunities.

This point won't hold if Harry can convert his subsidy into cash.  If he leases his house to someone for $10,000, he can rent Apartment A and keep his $10,000 subsidy.  (If the home value goes up, Harry may be able to rent it for $12,000, and pocket the $2,000 on top of the $10,000.)

I sympathize with homeowners who are being priced out of their homes because of rising property values.  But as I've pointed out before, the problem is one of liquidity, not wealth.  The liquidity problem ought to be fixable; if it is, waiving property taxes is a windfall.  Even that is no windfall, however, compared to the windfall promised by land trusts. 

That windfall seems to be exactly the point with land trusts.  Since they discourage people from moving away, they seem designed to keep neighborhoods intact.  I'm not sure that is a goal worth thousands of dollars per year per beneficiary.

I'll admit that I don't understand all of the nuances of land trusts.  Perhaps the City intends to charge the homeowner rent for the use of the land.  I haven't seen any discussion of that but, if true, it could match subsidy to income and dramatically reduce the amount of the windfall.  Also, the City might impose tight restrictions on the alienation of the house, either by lease or sale.  If you know, please share.  I will cheerfully accept correction.

Increasing the supply of housing really does affect prices

Here's a good illustration of the fact that the rules of supply and demand apply even to housing.  (Thanks to the Crossland Team.)  Check out the second chart.  Between 2001 and 2003, home prices stabilized (or stagnated, depending on your point of view) because of a surplus of housing.  The oversupply directly affected the rental market:  Average rents dropped for four straight years, and only recently have begun to rise again.

The market provided affordable housing in Austin for decades.   It can still.  Just let the market meet demand.  Reduce minimum lot sizes.  Permit more dense development like row houses and town homes.  Open residential neighborhoods to small multi-family developments -- four-plexes or six-plexes.  That's the solution to our affordability crisis, not affordable housing quotas.

Gyourko & Glaeser

Glaeser and Gyourko have done a lot of econometric analysis suggesting that zoning has a huge impact on home prices, at least in places like California and the Northeast.  Here is a good, informal explanation of their work.

Here is a similar post by (liberal) economics blogger Brad DeLong.

More on saving Town Lake

Here's the link to today's Statesman story on the ruckus over the residential towers being proposed for E. Riverside.  I wrote about the proposal here, here and here.

This controversy is following script. We're in Act II:  "The developer discovers the local neighborhood groups will give no quarter." They're now battling for public opinion.

There are really four possible outcomes here:

1. The developer gets its variance, the towers get built 80 feet from Town Lake, and the Hike and Bike trail (finally) gets extended through this property.
2. The developer is denied a variance, redevelops the property, and refuses to extend the Hike and Bike Trail. 
3. The developer is denied a variance, redevelops the property, but agrees to extend the Hike and Bike Trail anyway. 
4. The developer does not get a variance and does not redevelop the property (perhaps rehabbing the existing units), and we get no Hike and Bike Trail.

Predictably, the developer is threatening #2 if it doesn't get its variance.  Just as predictably, the neighborhood groups are assuring us that we'll get #3 no matter what.   Both threat and assurance are worthless: the developer always has an incentive to threaten #2 and the neighborhood groups always have an incentive to assure us of #3.

Note that neither has an incentive to raise scenario #4.  The developer won't mention it because it leaves open the possibility of future redevelopment extending the Hike and Bike Trail.  Also, the developer probably figures that #4 is what the neighborhood groups are after anyway; suggesting that's a possibility would be like throwing blood in the water.

For their part, the neighborhood groups won't admit that #4 is a real possibility either.  Doing so might signal that they are more interested in obstructing the development than in preserving the public's enjoyment of Town Lake.  (The 840 units would result in a net increase of 15% or so in the Travis Heights/South River City housing stock, a very bad thing from the perspective of an area homeowner counting on rapid home value appreciation.)

My own thought is we'll end up with #4, although I admit this is speculation.  I doubt redevelopment on the property will be feasible if the 150-foot setbacks are enforced. 

N.B.  I'd include in category #1 any variance that allows the developer to build significantly less than 150 feet from the banks.

Some affordable housing resources

Here's a paper by a couple of economists arguing that affordable housing set asides have hurt southern California's housing supply.  (I'll bet that's true, but I think their analysis is pretty weak.  Here's a paper criticizing their conclusions.)  I point this out because they show (pp. 4-5) that relatively few affordable units have been built under these programs. 

Here's a paper prepared for HUD on affordable set aside programs nationwide.  Check out p. 6, which summarizes average annual production of affordable units in several major cities.  (Very few, at least in the most expensive places.)

Here's another paper prepared by HUD summarizing how municipal land-use regulations hurt  affordable housing.

Here's another paper by HUD examining the impact of federal regulations on affordable housing.  This paper is interesting because it shows that even seemingly trivial federal regulations (e.g., the Real Estate Settlement Procedures Act or energy-efficiency requirements for air conditioners) can have a non-trivial impact on affordability.

How to put affordable housing downtown

Here is today's Statesman article about the lack of affordable housing downtown. 

The article really poses two questions:  (1) "Should we have affordable housing downtown regardless of whether the market provides it?" and (2) "What's the best way to do it?"

The first question is debatable, but for present purposes I'll assume the answer is "Yes." 

So how do we get moderately priced housing downtown?  Although I've seen a lot of suggestions, they all appear to be variations on one of two strategies:

The first is affordable housing set asides or "inclusionary zoning":  Require the developer to sell or rent X% of the units at an affordable price, regardless of their market price.  Alternatively, allow the developer to pay the subsidy's cash equivalent into a City-owned affordable housing fund.  (These set asides are not mandated by ordinance, but are usually extracted by the City in return for a zoning variance of some kind.  They're a centerpiece of the new Vertical Mixed Use standards.)

The second is for the City to "buy" affordability by paying the difference between the market rate and the affordable rate.  For example, if a unit's market price is $200,000, the City might pay the owner $50,000 to market it as a moderately-priced $150,000 unit, with covenants limiting the resale price.  (I call $150,000 "moderately priced" because it's less than the City's median home price.)

The second is by far the better strategy, for a number of reasons:

1. Requiring developers to include affordable housing screws with future supply.  As I've pointed out here and here, when developers must set aside X % of their units at below-market rates, either fewer units get built or everyone else pays more.  Either way, homes get more expensive on average.  (Portraying the set aside as compensation for a "density bonus" doesn't change this fact.)
2. Someone has to bear the cost when affordable units are sold below market price.  Set asides disguise, but do not eliminate, that cost.  When the City pays, the cost is transparent.  This is important, because it forces us to ask the right questions.  E.g., How much is it worth to have affordable housing downtown rather than, say, a few blocks to the south or east of downtown? 
3. When the City pays, there's an incentive to put the affordable units in the right places.  It's a lot cheaper to put affordable units in a development where the units start at $200,000 than in a development where the units start at $500,000.
4. If the City pays, we might see more pressure on the surrounding neighborhoods to open up their neighborhoods to more affordable, multi-family housing.

Set asides are nevertheless the more popular solution.  The burden falls on the property owner (a very small constituency) or future home buyers (an unidentifiable constituency).  In other words, set asides have nearly zero cost politically.  Also, some very vocal entrenched interests benefit from rising average home prices.   

If the City's bent on subsidizing affordable housing downtown, I think it should auction off a piece of property.  Let developers bid for the right to build, say, 200 affordable units on the property.  (If it is impossible to build affordable units for less than the sales price, the "high" bidder will be the one who asks for the least amount of money.)      

This will be the most cost-effective way of providing affordable housing.  It will also minimize the difference between the units' market price and their predetermined "affordable" price.  This is important for avoiding three types of economic waste:  (1) A unit sold below market price may be "overdeveloped" -- i.e., it may include upgrades that cost more than they are worth to the buyer; (2) a unit sold below market price does not necessarily end up with the person who values it most; (3) below-market sales create the opportunity for arbitrage, which can be prevented only through costly monitoring.  An auction gives developers an incentive to minimize these kinds of waste. 

Although this strategy will probably end up costing the City less than any other "City pays" strategy, it's not free even if it is off-budget.  If the City could have sold a piece of property for $5 million, but instead gives it to a developer for free to build 200 affordable units, it has paid a $5 million subsidy.  (With these hypothetical numbers, the City's subsidy would be $25,000/unit.)  Still, I suspect this will get us the most affordable housing downtown at the least out-of-pocket expense for the City. 

A good description of how restrictive zoning screws with affordable housing

From Coyote Blog:

Step 1:  Progressives argue for having government restrict land use and implement tight zoning.  Step 2:  Housing prices skyrocket, enriching the elite and making it tough for ordinary workers to own housing.  Step 3:  Progressives decry that lack of affordable housing represents a 'market failure' that must be addressed with more regulation.  For example, builders in the SF Bay Area are required to sell X number of below market rate 'affordable' homes for every Y homes they sell at market rates.  Step 4:  Builders costs go up from the new regulations, further reducing supply and increasing prices.  And the cycle just repeats, as bad outcomes from government regulation are blamed on free markets, and used to justify more regulation.

This earns it a spot in my economics blog links.

Does "Save Town Lake" really want to save Town Lake?

A group calling itself "Save Town Lake" has formed to fight CWS Properties' proposed high-rise development on Town Lake near S. Congress and E. Riverside.  Their website is here. 

Their pitch (as their name implies) is that we must act to save Town Lake and the Hike and Bike Trail: 

What makes it special?  There is room to breathe and lots of nature to experience right in the heart of the city.  Runners, walkers, strollers, bicyclists, meditators, picknickers, dogs and their owners all have a sense of freedom from urban chaos.  This openness is created because the current buildings are set appropriately back from the shore.

(Italics mine).

They're entitled to their opinion, but they shouldn't misrepresent the facts.  As I've pointed out, the apartment complexes there now jut to within 20 feet of Town Lake. A parking lot sits just 3 or 4 feet from the banks.  There is no Hike and Bike Trail on this stretch of Town Lake because there is no room for it.   That doesn't seem idyllic to me.

The developer is essentially proposing to create an extra 60 feet of buffer.  The neighborhood groups want an extra 180 feet, which would leave most of the property undevelopable.  We can debate whether it's better to have high rises and public access or low rises and no public access.  (We can even debate whether there'll be a developer willing to give us 200-foot setbacks.)  Just don't claim you're protecting public access to Town Lake when your opposition may foreclose public access to Town Lake.

P.S.  The cynical should check out their list of "Town Lake" developments, evidently meant to alarm us about overdevelopment.  Spring, 360 and the Monarch all made the list.

Zoning is not rent control

The Statesman has an article today on the proposed redevelopment of the Stoneridge apartments off South Lamar, which I previously wrote about here.  The developer wants to tear down 141 low-income units and replace them with 300 more expensive units.  It would be the kind of vertical mixed-use development the City has been pushing for transit corridors.  The property is now zoned commercial -- the apartments are a non-conforming use -- so the owner/developer needs the property rezoned.

The Statesman portrays the zoning request as a choice between affordable housing and increased density.  Affordable housing advocate Heather Way apparently has the same view, stating that she supports the project "only if low-income families can benefit from it and only if it doesn't displace low-income families."  (Not surprisingly, Jeff Jack and Zilker Neighborhood Association adopt the same line, but I covered their opposition in my last post.)

I was surprised to see that neither the Statesman nor Way understands the difference between zoning and rent control.

Both assume that if the City refuses to rezone the property, it will remain affordable housing.  That's quite a stretch.  There are at least three things the owner/developer can do without Council permission, besides maintain the property as is:

1. Renovate the apartments and raise the rent. Suppose (i) the apartments rent for an average of $550/month; (ii) they could be renovated for an average of $30,000 each; and (iii) they would rent for an average of $850/month after renovation.  Then the renovation would cost $4,230,000, but would bring in an extra $507,000 per year in income, exceeding the $423,000 or so a reasonable owner would demand as a return on his investment.   
2. Convert the apartments to condominiums.  Several low-income apartments have been converted in the area.  Some are asking over $200 per square foot.  If you assume the average Stoneridge apartment would fetch $150,000 after conversion, the conversion would be worth $21 million minus the $10-12 million cost of conversion.  I doubt the apartments, as low-income housing, have a going value of more than $6 million or so.
3. Convert to commercial use.  Good shopping on South Lamar is scarce.  As is office space.  These properties would doubtless be lucrative if converted to either.

I don't know how all the numbers break down.  But I'll wager that Way doesn't either.  (Jeff Jack and the Zilker Neighborhood Association don't care.)  Given the demand for rental housing and condos in the area, it seems unlikely that these units will remain low-income housing for long.  The only way to keep the units cheap would be to enact some form of rent control (which is a bad idea, and which, incidentally, would also be opposed by the NAs.)

Put simply, the Council can't control whether the affordable units stay or go; it can only control whether more units can be built on the property.  If Council refuses to rezone the property, (i) we will lose an extra 159 housing units in the area; and (ii) we will have zero affordable units on the property rather than the 30 promised by the developer. 

I also suppose it's asking too much to expect the Statesman or affordable housing advocates to take the long view. If we permit developers to build to the density demanded by the market, the price of housing eventually will settle very close to the cost of construction.  This is as cheap as housing can get without a subsidy.  There will be more affordable housing for everyone, including those Way purports to defend.

Update.  The Council did the right thing and approved the rezoning application on first reading.  They did this despite (i) NAs' demand that 45% of the new units be reserved as affordable housing,  and (ii) genuinely emotional (if misdirected) appeals from several of the current Stoneridge residents.  Special kudos to McCracken who (diplomatically) chided the neighborhood activists for trying to impose onerous affordability set asides after supporting a 10% set aside in the VMU compromise.