City Council approved the Village of Little Texas affordable housing project at today's meeting. A whopping $3 million and a permanent exemption from property taxes breaks for 50 affordable units. Laura Morrison cast the lone nay vote. For once, we agree.
Austin's freshly minted Comprehensive Housing Market Survey has lots of interesting tidbits. One is this map depicting Austin's concentrations of housing affordable to households earning between 51% and 80% of median family income. (The darker the color, the greater the density of affordable housing.)
I suppose this is no real surprise, but the degree of segregation still is striking. Most cities have pockets of affordable housing concentrated near the city center. Inner city neighborhoods have high concentrations of old housing, and old housing tends to be cheap housing. Mass transit is usually better in central cities, too, and the poor need good mass transit. And, finally, central neighborhoods are usually quite dense, which means lower land costs per unit.
Central Austin, though, has very little affordable housing. Even central east Austin, historically a repository of cheap housing, now has only a moderate density of affordable housing. Affordable housing in Austin instead has been relegated to large, deep pockets in the older suburbs to the north and south; these, incidentally, contain some of the densest census tracts in the city.
A couple of those who commented on my post on the city's affordable housing investment in the Village on Little Texas pointed out that there is already a lot of affordable housing in the area. This map confirms the point. I've marked the site of the Village on Little Texas with a light green arrow. It is in, or at least on the fringe of, one of the largest pockets of affordable housing in Austin.
It's fair to ask whether the city should invest millions to subsidize a relative handful of affordable units in an area that already has market-rate affordable units. Particularly such steep subsidies. The city needs to step back and sort out its priorities.
One more point on the Village on Little Texas. As I noted, the Austin Housing Finance Corporation plans to provide a subsidy of $5,000 or so per year per affordable unit.* Austin's cost of money is roughly 5%, the interest it pays on bonds. A $5,000/year subsidy is thus equivalent to a $100,000 lump-sum investment, assuming the $5,000/year subsidy increases with inflation.
That's a lot of money. At this price, $1 million buys just 10 affordable units. Austin has 300,000 occupied housing units. An extra ten units here or there is not even a rounding error.
$100,000 is too much to pay for one unit of affordable housing. Good non-profits can do much more with much less by matching city money with private donations and federal grants. We have no business spending $100,000 per unit if a non-profit can procure an affordable unit for $10,000.
*I should be clear that this is my estimate; I'm using the reported difference between market rents and subsidized rents. It could be that the 50% MFI units are receiving a subsidy of just, say, $3,000 per year. It would be nice if AHFC told us, rather than making us guess.
This affordable housing project in South Austin is drawing lots of criticism. Rightly so.
It's a complicated deal and the Austin Housing Finance Corporation has not disclosed all the relevant details, which makes a thorough analysis impossible. But the gist of the deal is this: AHFC will buy a tract of land on Little Texas Lane in South Austin for $2 million. It will then loan a developer another $1 million to develop the Village on Little Texas, a 240-unit apartment complex. (Ironically, this project will be built next to the "apartment-complex city" I recently called a wasted opportunity.)
The project will provide 50 units affordable to tenants making less than either 50% or 30% of the median family income. Rents for the affordable units will range from $339 to $613 for one-bedroom units, and $396 to $726 for two-bedroom units. Rents for the remaining units will range from $730 to $1,025. (AHFC memo (pdf).)
AHFC is paying too much for these affordable units. Because AHFC will own the property, the city, county and AISD will forego property taxes, which (according to the Statesman) will range from $300,000 to $400,000 per year. But the affordability discount appears to be roughly $400/month per month, or $5,000/year. The total value of the subsidy for 50 units, then, is $250,000 per year, much less than the foregone taxes.
AHFC has is also taking a roughly one-third ownership in the project. I haven't seen pro formas for the project, but I doubt that it will generate enough profit to provide AHFC a decent return on its $2 million investment (or $3 million, if that $1 million loans is forgiven).
It looks like a bad deal.
There are two other problems. First, AHFC should be maximizing the number of affordable units. It is a bad idea for it to tie up millions of dollars of capital in one project. Even if that investment generates a decent return, that's $3 million that could be used today for affordable housing elsewhere.
Second, the tax break is troubling. It is an off-the-books subsidy, which tends to obscure the true cost.
But, worse, this kind of tax break is really a shell game the city uses to screw AISD and the county out of their share of property taxes. Here's how it works: AHFC gets the property tax free. The taxes the property would have generated are instead added to the project's net return. AHFC gets one-third of these profits. So AHFC effectively has one-third of the property taxes returned to it. But the city is entitled to only 20% of the taxes generated by a piece of property; AISD, the County, ACC, etc. get the rest. Thus, by purchasing the property, AHFC essentially raises the city's share of the property tax from 20% to 33%. The rest of the county and AISD's share goes to the developer.
Perhaps a hypothetical will make it clearer. AHFC buys a piece of property and develops the project on its own so that it is entitled to 100% of the net return. Since it pays no property taxes, those taxes swell the net return dollar for dollar. AHFC (and the city) effectively use AHFC's non-profit status to convert AISD and county taxes into city taxes.
No wonder the city likes this structure.
Here.
My thesis: Central Austin has a strikingly low percentage of families compared to the suburbs. None of the usual explanations applies -- i.e., central Austin families (except for those in a few neighborhoods) have not abandoned central Austin because of crime, overcrowding, post-industrial blight, bad schools, or the flight of jobs to the suburbs. The only explanation, I think, is that Austin's suburbs have better, bigger and cheaper housing.
I did not offer a prescription. Anyone who reads this blog can guess, though. We need more multi-family in central Austin to relieve the price pressure on single-family homes and to give households more options. (Multi-family has many other benefits besides these, of course.) And we need to make it easier to upgrade central Austin's generally older, smaller and inferior housing stock. The McMansion ordinance did not cause this divide, but it certainly won't help. (For those who don't know, the McMansion ordinance bans even relatively modest homes on some lots, homes no one would call a McMansion.)
I often experience buyer's remorse after writing a piece like this because I'm afraid my single friends will take it the wrong way. I don't think families with children are more important or "better" than other households. I merely think Austin's core must have a good mix of households to remain healthy. (The suburbs would be healthier, too, if they offered singles or couples something other than inexpensive housing in compartmentalized pods.) Balance matters, if for no reason other than allowing us to continue using the expensive assets (like schools) already in place. I don't think we have a good balance now.
For those interested, here is my previous piece at Newgeography.
Central Austin is unaffordable in part because it has too few apartments. The lack of space for multi-family props up their rents, either by directly restricting supply or encouraging older units to "filter" up to a more expensive market.
There are too few apartments in central Austin because too much land is set aside for single family. Here is what I wrote a year ago in opposing the Zilker neighborhood's VMU opt-out request:
According to the City's residential acreage data a paltry 11% of the Zilker neighborhood's residential property is zoned multi-family. Only 2.6% is zoned at the reasonably dense MF4 or MF5 levels.
These multi-family parcels are nearly maxed out. According to data collected by the city demographer, ZNA had 933 occupied multi-faily units in 2005, or roughly 1,000 total units (assuming a reasonable vacancy rate). Using the residential acreage data above, the City's minimum site area standards, and a reasonable assumption about the mix of one-room and two-room apartments, I've calculated that the current zoning permits fewer than 1,200 multi-family units. While some of ZNA's 1,000 existing units are non-conforming (i.e., not built on MF-zoned property), there is clearly little room for more housing under current zoning entitlements. And we all know what happens when a developer asks for greater entitlements in the Zilker neighborhood.
Austin's affordable housing consultant, BBC Research & Consulting, apparently agrees. From its report:
It is unclear, based on a review of the city’s recent update to its existing Comprehensive Plan and future land use map, how much land is dedicated to high density single family development and multifamily development (e.g., single family detached homes on 3,500 sq. feet lots and multifamily density of 20 units/acre). These uses appear minimal compared to the amount of land dedicated to standard single family residential.
Note BBC did not conclude merely that we have a "minimial" amount of the land set aside for multi-family today. It concluded that even our long-range plans allocate too little land to multi-family.
Perhaps the city should establish baselines for neighborhoods -- e.g., neighborhoods' comprehensive plans should set aside a minimum of __% for multi-family. If they don't, Council won't approve their plans.
See Austinology and M1EK for other takes.
In the fall of 2008, the City Council, concerned about the lack of affordable housing in the city, commissioned a comprehensive housing market study from BBC Research & Consulting. BBC presented its final report to Council in March. (H/t Katherine Gregor.)
I haven't had time to work through the entire 142-page report. I disagree with some of what I've read, but there is much here to like -- and much that echoes this blog's themes.
BBC's very first recommendation is that the city "reevaluate the zoning and development process." BBC recognizes that part of the problem is the role played by neighborhood groups and part of the problem is the lack of density; not surprisingly, these are linked:
Austin’s current process of evaluating applications for residential development is community based. The city’s zoning and land use regulations also reflect the city’s dedication to environmental preservation and commitment to smart growth.
These principles are part of what makes Austin a great city. However, they can conflict with providing affordable housing for residents and workforce. In desirable areas where there is much demand for housing, anything that constrains the supply leads to increased housing costs.
We have identified several opportunities for the city to modernize its current development process that will reduce the barriers to affordable housing development in Austin. These include:
- Reconsider the role that many neighborhoods groups are playing in development decisions.
- Develop a strong, citywide Comprehensive Plan that guides development and forms the basis for the acceptance or denial of development applications.
- Increase density by approving dense developments that offer opportunities for affordable, attached housing products.
- Educate residents about the need for workforce housing in Austin and the consequences of not meeting current and future needs for housing.
(Italics mine.)
And more on neighborhood groups and density two pages later:
The city’s current neighborhood-based planning process does very little to facilitate the development of affordable housing on a citywide basis. Some of the neighborhood plans have affordable housing as a goal; others do not. We were also told many times in our focus groups with more than 100 stakeholders that Austin has lost many affordable units to neighborhood resistance.
Austin is not unusual in this regard. Residents in every city and town are notoriously resistant to density, and the more affordable the project and the greater the density, the higher the resistance. Neighborhoods often forget that a desirable city will grow; they cannot stop this momentum. Restricting workers from obtaining housing in an area does not mean these workers will go away— they may live farther away, but they still need to drive to work. Growth limits almost always lead to increased traffic congestion and the leapfrog effect of affordable housing being pushed farther and farther from employment centers.
Neighborhoods often use declining property values as successful arguments to fight affordable housing developments. Many academic studies have adeptly demonstrated that the effect of density and affordable developments on property values is not negative.
As I said, there is a lot more to this study, and it flags other problems with Austin's housing market. I intend to cover some of the other points after I've finished working through the study. But it's good to see the city hired consultants willing to provide a clear-eyed assessment of the city's problems.
Ed Glaeser and Joseph Gyourko's e-book (pdf) on federal housing policy really is worth a read.
Glaeser and Gyourko argue that federal housing policy wrongly treats every jurisdiction alike. The country really has three different housing markets.
First, there are markets with high demand but elastic supply -- e.g., Houston and Atlanta. Housing in these markets closely tracks the cost of construction. Because developers cannot supply housing more cheaply than this over the long run, it makes no sense for the federal government to intervene directly in these markets -- there simply is no market failure. (For the poor, Glaeser and Gyourko suggest outright transfers so they can buy more housing, or housing vouchers as a second-best solution).
The second kind of market is the low-demand market -- Detroit, for instance --where housing can be had for less than the cost of construction. It is silly to subsidize the construction of new housing in these places.
The third kind of market is the high-demand, inelastically-supplied market -- the West Coast, the Amtrak corridor in the northeast, and a few other markets in the country's interior. These markets exhibit government-created market failures. Tight zoning regulations in these markets combined with high demand have raised the cost of housing well above the cost of construction, sometimes by hundreds of thousands of dollars. New construction permits amount to a tiny fraction of the housing stock.
The market failures in these jurisdictions endure because local governments have no incentive to increase the supply of new housing: the benefits from new housing go mostly to non-residents, while the costs from polution and congestion -- not to mention the effect of new competition on housing prices -- fall on existing residents.
Federal housing policy -- particularly the mortgage interest deduction -- has different effects depending on the market. In elastically-supplied markets like Houston or low-demand markets like Detroit, the mortgage interest deduction increases consumer demand and stimulates the construction of more housing.
In high-demand, inelastically-supplied markets, though, the benefits of the mortgage interest deduction flow to existing homeowners. The mortgage interest deduction paradoxically makes housing in these markets less affordable.
Glaeser and Gyourko argue that federal housing policy ought to target the broken markets. The goal, they suggest, should be to incentivize the high-demand, inelastically-supplied markets to allow more housing.
They propose capping the home mortgage interest deduction at $300,000 for households in these markets. (They would phase out the deduction for current existing mortgages for equitable reasons.) This cap would generate additional tax revenue. The federal government would then refund that revenue to the local governments (via the states) provided the local governments made sufficient progress toward increasing their housing supply. Glaeser and Gyourko essentially propose bribing local jurisdictions with their homeowners' tax dollars.
Needless to say, I think this is a great idea. Rich housing markets are becoming increasingly stratified by income. The lower and middle classes are being run out of these markets by high home prices. Their allegedly progressive citizenry, embarrassed by the increasing inequality, flail about for solutions. But they won't allow the one thing that would improve affordability over the long-term.
Incentivizing new development in these cities would benefit the rest of us, too. The high-demand cities have high demand because they make their citizens more productive. Restricting access to them creates a net welfare loss for the country as a whole.
But Glaeser and Gyourko's proposal will be dead on arrival. The costs of their proposals would fall on a small, clearly identifiable group -- wealthy homeowners in high-priced markets. These homeowners would suffer a double-whammy, through the loss of their tax deductions and the loss of home value due to increased supply. Everyone else would benefit, of course, but those benefits would be diffuse. Local governments would benefit from the extra revenue, but local governments don't vote for senators or congressmen. If this proposal were enacted, Barbara Boxer would hear the howls of Marin County homeowners from her seat on the Senate floor.
A couple of weeks ago, the Statesman reviewed Austin's progress in distributing the 2006 affordable housing bond money. To date, Austin has distributed about $11.8 million of the $55 million we voters approved.
Stop Domain Subsidies' proposed Charter amendment to ban retail subsidies is fraught with unintended consequences.
Here's one: The Charter amendment likely will shunt low-income residents away from mixed-use developments and into stand-alone residential developments. Why? Because the proposed amendment bars subsidies to developments that merely include a retail use, even if the retail use itself receives no subsidy. The City thus will be unable to "buy down" the affordability of units in mixed-use developments that include a retail use.
A concrete example:
Back in 2006, the City gave Ardent Residential a zoning change to redevelop the Stoneridge Apartments on South Lamar into a 300-unit mixed-use development. The developer agreed to make 10% of the units affordable at 80% MFI. But the units being replaced rented for a lot less. To quell the furor over the rezoning, Betty Dunkerly proposed using some of the City's affordable housing bond money to "buy down" 10% of the units to 50% MFI, a genuinely affordable level. The developer and the City are squabbling over the "buy down's" price tag, but the City appears ready to honor its pledge. (It has to spend its $50 million in affordable housing bond money somehow.)
I don't know whether Ardent has filed a site plan yet, but it has talked all along about including retail as part of the mixed use. That was part of the development's attraction.
Assuming Ardent still intends to include a retail use, then, the Charter amendment will keep the City from honoring its pledge to buy "deep" affordability for these units. The Charter amendment will keep the City from buying deep affordability in any mixed-use development that includes retail. The City will be forced to spend its affordable housing dollars on stand-alone residential developments, or perhaps "live-work" developments.
I don't see how this protects local merchants. The mixed-use development will still be built, and it will still have retail; the developer simply will rent the units at the market rate (or 80% or 60% of MFI if it takes advantage of the VMU incentives).
One could argue, perhaps, that purchasing affordability in mixed-use developments is an expensive, inefficient way to provide affordable housing. (I'm ambivalent about it myself.) But it doesn't seem wise to me to silence that debate by Charter amendment.
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