Austin Contrarian

The City's Comprehensive Housing Market Survey

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.

Rethinking Federal Housing Policy

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.  

Where should Austin's affordable housing dollars go?

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.

The city is distributing the money to local non-profits.  That's a good idea, or at least can be if the city does it right.  Competition among non-profits should give us the most affordable housing for the money.  (For this to work, of course, the city must turn some of them down.)   And turning the non-profits loose should yield some innovative ideas.  

I do have a problem with the city's priorities, though.  There don't seem to be any.   Here are some of the projects the city has approved to date.

• Apartments in South Austin for people with disabilities;   
• Energy-efficient homes in East Austin; 
• A Habitat for Humanity subdivision in Northeast Austin; 
• The purchase and renovation of a single home for a 50 year old woman with disabilities; 
• Efficiency apartments for the homeless 
• Buying down affordability in a mixed-use project on South Lamar. 
• A children's shelter.  

The city seems to be chasing four or five goals at once:  (1) providing transitional housing for the homeless or the near-homeless; (2) promoting home ownership for the low-income; (3) providing disability-accessible housing for the disabled; (4) promoting energy-efficiency in low-income housing;  and (5) promoting mixed-income in mixed-use developments.

I don't like this scattershot approach.  The city should try to get the best return on its bond money.  It may be counter-intuitive, but this means that all the money should go toward the same goal.  

In principle, the city is in the same position as a consumer who has $5,000 to apply to her debt.  She has a credit card balance at 15% interest, a car loan at 8%, student debt at 6%, and a mortgage at an after-tax rate of 5%.  While she may be tempted to spread the money around, she should spend it all on the credit card, where it will earn the highest return.

We need to decide which affordable housing investment gives us the best return.  And then we should put all of our money toward that investment until our second option begins to offer a better return.  

Which investment gives us the best return?  Efficiency apartments for the homeless or near-homeless?  Home ownership for the low-income?  Affordable housing in upscale, mixed-use projects?

It's not even close, in my opinion:  Our priority ought to be transitional housing for the homeless or about-to-be homeless.  We do more for individual welfare when we move someone from the street to an apartment than when we move someone from an apartment into a house or an upscale apartment in a mixed-use development.   And there are obvious social benefits from getting a homeless man off the street, or keeping a mother and young child out of an emergency shelter.  Stable housing allows these people to pull things together, to re-enter the workforce or pursue more education.  Finally, the market seems to do a pretty poor job of providing this ultra-cheap housing.

Regardless, we ought to identify our top priority.  And then we ought to keep investing in that priority until diminishing returns steer us elsewhere.

Subscribe to Austin Contrarian by Email

An unintended consequence of the Stop Domain Subsidies' Charter amendment?

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.

I'm not making this filtering stuff up.

Here's how two economists describe the filtering process:    

Filtering.

If you don't understand filtering, you don't understand housing markets.  Because lots of people plainly do not understand filtering, here's my attempt at an explanation:

When property values rise, low-quality housing "filters up" to the high-quality housing sub-market.  The reason is that rising rents encourage landlords to invest more in the property.  When property values fall, high-quality housing "filters down" to the low-quality housing sub-market.  The reason is that falling rents encourage landlords to invest less in property.  The key in either case is that old housing costs more to maintain than new housing.

Here's the longer version:

Housing naturally deteriorates as it ages.  Stuff breaks.  Stuff -- expensive stuff like the roof -- has to be replaced.  Minor wear and tear accumulates over the years until the place is downright seedy.

Seedy, that is, unless the owner regularly invests in maintenance.  Every homeowner knows that.  It would be nice if the mortgage payment and property tax covered the cost, but they don't.  Those occasional, "extraordinary" expenses turn out not to be extraordinary at all.  And they are far more frequent for older home.  Thus, as a house or apartment ages, it takes ever more money to keep it in good shape. 

Every landlord with an old property confronts the same decision:  Should I spend the money to keep the property in top shape, or should I let it go?

Keeping the property in top shape allows the landlord to charge more rent.  But it also costs the landlord more in maintenance and periodic renovation, especially for old apartments.  What the landlord decides to do depends on the current market, his estimate of future demand, and about a million other things.  But we know one thing for sure:  A landlord is less likely to maintain an apartment in tip-top shape when the rent for tip-top apartments is falling.  Declining rents mean a declining return on the maintenance investment.  That spells less investment .

Without constant maintenance, apartments deteriorate from "tip top" to "slightly dilapidated."  Renters, sensible people that they are, are not willing to pay as much for bad quality.  Rents fall, and the apartments "filter down" into the pool of affordable housing.  

If you want more affordable apartments, build more tip-top apartments.  Increasing the supply of high-quality apartments lowers the rent for high-quality apartments, all else being equal.  Falling rents for the good units encourage landlords to let the older ones slide into the affordable sub-market.

On the other hand, if you want to raise the rents for older properties, then discourage the construction of new apartments.  Restricting supply will raise the rents for high-quality housing, including older, well-maintained properties.  Higher rents will encourage landlords to spend more on maintenance and renovation to move their properties from the low-quality sub-market pool to the higher-quality sub-market.

This is pretty basic supply and demand.  But some people just don't believe it.  I think there are three reasons.

First, apartment renovation usually coincides with new housing construction, and people mistake this association for cause and effect.  Condos and apartments get built during periods of rising rents.  Everyone understands that.  But the same rising rents give landlords an incentive to invest in renovations and upgrades.  We thus should expect new construction and apartment renovations to go hand in hand.  These are symptoms of the same market forces, not cause and effect.

Second, people mistakenly use what is happening to their apartment to extrapolate to the entire market.  The filtering process does not guarantee that every older property will become more affordable.  On the contrary, as rents rise, some old properties will be torn down and replaced with new, more expensive units.  The old units never get a chance to filter down.  But this is simply an example of the "filtering up" that occurs when rents rise.

The remedy for "filtering up" is more housing, not less.  If we halt new construction in order to preserve the existing stock of low-quality units, we guarantee that more of the low-quality units will eventually filter up.  We cannot predict exactly which units will filter up and which will remain affordable.  We just know that there will be more of the former and fewer of the latter.

Finally, neighborhood gentrification can blur things.  Gentrification is a complex process.  It typically occurs because other neighborhoods have become more expensive, pushing buyers and renters to what otherwise would be a less desirable neighborhood.  The increased demand raises rents, which spurs more renovation.  In other words, rising rents in one neighborhood can cause units in another to filter up.

Gentrification can also be spurred by falling crime rates, improved amenities (such as new parks or a decommissioned power plant), and by new investment in the area.  Sometimes it's just chance.  It is rare, though, that adding new housing causes a rise in rents.  In fact, new housing would not be built unless rents were already rising.  New housing is thus generally a symptom of gentrification rather than the cause.

Related posts:

1. Are luxury condos downtown good for Austin's housing market?  (Sept. 11, 2006)
2. Those high-priced condos will be great for families with children. (May 28, 2007)
3. Freeing up space for others. (June 7, 2008).

A couple of affordable housing statistics

I'm still digesting this Neighborhood Housing and Community Development report on affordable housing in Austin (pdf).  For now let me cherry pick two interesting statistics:

• Number of affordable multi-family units built under the S.M.A.R.T. Housing program since 2000:  5,966.  (p. 6)
• Number of multi-family units removed from the market since 2006:  3,000. (p. 11)

Two thoughts:

1.  I was surprised that the S.M.A.R.T. program has produced that many units; but

2.  an average production of 1,000 multi-family units per year is well below the replacement rate. 

I'm not knocking S.M.A.R.T. housing.  5,966 affordable multi-family units are better than 0 units, and there are other affordable housing programs (although the S.M.A.R.T. housing program is touted as one of the more successful ones).

But these statistics suggest that the S.M.A.R.T. Housing program can satisfy only a small percentage of the total demand for affordable housing.  Most people will have to look elsewhere.  S.M.A.R.T. Housing's real benefit is in directing affordable housing to desired (i.e., otherwise expensive) locations.

Housing + Transportation Affordability Index

Check out this totally cool site that maps housing plus transportation costs (plus a whole bunch of other statistics, like average block size) by census block group.  They use census data to estimate the average home and transporation costs as a percentage of median income. The map's creators' point is that those suburban homes are a whole lot more expensive when you factor in transportation  costs. 

I'm fuzzy on their methodology for estimating transportation costs.  I spot-checked the block groups around my neighborhood, and found big differences in transportation costs that I'm skeptical exist.  And bear in mind that housing + transportation costs may take a huge bite out of, say, a Pflugerville household's income, but they would probably be a mere nibble compared to the bite of a central Austin mortgage payment.

Still, this is the coolest thing I've seen in a while.  (I admit that I probably have a warped sense of "cool.")

H/t Smart Growth around America.

Condo conversions

One argument frequently trotted out against zoning for greater density is that it encourages the redevelopment of low-income rental.  But it is silly to believe that zoning can maintain the stock of affordable housing.  When rents lag behind home prices, owners will simply convert the apartments into condos. 

I'm aware of three condo conversions on South Lamar, one on Thornton (around the corner from my house), one off Oltorf, and one on South Congress.  There apparently are many more:

Last year, 824 apartments were converted to condos in Austin, from the downtown area to the suburbs. This year, 1,167 more units are expected to be converted in the Austin area, said Robin Davis, manager of Austin Investor Interests LLC, which tracks the apartment market.

That's a lot of low- to moderate-rental taken out of the market.  On a positive note, the converted condos are a lot cheaper than the new stuff being built.

I suppose Austin could take the San Diego/San Francisco/Berkeley approach of limiting condo conversions.  A saner approach would be to permit small infill projects that blend in with the neighborhood.  And lots of dense multi-family projects on transit corridors.  The stuff built today will be the affordable housing 20 or 30 years down the road.   

The McMansion ordinance as an anti-gentrification tool

The Organization for Central East Austin Neighborhoods (OCEAN) wants to drop the McMansion ordinance's guaranteed minimum home size of 2,300 sq. ft. for Central East Austin lots:

Over the years, Rudolph Williams has watched house sizes grow in Central East Austin. More and more, two- and three-story houses are replacing the one-story, 1,500-square-foot houses typical of the area.

Although the city clamped down on home sizes in proportion to lot sizes last year, he has been working to tighten the rules even more for the smaller lots in his area — those less than 5,750 square feet — as a way to protect the area's character, culture, diversity and history.

. . .

Currently, the rules say that on lots of all sizes, a property owner can build a residential structure that is 2,300 square feet or has a floor area that is 40 percent of the area of the lot, whichever is greater.

The neighborhoods organization wants to remove the 2,300 square feet allowance for lots less than 5,750 square feet. So on a lot that's 5,000 square feet, the biggest house could be 2,000 square feet.

The article implies that OCEAN's main concern is gentrification:

Limiting the size of houses on smaller lots would help reduce tear-downs of rental units, the primary affordable housing option for low-income people in Central East Austin neighborhoods, and force developers to build smaller, Williams said.

However, the change wouldn't be effective alone, Williams said. It must come with other protections from local government and school authorities, such as tax relief for renters and increased homestead protection for poor homeowners, he said.

"We're at a tipping point right now. Can we create a neighborhood where rich and poor can live together?" Williams asked. "Or will this be another gentrification story? Another Clarksville?"

Gentrification is a complex issue.  I don't want to tackle it here.  But if you think you need to adopt anti-gentrification measures, I question whether you should start by stripping equity from the small lot owners.

Given the prices in Central East Austin, the loss of 300 buildable square feet would probably be worth $10,000-$20,000 to the small-lot owners (lots with around 5,000 sq. ft.).  Eliminating the McMansion minimum would hurt them and no one else.  It would not penalize the owners of lots that have already been redeveloped -- i.e., the yuppies living in spanking new $300,000 homes.   

I haven't been to a single OCEAN neighborhood association meeting.  Perhaps the people who would be adversely affected by this uniformly support it (in the hope of lower taxes, for example).  But I'm always skeptical of plans that would put all of the burden on a small minority, particularly a minority that had the least to begin with.  Neighborhood groups aren't as homogeneous as they sometimes claim to be.  The City Council should do its due diligence this time:  Before ordering small-lot owners to fight gentrification on behalf of everyone else, it should make sure they are volunteers rather than conscripts. 

Note:  I inadvertently published an earlier, very rough draft below the fold.  (There wasn't supposed to be a "fold.")  Sorry for the gibberish.