The following is an expanded version of the presentation I recently made at the May 3, 2017 Marin Coalition luncheon on “Housing in Marin.”
We live in difficult times. We find ourselves surrounded by wealth and overnight billionaires, while fewer and fewer people are able to afford basic necessities of food, education, health care and housing.
So, it is understandable that people would have strong emotional reactions to this. However, emotions alone won’t solve these challenges.
Many of us are rightfully horrified by the Far Right’s “alternative facts.” Yet, the conventional wisdom about affordable housing is doing the same thing by repeating ideological wishes as “facts.” Wanting there to be more affordable housing and actually bringing that about are completely different things.
If I were to put a title on the methods conventional wisdom tells us, it would be “the beatings will continue until morale improves.”
The conventional wisdom believes that we can punish people into building affordable housing: that we can create more affordable housing through more punitive taxes and fees, and penalties, by creating taxpayer funded “housing trusts” and “development funds,” and by creating bigger and state and regional agencies. Conventional wisdom believes in decreasing local control and forcing development “streamlining” provisions, annual growth “quotas,” and state mandated, “by right” zoning control. It believes that growth itself will produce affordable housing;
I completely disagree.
Let’s look at reality. Not my reality or your reality but just plain reality.
Sales taxes, property taxes, impact fees, “housing trust” fees, in lieu building requirements and fees, and penalties are all regressive. They increase the cost of housing and cost of living in Marin, and those increases fall disproportionately on those who can least afford it.
Developers simply pass on these costs on to buyers and renters. And if they can’t, investment capital goes elsewhere. Money has little loyalty to any particular place.
If forced to build affordable units, developers will just demand the ability to build more luxury units to compensate for the cost of the few affordable units or they will claim projects are not financially feasible. However, the overall rise in housing prices that this increase in luxury housing creates more than offsets the benefits of the few affordable units created (i.e., property values respond to current sale prices - developing / sales of more luxury units / homes tends to raise the overall property appraisals in the neighborhoods where they are located).
Taxes and fees also drain funds out of the private sector, who are the only ones who actually build housing. And finally, mega-agencies inevitably result in abuses of power and “pork barrel” development projects, which is why all the redevelopment agencies in California were closed down after a ruling by the California State Supreme Court in 2013. They had become gigantic troughs of public funds that fed uneconomical “pet” development projects of politicians, big banks, big developers and big labor.
There is zero historical evidence that empowering bigger agencies and creating bigger and bigger plans (e.g., Plan Bay Area) result in the private sector creating more affordable housing. In fact, the only time when we created significant amounts of low income and affordable housing in the U.S. was from 1937 through 1975, when the federal government was actually directly financing and building that housing.
Bigger agencies and bigger plans simply add an enormous burden to the compliance workload of local staff and they increase development approval time and costs for private capital. At best, this ends up creating unsustainable development without affordability.
In other words: WinCup.
The fatal flaw in the top down, central control “logic” is that, today, government does not build any housing. And, in my opinion, they should not attempt to become real estate developers or builders or owner-managers of housing.
The fact is that the methods conventional wisdom relies on are a waste of public assets and more importantly “opportunities,” because land and potential development sites are increasingly precious. When we screw up a location opportunity, we are stuck with it for a lifetime.
Again, in a word: WinCup.
Finally, we constantly hear that housing affordability is the result of a NIMBY problem. Certainly, there have always been NIMBY’s, but it’s not true for the vast majority of people. I think lack of affordability, right now is predominantly being driven by social and economic factors.
It’s hard to blame longtime residents who have invested their lives in making Marin what it is today, for logically resisting poorly conceived plans for large-scaled change. Anyone who’s ever worked hard in their lives to earn enough to live in a place like Marin knows what that feels like. It doesn’t make them the enemy.
Whenever I speak in public in Marin, I see the audience start to divide when I start to criticize big agencies, big government and central planning. The crowd begins to separate into those who work in government or with big government on one side, and everyone else in the private sector, on the other.
It’s nothing new that people tend to know where their bread is buttered. Government officials, big developers, big banks and advocacy groups consistently favor big government whereas business owners, entrepreneurs and smaller private developers consistently favor smaller more efficient government. This is not a partisan issue.
But what I want to talk about are the results from my investigations and experience about what works and what doesn’t work, historically. Because history has shown us that it doesn’t matter what side we’re on or what we “believe” or what our “feelings” tell us. Cause and effect can produce predictable outcomes, regardless of our best intentions.
The question we should be asking ourselves is can our housing affordability challenges really be solved only on a local or county level?
My answer is “no,” they cannot.
Real inflation-adjusted household income has been falling since the 1980’s. New business formation has been falling since the 1990’s. As a result, income inequality has become the #1 cause of our housing un-affordability crisis. For similar reasons healthcare costs have become the #1 cause of bankruptcy.
We have the largest wealth gap between rich and poor in our history. In the 1950’s the average CEO made about 15 times the wage of their average employee. Today the average CEO makes more than 400 times that.
Why is that? A major driver is our current tax code.
None of us likes paying taxes. Particularly, if we feel our government is not spending our money wisely or efficiently. Today, both of those are true.
But, the fact is that from end of World War II through the early 1970’s, the margin tax rate on earnings over $1 million was above 90%. These enormous federal revenues built our entire national infrastructure: our roads and highways, major utilities and public infrastructure, public schools and libraries, parks and our major public transportation systems. It sent millions of G.I.’s to college, subsidized mortgages for homebuyers and build hundreds of thousands of units of low income and affordable housing.
It created the middle class.
Today, tax rates continue to trend down, particularly for the wealthiest, and our national, state, local and personal indebtedness continues to rise. Someone earning $100 million a year pays the same rate as someone earning a few hundred thousand. Political beliefs aside, this exerts a significant upward pressure on housing prices and a negative force on affordability.
Global investment has increased dramatically in the past 20 years. Add to that, since 2008, global money center banks have kept interest rates artificially low, at close to “zero” percent, while pumping tens of trillions of dollars into the global economy.
Where did a lot of that money go?
Real estate has become the “savings account” for investors around the world. It may be the only dependable, asset-backed, tax sheltered, investment vehicle available today that still produces a reasonable “yield” – rate of return on investment. It is almost considered risk free in the long run. And, San Francisco Bay Area is a top global investment market.
This fact alone has been driving up all real estate prices in California and around the world, and no amount of building will create housing affordability in that financial environment. And, when interest rates rise, affordability will be even further out of reach due to the earnings gap noted above.
Jobs and education
Global out-sourcing and global competition in the manufacturing and in service industries is increasing. This has created a enormous downward pressure on wages in all industries, even among previously immune professions such as doctors, lawyers and architects.
In addition, the number of jobs and skills that are becoming obsolete is increasing rapidly. This is dramatically impacting employment in accounting, bookkeeping, banking, publishing, education, insurance, marketing, sales, manufacturing (due to robotics) and retailing.
A joke in the real estate industry is, “What is the shortest book in the world?” It’s called “The Future of Retail.” It’s one page, which reads, “The end,” and it’s written by Amazon.
Coming full circle, we need to ask ourselves how does this impact the outdated Norman Rockwell, “mixed use” vision of “Main Street,” that local planners love so much, with the little apartments about the cute mom and pop shops?
Who will fill that “shop” space?
Our federal government has been getting out of the housing business since 1968, when President Nixon stated that intention. Since then, every major federal housing development program has been deconstructed or eliminated except for Section 8 subsidies and Low Income Housing Tax Credits.
However, Congress hasn’t increased the Section 8 voucher values to be even close to keeping up with inflation, particularly in places like Marin. Meanwhile, the federal Low Income Housing Tax Credit (“LIHTC”), which is the major federal subsidy to affordable housing development in this country, was $6 billion in 1986 and is now only $8 billion (2016 data). It would have to have quadrupled to even come close to the rise in housing values and rental costs.
So yes, of course, Section 8 voucher values and the LIHTC should be increased. And, while we’re at it, it would be helpful if federally funded housing projects were opened to competitive bidding instead of having to pay federally set “prevailing wages,” which are set by and heavily favor big unions and dramatically increase development cost to the point of making many projects financially infeasible.
And yes, it would be helpful if HUD would direct more funds to local Housing Authorities, such as our Marin Housing Authority, so they can properly maintain their public housing properties such as Golden Gate Village.
If it were up to me, we’d do without a couple of F-35’s and a few more nuclear missiles and find the funding.
But guess what? None of these things are going to happen.
We are on our own.
What to do?
We know conventional wisdom’s approach: more central planning, bigger government agencies, more top down central control. Even the Marin Grand Jury, who I greatly admire, recently said more of the same, more centralized control, is the remedy.
I respectfully disagree. Though I believe regional “co-ordination” of planning is desirable, that is not in any way the same as regional control. Look at it this way. We’ve been using this “punishment” and “top down” approach for almost 20 years in California.
As Dr. Phil says, “How’s that working for you?”
How many units of affordable housing has this approach produced in California?
And, what new ideas do we hear from government?
Well, former Supervisor Kinsey recently said, “We have seen the future, and the future looks like this.” “We’re going to need to use (tax payer funds to buy) our existing housing stock to achieve our housing goals.”
What an incredibly dumb idea. Why in the world would be use taxpayer funding to purchase real estate in one of the most expensive real estate markets in the world. Where is the “added value” or the financial leverage in that investment?
Or, consider the latest, proposed betrayal of Cap & Trade funds that’s circulating in Sacramento. The plan would be to re-direct as much as $1.5 billion dollars in funding away from subsidy in green business innovation, as was promised, to politically doled-out slush funds for big developers. Imagine what that funding could do if spent wisely.
Our elected representatives seem to be suffering from a profound lack of imagination and political courage. They seem willing to give away fundamental rights and local control for the long term in exchange for short term financial gains and a pittance in grants funding.
We need to remember that we live in a “capitalist” economy. That means we have to make capital work for us locally, not against us.
Development chases return on investment, so we need to enhance it for affordable housing. Investment of private capital and development responds to carrots and opportunity not ideology. So, we need to consider incentives and methods that are more financially efficient, while also being more locally adaptable and locally empowering. Gutting regulations to give private capital free reign without safeguards to ensure compensating public benefits is a recipe for disaster.
That considered, the state Government could do a lot.
How are we spending taxpayer money?
In order to consider new methods, it’s helpful to look at how we are presently spending taxpayer funds to promote affordable housing, and ask if those expenditures are producing the desired results.
Last year, the Association of Bay Area Governments (“ABAG”) had an operating budget of $58 million, $40 million of which they spent on “planning” and planning staff. Similarly, the Department of Housing and Community Development (“HCD”) in Sacramento spent $36 million on “housing policy development.” Meanwhile, in 2015, the Metropolitan Transportation Commission, which will soon be absorbing all of ABAG’s planning staff, does not break out its housing or planning activities but spent $80 million on outside consultants, a good deal of which was probably for the Plan Bay Area initiative.
In total, how many housing units have any of these bureaucracies ever actually built?
Now add the costs incurred by cities and counties to comply with the requirements and often whimsical demands and erroneous interpretations of the law by these multi-layered and often redundant state and regional agencies. It is not a stretch to say that in the state of California we are spending hundreds of million dollars on staff and their pensions and their benefits to deal with top down bureaucracies.
What if there were solutions that didn’t need such massive state agencies or their enormous planning staffs. What kind of savings could be realized by downsizing central planning administration and its policing arms?
I’m not suggesting that state and regional agencies can be eliminated. State and regional coordination of growth (vs. control) will always have benefits. But we need to start asking ourselves how to spend precious taxpayer funds as productively as possible.
Options and naysayers
So, you are asking, what could we be doing?
With regard to housing, I would suggest that we have to change the role of state government from “central planner” and “punisher in chief” to state “manager” and “market maker.” Don’t add taxes and fees and penalties. Add incentives and financing options.
But here’s the catch about change and new ideas. We’ve all observed situations where everyone is basically in agreement with the fundamental problem: the need for more affordability. But somehow, when someone suggests a new idea, which inevitably involves “change” in the status quo, an odd phenomenon occurs.
That person and their idea are attacked from all sides. Somehow any new idea has to be perfect in every way and immediately solve every problem or it is categorically dismissed. Somehow the bar suddenly rises from “we need to do something” to “nothing is good enough” to even try.
So, the suggestions I’m going to offer are just that: suggestions. I don’t claim they are perfect or will solve all problems. I don’t know if they will all work once fully vetted and analyzed. All will involve changes in public policy and some will involve changes in state laws, or federal approval. However, what I do know is we have to start the discussion somewhere, and that somewhere has to be a new somewhere, untethered from what we’ve been doing for the past two decades.
Since I believe our affordable housing challenges are driven more by income inequality and lack of financing options, to paraphrase Willy Sutton, I suggest we start “where the money is.”
Simply put, my proposals are these. Dramatically downsize state and regional agencies and shift the decisions about and approvals of affordable housing solutions to local government. Use state cost savings achieved and make changes in state regulations and tax law to stimulate investment and empower local governments to be able to offer incentives for affordable housing development.
I am not so naïve as to think we will abandon statewide growth projections and jobs projections, or stop using that information to inform and coordinate the challenges local municipalities face. But there’s a chasm of room for improvement between that scenario and the draconian way planning is being done today.