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Yuppies In My Backyard: SB-827 and Deconstructing Community – PART III

Development Lowers Housing Costs and Other Myths:

Recently, YIMBYs have excitedly commented on reports of falling housing prices and rents in places like Seattle and New York City. They see this as evidence that more development brings down housing costs. But, what they are misunderstanding is the difference between the natural boom and bust cycles of real estate development and long term economic and housing pricing trends.

Seattle, for example, has built tens of thousands of high density development in recent years, mostly for the exploding tech worker market. New York has seen the biggest flood of international investment in real estate in its history, mostly because foreign investors believe that its prices will never go down.

However, the real reason there is a noticeable fall in rental rates and condo prices in Seattle and New York is because of temporary over-building. And, almost all the housing built there in the past few years, was high end, luxury housing that was asking astronomical rental rates and sale prices. When too many developers speculate in over-priced markets, corrections always appear to be greater when measured in percentages, because the sales and asking prices at the top were so out of whack to begin with. But, make no mistake about it, barring a national economic slowdown, housing prices and rents in Seattle and New York City are going nowhere but up. Their jobs creation is simply too great.

Since the 1960’s, the San Francisco Bay Area has experienced significant ups and downs in the housing market, but the end result has still been less affordability, overall. In fact, for two years now San Francisco apartment rents have been falling, a trend that began before the latest wave of luxury residential development guarantees to glut the market. In 2017, approximately 5,400 new residential rental units hit the market in San Francisco.[1] And, according to Paragon Group (Analysis of Planning Dept. Q2 Pipeline Report, Jan 2018), an astonishing 63,450 units of rental and for sale residential units are now in the pipeline.

Will this classic boom and bust glut lower prices in the short term? Of course. But, they will be discounting from such a high number that even if rents drop 10% or 15% across the board, prices will still be out of reach for most people.

Unfortunately, none of this materially helps families who need low and very low income housing. None of this will enable holders of Section 8 vouchers to finally be able to rent where they'd like to live or near their job. Boom and bust market cycles may provide buying opportunities for those on the cusp but they won't solve our affordable housing challenges in the long run.

However, I will say this: YIMBY California founder Brain Hanlon is right about one thing. In an article in the Sacramento Bee, in July of 2017, he called the lack of funding for affordable housing a “sick joke.”

Why we’re Running Short on “Affordability”

An appreciation of history of affordable housing is a good place to start in order to make sense of the decisions we, as a society, need to make. [2]

The short-handed version is that although the country’s first public housing project was built in Milwaukee in 1923, it wasn’t until 1934, during the depths of the Great Depression, that the federal government began to make a concerted effort to create affordable housing. This was primarily accomplished through massive federal subsidy. Those programs and collaborations with private capital produced hundreds of thousands of housing units through the 1940’s, 50’s and 60’s. But, in the late 60’s, President Nixon ended all direct federal involvement in housing construction. Housing affordability in the U.S. has been decreasing ever since.

Today, the federal government’s involvement in low income housing is minimal. The Low Income Housing Tax Credit (LIHTC) was created in 1986 by the Reagan Administration and it, along with the Section 8 program, is one of the last major subsidy programs supporting affordable housing construction.

The program allows housing to be built by private capital with the federal government providing tax credits as an incentive (states doll out the credits and California has its own matching credits). It’s a sound concept. Private developers can apply for tax credits if they built low and very low income housing, then they can sell those credits for cash, to major corporations and Wall Street bankers.

But, let’s consider what has happened to that program since its inception.

In 1986, the federal budget allocation for the LIHTC was approximately $6 billion in subsidy. Today, the federal allocation is approximately $8.6 billion. In 1986, the median home value in San Francisco was about $161,000. Today, the median home value is almost 8 times that. This means that to just keep up with inflation, the LIHTC today would need to be about $50 billion. But, that would only address the housing demand calculated as of 1986. Today’s housing demand is many times what it was in 1986. Just spit-balling, I would estimate that in order for the LIHTC to begin to effectively address affordable housing demand, today, the national LIHTC subsidy would need to be over $100 billion per year.

So where is the money supposed to come from to address affordable housing needs? A good question.

Banks funded by private savings have traditionally been a major source of financing for real estate purchase and development. But, savers have been severely punished since 2008 by artificially low interest rates, making those holding cash feel like suckers. As a result, savings are down by historical measures.

In addition, since the early 1980’s, we’ve seen a massive expansion of debt, leverage and financial reporting shenanigans in almost every conceivable aspect of our economy: public, private and, corporate. Fancy accounting, souring stock prices goosed up by historic share buybacks, margin buying, artificially low interest rates, financial derivatives of every imaginable type, quantitative easing (printing money) and weak dollar policies have all kicked the can down a shorter and shorter road and masked the fundamental weaknesses in our economy and financial markets.

These trends have probably only caught the average person’s attention since 2008. That event exposed the great divide that has formed between the owners of assets and users of assets (renters). But, the 2008 crash did not cause the affordable housing crisis: it just exposed failures in our financial system and our failure to ensure what Franklin Roosevelt, in his speech before the San Francisco Commonwealth Club in 1932, called the government’s social contract with its citizens. It exposed the rampant corruption at banks around the world.

Or, as Warren Buffett has famously put it, “When the tide goes out you get to see who’s been swimming naked.”

If we want housing affordability, we either have to subsidize it (public or private capital) or move somewhere where demand is not insatiable. Even Google and Facebook have recognized this and in order to stay here are now planning to build their own 21st century versions of company towns, which may be a good thing. If multi-billion dollar tech companies need housing for their employees, then let them roll up their sleeves and have at it, rather than sit back and write checks to buy political power and leave the public to deal with the negative impacts and unintended consequences.

It’s Not Fair

Lack of affordable housing in the Bay Area for all income levels is clearly a problem, but the Senator Wiener and YIMBY supporters take this a step further. For them, it’s all about fairness, which raises some interesting questions.

Why are people, in general, even those who are entitled and well-off by most standards, becoming so tribal, desperate and angry? And, when did quality of life become narrowly defined as my quality of life?

This is, of course, the accusation YIMBYs make against suburbanites.

However, there’s a difference between wanting to preserve the quality of life that one has worked hard to maintain and demanding what someone else has. Being a suburbanite isn’t a “movement” or a belief system. It’s a middle of the road lifestyle solution that has worked well for raising a family and having a more healthful balance with nature. A suburb is not political and it does no good to politicize it.

The YIMBY movement appears to be based on a “what’s yours should be mine” philosophy, driven by a self-interested definition of “fair.” But, what is “fair?” Is it unfair if YIMBYs can’t afford to live in Tiburon, Napa, Sarasota or Lafayette? Absolutely! But, is their situation in any way unique?

My grandparents immigrated to this country as teenagers, a hundred years ago: couldn’t speak English, had few skills and no money. They’re only option was to live in squalid conditions in ethnic neighborhoods where people would rent to them. Imagine how unfair that felt. My own parents had their personal ambitions stunted, growing up in the Great Depression, then off to fight in World War II, only to come back to the stifling conformity of the 1950’s. Was that fair?

I know. I can see some readers rolling their eyes. But, it's the truth. Life is inherently unfair to the majority of people at any given time, and every generation has its challenges.

This is not said out of lack of empathy. That’s just how it is. Yes, certainly, it’s our obligation to address that unfairness and relieve people’s suffering as best we can, as a society. But, should individuals or categories of people (suburbanites) really be held personally responsible for the lack of affordable housing when the vast majority of them only managed to afford to live where they do by dint of a lot of hard work and a bit of luck?

Read Part I

Read Part II

Read Part IV

[1] Statistics by RentCafe 2017

[2] Please see The Best Laid Plans: Our Affordable Housing Challenges in Marin for an overview of how we arrived at the place we find ourselves today, regarding affordable housing.