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Affordable housing solutions: more government, less government, or smart government?

Black and white thinking is the death of creative problem solving. And the tendency to argue by “sound bite,” which has become so normalized by social media, leads to solutions based on nothing more than noise.

On one side, advocacy groups and politicians gravitate to ideologies supporting more government and top-down solutions. On the other side, groups promote free markets and less government as the panacea for all that ails us. But, it’s not about more government or less government. It’s really about “smart” government. And the best way to examine what is or is not smart is through the cold lens of economics.

All real public wealth is the result of the efficient utilization of private manpower and capital (the tax base), which is measured as “productivity.”

The efficient utilization of capital is absolutely critical to addressing any large scale, systemic challenge such as affordable housing. Capital is always limited.

It’s no secret that government, and particularly unelected agencies such as MTC, have not shown themselves to be efficient stewards of our taxpayer dollars nor are they proficient at creating affordable housing. So, our skepticism of grand plans such as the CASA Housing Compact are more than justified. At the same time it’s also clear that although the market is good at efficiently utilizing capital, left to its own devices, markets and self-interest have an equally poor track record of producing affordable housing.

Clearly, government has a role and in fact the central role in addressing affordable housing and other tragedies of the commons.[1] But the question is by what methods -- a system of punishments and taxes and wasteful confiscation of private capital by “middle man” agencies or a system of incentives and benefits within guidelines that create direct investment of private capital in affordable housing?

In other words, do we want to create affordable housing policies that decrease the efficient utilization of capital or policies that increase the efficient utilization of capital?

Regardless of the scale of development, sucking private capital into more and larger government, middle-man agencies is arguably the least efficient use of capital. Agencies and their layers of staffing, rules, approvals, quotas, maps, penalties, housing trust fees, and so forth skim off significant percentages of limited capital without public benefit.

They decrease the productivity of capital. And those agencies’ tendency to try to pick winners and losers based on rigid rules and political ideology, all but guarantees failure.

The “social capital” costs of this methodology are also far too high. It risks destroying the fabric of communities, which ends up being a disincentive to private capital investment that is seeking stability and predictable returns, above all else. But although private capital is better at knowing what to build where, private capital needs to be carefully directed toward desired affordable housing outcomes.

The thing that matters most is results. Regardless of how “fair” or politically correct a proposal might be, if it makes the utilization of capital less efficient, it will ultimately work against our affordable housing goals. This explains why many of the affordable housing policies of the 1950s led to the collapse of the outcomes of those policies in the 1970s, e.g., the Pruitt Igo Public Housing Project in St. Louis, Missouri.

So, what to do?

The first thing to do is to acknowledge some facts. The “market” will not build affordable housing on its own, regardless of zoning changes, and RHNA quotas and punishing cities that don’t actually build affordable housing for not building affordable housing is equally counter-productive.

We also need to acknowledge that our affordable housing “crisis” is just one of many symptoms of our overall standard of living / affordability crisis, and therefore cannot be solved in a vacuum. Doing that helps us focus on what we can do, not on what we wish we could do.

Finally, California is not a sovereign nation. We have no Federal Reserve to control interest rates or set monetary policy (e.g., quantitative easing[2], etc.), nor do we have a Treasury to print currency. So, we cannot significantly impact “affordability” (housing and standard of living) if the federal system is working in the other direction, unless we are very strategic in our approach.

This makes a good case for why all California elected officials need to be applying maximum pressure on Washington DC, to take housing affordability seriously. We need their help.

We also need to be aware that when public and private debt burdens are low and wages are relatively high, we can raise taxes and fees to accomplish public benefit goals. But when public and private debt is high and wages are struggling to keep up, raising taxes and fees to accomplish public benefit goals is a disincentive to investment and further impoverishes those we’re trying to help. In the 1950s and 60s, housing policy was dealing with the former scenario. Today, we are dealing with the latter.

This limits our options.

Why top down planning is a flawed approach

State zoning control, the CASA Housing Compact and Plan Bay Area all share the same two fatal flaws:

The first fatal flaw in the top down approach is that layers of rules, maps, penalties, housing trusts, fees, and zoning giveaways without circumstance-specific goals will fail to produce economically sustainable affordable housing. The market, being primarily driven by short term profits, is simply incapable of addressing long term policy goals in a financially feasible way.

At the same time government agencies have proven to have extremely limited ability to understand the dynamics of growth or financial markets or how to efficiently deploy capital. If the private sector had the kinds of delays and cost overruns government agencies and contractors regularly produce (e.g., MTC and the Bay Bridge), the entire country would soon be bankrupt.

Unarguably, in any endeavor, the most efficient way to finance anything is to cut out as many middle men as possible (e.g., the Internet), which generally means fewer and leaner government agencies, not more and larger government agencies.

The second fatal flaw is that generally, the top down approach has everything upside down.

The terms “top down” and “one-size-fits-all” are thrown around a lot these days. But what do they really mean? The problems that result from top down control are not just about planning and directives being issued from the top down, but because the focus of all the programs and allocation of public funds is designed and targeted only for the biggest development project types and investment interests -- major lenders and developers at the top.

Ironically, the vast majority of opportunities to address affordable housing are at the bottom: local infill development opportunities.

If you need proof of that, and if you live anywhere other than downtown San Francisco, downtown Oakland or downtown San Jose, just go online and look at the parcel sizes in your community. Small to mid-sized affordable housing development opportunities outnumber larger scale opportunities 1,000 to 1. And those are better addressed by small to mid-sized local developers.

Large-scale housing development is also completely different from smaller scale infill housing development: it is a different business in every conceivable way -- from how it’s financed to how it’s constructed and who builds it. The capabilities of these two types of developers are also completely different and no developer is good at both.

The need for parallel bottom-up affordable housing policy

All evidence suggests that we actually need two separate, parallel types of housing policies.

We already have a robust system in place to benefit large-scaled development and major financial interests. But we need to craft legislative solutions that concentrate on empowering local government agencies and local developers and property owners.

Concentrating power and capital only at top and to the biggest stakeholders fails to engage middle class, small to medium-sized local developers, who are much more attuned to recognizing local affordable housing opportunities. Small to mid-sized local developers are also far more adept at pursuing infill development, adaptive reuse, and historic preservation than large-scaled “scrape and build” developers.

The “feed the top” approach, which we’ve been using for 30 years without success, fails because it neglects the fact that at any given time the majority of investment capital and human capital is not being deployed at the top, but somewhere in the middle. Because of this, existing housing policy is failing to capitalize on the power of local solutions and opportunities at appropriate scale.

Small to mid-sized, local developers see many opportunities where large, regional and national developer don’t or can’t. But there are no incentives or programs to support locally driven development. No tax credits. No subsidies. Nothing but the occasional philanthropic grant or low interest loan, which isn’t even that low.

The consequences of this should not be underestimated.

Consider that a typical, large nonprofit affordable housing developer can seek tax credits and subsidies, but cannot effectively manage projects under 50 units or cost effectively syndicate Low Income Housing Tax Credits for projects of less than 100 units. At the same time small to mid-sized developers can built smaller projects on thinner margins, but stand close to zero chance of competing for federal or state Low Income Housing Tax Credit allocations.

So, if all of the affordable housing programs and incentives are skewed toward the biggest development and financial interests, how is any “infill” affordable housing financially feasible in the majority of San Francisco Bay Area communities?

The answer is, it’s not.

The current trend to only consider the largest participants as “stakeholders” and crafting all public policy to fit their needs, is huge mistake.

We need incentives and tax breaks that are available to local developers and property owners, directed by local planning and economic development agencies, not from Sacramento, in order to take advantage of the wealth of affordable housing opportunities that actually exist in most of our towns and counties.

In suburban and ex-urban communities in the San Francisco Bay Area, the vast majority of affordable housing opportunities are for duplexes, triplexes and four-plexes and more modest sized infill development, not for large, 100+ unit projects. In addition, much needed technological innovation and design flexibility is more likely to come from the bottom than from the top. Small to mid-sized, entrepreneurial developers are by and large far more responsive to local community needs than major real estate developers, who are beholden to big money backers seeking risk-adverse returns.

Empower local solutions by local governments and local developers, equally

In California, if we want to provide affordable housing throughout the Bay Area, we need policies that empowers and supports local solutions directly. Trying to turn every town into a mini-San Francisco is just plain dumb.

Some of these programs and initiatives to promote small to mid-sized affordable housing development might include:

And last but not least…

Link affordable housing development assistance, big and small, to science-based, green building and clean energy technology -- not political rhetoric or ideologically-driven beliefs. It’s time to bring housing construction into the 21st century.

California’s recent announcement of its clean energy goals – 100% clean energy by 2045 – and General Motors announcement that it is going “all electric” and abandoning the internal combustion engine, redefines the relationship between housing, transportation and environmental impacts.

Any government planning based on eliminating cars is planning for the past, not the future. The increasingly rapid transformation of “personal transportation vehicles” using alternative fuels has relegated the junk science of Transit Oriented Development (TOD) and Plan Bay Area into the dustbin.

Conclusions

We have an incredible opportunity, using the power of simple legislation, to move forward and to do so quickly and effectively to create affordable housing.

Will the politicians in Sacramento seize the moment?

Will our locally elected officials speak up and fight for it?


[1] The tragedy of the commons is an economic problem in which every individual tries to reap the greatest benefit from a given resource. As the demand for the resource overwhelms the supply, every individual who consumes an additional unit directly harms others who can no longer enjoy the benefits.

[2] Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.

[3] Affordable housing opportunities and needs vary from place to place; e.g., senior housing in one location, migrant worker housing in another, teacher housing in another, etc.


Bob Silvestri is a Mill Valley resident and the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization funded only by individuals in Marin and the San Francisco Bay Area.