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Paradigm Shift: Rethinking Housing Affordability

The following article is based on a presentation given at a Marin Coalition event held on April 10th at the Club Restaurant at McGinnis Park.

Let’s start with a quiz:

Who said…

“[government] Housing policies decrease housing supply. Excessive rules, regulations, and red tape add to the cost of housing!”

Affordable Housing Facts

The Federal Housing Administration (the “FHA”) was created in 1934 to address the housing crisis that resulted from the Great Depression. Since that time, two things have become obvious. The first is that private, for-profit investors have never built and will never build any affordable housing without some type of financial subsidy or incentive. And the second is that the theory of “supply and demand” is not as simple as many claim.

National Archives

From 1938 through the 1960s, the federal government built, owned, and operated low-income housing projects across the country. The housing was very basic but it served its purpose.Unfortunately, the story of public housing (which came to be known as “the projects”) did not end well.

Below is a photo of Pruitt-Igoe in St. Louis: a 2,870-unit multifamily housing project designed by world-famous architect Minoru Yamasaki, opened to great fanfare in 1954.

The project was abandoned and demolished in 1972.


The reason was simple: Successive administrations and Congress failed to provide sufficient funding for adequate management and ongoing maintenance and operations.

The demolition of Pruitt-Igoe marked the beginning of the end of the government-owned and operated public housing in the U.S. Its demise began years earlier when Richard Nixon was elected President and declared that henceforth the federal government would stop building and owning low-income housing in the U.S.

Nixon’s abandonment of one of the founding principles of the New Deal was followed, 20 years later, by the Reagan Administration’s embrace of a theory called “Trickle-down/Supply-side” economics, promoted by prominent economist, Arthur Laffer, among others.

Trickle-down economics prioritized financial capital over human capital and argued that tax cuts for the wealthy would lead to investment in new businesses and jobs creation (the “trickle-down” effect) and that broad-based deregulation would lead to abundance for all (the “supply-side” effect). With regard to housing, this meant wholesale de-regualation of zoning and planning.

For a more detailed discussion of trickle-down/supply-side economics CLICK HERE

This went hand-in-hand with the Republican Party’s mantra about getting rid of“big government.” However, as attractive as this theory sounded, it resulted in disastrous consequences in every country that embraced it.

But the final nail in the coffin of federal government involvement in developing low-income and affordable housing came from the exuberant embrace of the “markets will solve everything” approach, which was proselytized by former Buffalo Bills quarterback turned U.S. Senator, Jack Kemp, when he assumed the cabinet position of Secretary of HUD in 1989.

Kemp built upon Nixon’s and Reagan’s policies and took it a step further by promoting the idea that the federal government could not only divorce itself from building, owning, and operating public housing but also from directly financing it. He believed that everything could be turned over to the private market via financial devices such as insuring private lenders, tenant rental vouchers, and what came to be known as low-income housing tax credits (LIHTC).

Most famously, HUD Secretary Kemp wrote a report entitled "Not in My Back Yard" Removing Barriers to Affordable Housing" (“The NIMBY Report”) in 1991, which was wholeheartedly endorsed by then-President George H. Bush.

The NIMBY Report said,

“[government] Housing policies decrease housing supply. Excessive rules, regulations, and red tape add to the cost of housing.”

So, the answer to the quiz was “both” said it.

Why was the NIMBY Report written?

On the surface, Kemp’s report appeared to be an extension of the policies that preceded him, but his motivation had nothing to do with wanting to help increase the production of affordable housing. Kemp’s primary motivations were,

But more importantly, his motivation was

I can attest to this, having sat in on conference calls in the 1980s, between developer clients and Jack Kemp and other HUD officials, during which these developers lodged their complaints about how local planning, zoning, and environmental regulations were an impediment to maximizing their profits.


The days of urban renewal and environmentally destructive mega-developments -- like Marincello, by Gulf Oil Company, which envisioned freeways and a massive, new city where Marin County’s Golden Gate National Recreation Area open space sits today – were coming to an end and many developers were very unhappy about that.

As a result, since the 1980s we have seen,

Unfortunately, human nature prevailed over all of these “trickle-down/supply-side” economic experiments. The wealthy simply used these programs to enrich themselves as much as possible and private developers continued to focus on building for the high-end of the housing market because that offered the highest rate of return on investment. Financing terms from private lenders have been at the mercy of market interest rates, and over time, the monetary value of Section 8 vouchers have failed miserably to keep up with market rental rates, making a housing voucher in counties like Marin, essentially unusable.

Meanwhile, the Low Income Housing Tax Credit program has been primarily aimed at the biggest developers doing the biggest projects (no LIHTCs go to small infill housing projects) and tax credits are doled out by unelected, bureaucratic state agencies (like the Department of Housing and Community Development in California) in a process that is fraught with political influence and insider access.

Worst of all, local governments have little say in LIHTC allocation decisions, so they are left without any “carrots” to offer to private developers to convince them to build the types of affordable housing their local community might really need.

Trickle-down/supply-side economics has been a bi-partisan affair

To be fair, I should point out that the dramatic deconstruction of the spirit of the 1930s New Deal, has been a bi-partisan effort and not all due to Republican administrations. Although the fundamental “free market” policies were set in motion during Republican administrations, subsequent administrations, including Obama and Biden, have all happily carried them forward.

In fact, for the past 25 years, federal housing policies have been increasingly focused on endorsing trickle-down economics and the “markets will solve everything” mantra and increasingly intent on pillorying any state, county, or city that dares to question it. And, here in California, Governor Newsom and Attorney General Bonta are both following Senator Scott Wiener's lead.

The irony of this Republican legacy seems to be lost on progressive, YIMBY housing advocates, who grovel at the political trough for funding from tech billionaires (desperate for employee housing at the taxpayer’s expense), Wall Street real estate investors (seeking bigger profits), construction trade unions (wanting to ensure union employment), and most prominently by the National Association of Realtors (who want more product to sell), to aggressively sue “delinquent” counties and cities.

But, all the politics aside, what the data is telling us?

What is “Affordability?”

A chart of inflation in different sectors of the economy, since the year 2000, clearly shows that housing cost inflation is not been extraordinary in comparison to other market sectors. In fact, the costs of energy (gas, electric, etc.), medical care, food & services, and college tuition inflation have all been greater than housing inflation over the same time period.

So, if housing inflation is not the lone outlier problem that politicians and the media have portrayed it to be, what is really going on that is making housing and everything else so unaffordable?

The next chart shows that the income gains of various income brackets were all rising in unison from the end of World War II until 1980 when trickle-down economics was embraced, at which point they began to diverge. The income gains of the upper 5% of the population began to run away from middle-class earnings gains and everyone else below them.

Similar data compiled by the Pew Institute, shown below, indicates that the American middle class experienced the biggest negative change in wealth while the poor went nowhere.

As noted, this data is not inflation-adjusted, so the reality is even worse.

If we look at “nominal” wage gains in average hourly earnings over the past 60 years, the gains look impressive. So, one might think that “trickle-down” worked. But that’s an illusion.

If we take this same data and display it, inflation-adjusted, we get a very different picture.

The real gains in average hourly earnings (purchasing power) have been zero for more than 55 years.

However, the truth is even worse than that. The chart below shows that the average number of hours worked per week has been steadily dropping, so the average worker is actually taking home less and less.

If we combine the net effect of all this, we get the chart, below, which shows that the inflation-adjusted, average weekly earnings of the average American worker has not risen since the 1960s and has been below that level for more than 4 decades since that time.

But, if the buying power of the average American family has not risen in almost 70 years, how are people making ends meet?

The chart, below, provides the answer.

It shows the divergence between “the cost of living” and “average disposable income,” after taxes, for the average consumer. The trends are ominously clear. Consumer credit (debt) is rising to fill the gap between Disposable Personal Income and the Cost of Living -- a gap that has been increasingly negative for decades.

It is telling that the dramatic divergence shown on this chart began soon after 1980 when the federal government’s commitment to trickle-down economics was put into practice.

As a result of all of this, according to the Bloomberg Housing Index, “housing affordability” is now the lowest (worst) it’s been in 50 years.


California’s Housing Policy Failure

The State’s chosen affordable housing methodology can be summed up as….

“The beatings will continue until morale improves.”

This modern “Inquisition” has everything “ass-backward.”

According to a recent study by the Orange County Register, the California State Legislature has passed approximately 160 new housing laws in the past 10 years. Each of these has removed various aspects of local control of planning and zoning and environmental protections. And, each of these has increased legal and financial penalties on local governments for failing to “build” enough housing to meet their state-mandated, Regional Housing Needs Allocation (RHNA) quotas.

These laws have also intentionally ignored the socioeconomic impacts of growth on communities and local government finances.

The Flaws in California Housing Laws

California housing laws have 2 major flaws, which ensure that the state’s approach will never result in the construction of any meaningful amount of affordable housing.

The first fatal flaw is that hardly any California counties and cities build housing, either because they lack the funding or have no local agency to do so.

At present, only San Diego, Los Angeles, Sacramento, Livermore, Alameda, and Santa Rosa actively have agencies with housing development capabilities or housing development programs in place. In all other instances, counties and cities are only involved in housing management services and rely on private developers to build housing in their jurisdictions.

What sense does it make to threaten and penalize local governments for not “building,” when that’s something they don’t do? Instead of helping local governments build housing, the state penalizes them for market dynamics that drive private investment in housing development that are completely beyond their control.

The second major flaw is that the state’s economic assumptions are flawed at best and outright fraudulent at worst. The state’s housing “needs” data continues to be unsupported by any facts.

False “Need” Based on False “Facts”

At this time, HCD and Governor Newsom claim that California needs 2.5 million new homes to fill its housing shortage in the next 10 years. Meanwhile, HUD and Freddie Mac say that the entire country needs 3.8 million new homes to fill the housing shortage for the entire country in the next 10 years.

So, are we do believe that California needs 66% (2/3rds) of the nation’s total housing need?! This, in a state that has been losing population for years and by objective analysis by the California State Auditor’s Office and the state Department of Finance is projected to have negative growth for the foreseeable future?

Despite this, throughout 2022 (after which the state was chastised by the State Auditor and the CA Department of Finance), HCD and Governor Newsom were claiming that California needed 3.5 million new homes in the next 10 years: 92% of the entire national housing need.

Trickle-down/supply-side economics simply does not work

If success is defined by the response to policies and programs by those it claims to serve, one has to ask, why then is the resistance to state affordable housing laws greatest at the bottom (e.g., South Central LA, Marin City, etc.)? Is it because these communities see things for what they are: just another scheme to promote gentrification and drive poor folks out of their homes?

Similarly, if success is defined by the number of homes being built, then we must look at the data to judge the efficacy of trickle-down/supply-side policies. But, the data suggests that trickle-down economics remains a theory in search of facts.

In a recent article called “The Case Against YIMBYism” by Michael Friedrich that appeared in The New Republic, the author writes,

“A decade since the YIMBY movement launched, there’s little serious evidence that its policies are the magic supply-increasing bullet that proponents claim, nor that they meaningfully decrease rents for working families.” [Emphasis added]

While some have rightfully taken issue with Friedrich’s analysis for not going far enough, historical housing data bear out his fundamental conclusions.

Consider the charts below.

Nationally, since 2008, housing starts have recovered to average, post-recession, 1980s levels. Now compare that to a chart of housing starts in California.

Since 2008, when the California Legislature passed Senate Bill 375, the first “trickle-down/supply-side” housing law, California housing starts have lagged the rest of the country by a significant margin. Based on the chart above, one might reasonably conclude that not only are California’s housing laws failing to produced affordable housing, but that they are actually hindering it.

One might be tempted to blame this on other factors such as mortgage rates. But mortgage rates are generally the same nationwide and according to data compiled by the federal government, 30-year mortgage rates are currently at the historical average since 1970, at 7.75%.

There is no statistical correlation between housing starts and 30-year mortgage rates. This strongly supports the thesis that our current “unaffordability” crisis, in California or elsewhere, is due to the lack of income gains and wealth accumulation as noted in the charts, above.

RHNA Poster

The Foreseeable Future Consequences of California Housing Policies

It is common knowledge that the latest round of “RHNA housing quotas,” handed down to counties and cities, by HCD, are grossly unrealistic, have no factual or statistical basis, and will be impossible for the vast majority of counties and cities to achieve under even the best of circumstances (which are not the times we’re living in).

For a more detailed discussion about RHNA CLICK HERE

We must ask then, how will local and state governments, particularly small to medium-sized counties and cities whose revenue-raising options are extremely limited, cover the costs of roads and infrastructure improvements and maintenance, new schools, public utility improvements and expansion, public services and public amenities, police and fire protection, environmental protection, and all the other socioeconomic impacts of unplanned and unregulated growth?

The only means available to them are through piling on more and more local taxes and fees and taking on more and more government debt. Add to that the draconian financial penalties they will incur for their quota failures, under state housing laws, and the legal/financial liabilities incurred from third-party (YIMBY and NAR) lawsuits, and we’re looking at a recipe for dire financial consequences.

So, what is the RHNA endgame?

The worst-case scenario is grim

As noted, above, there is no question that the vast majority of California counties and cities will fail to “build” the number of units and the types of units required by the current RHNA housing quotas. And since most have exhausted their ability to add more potential housing sites to their "Housing Opportunity Sites" list in the next round of quotas, if HCD continues to pile on ever more unrealistic quota requirements in order to achieve certification in the next cycle, cities and counties will either have to rezone large areas of single-family neighborhoods and public open space for high density development or, within the next 8 years, begin fail to achieve certification by HCD, which will automatically trigger “the builder’s remedy.”

Under the builder’s remedy, all local planning and zoning regulations are immediately set aside for “qualifying projects” (that have 20% “affordable” units) private, for-profit or nonprofit developers get to build pretty much whatever they want, wherever they want, regardless of the size, density, public costs, or socioeconomic impacts. And, if local governments refuse, they will be dragged into court and face severe financial penalties, requirements to pay for the developer’s court costs and legal fees, and can even be ordered to pay the developer for his loss of profits due to the local government’s delay in approving its project.

It is unquestionable that in these times, when many small to medium-sized counties and cities are woefully underfunded and local public services are already stretched, having to provide more and more public services and infrastructure for more and more housing will produce a rash of bankruptcies as a result.

Unless the state’s housing policies are dramatically reformed, the State Attorney General, HCD, and the ultra-progressive legislators, who carry water for Senator Scott Wiener/YIMBY/big money juggernaut, will likely use all of this as an excuse to once and for all strip counties and cities of the remainder of their “police” powers to control local planning and zoning, and wrest local control of all planning and zoning to the state and regional level, administered by unelected, politically appointed, bureaucrats.

So, is there anything we can do right now?

Federal and state policies and programs need to change, immediately, if there is any hope of addressing our affordability challenges in a meaningful way. There are several things that could be done relatively quickly but several common sense suggestions would include,

This will take major structural changes in how all the related agencies function and the creation of new agencies, particularly at the local level, and it will take funding to accomplish this, but it can be done. And, again, as history has shown us, the commitment to build and operate low-income housing must be a long-term one with adequate funding programs to ensure its operations, ongoing maintenance, and professional management.

Rent control of privately-owned housing has been counter-productive throughout the past 75 years. Its negative impacts on private, capital investment have always outweighed the resultant housing benefits.

Historical evidence shows that rent control has generally been an ineffective and counter-productive policy that has failed to address housing affordability issues. Rent control is counter-productive because its negative impacts on private, capital investment outweigh the resultant housing benefits and it distorts the housing market, which leads to inefficient allocation of housing. It has been shown to reduce the supply of rental housing over time.

Rent control of private housing units causes landlords to neglect maintenance and upgrades, and leads to shortages and long wait lists as renters are reluctant to give up their rent-controlled units.[1] This can result in a mismatch between housing supply and demand.

Surveys have found that over 90% of economists oppose rent control, and studies have shown that the removal of rent control actually leads to faster growth in the housing supply.[2]

A stand-alone Government housing agency is at a great disadvantage when it comes to developing affordable housing. Agencies should expand affordable housing opportunities by entering into partnerships with for-profit, private capital financed organizations that are developing mixed-use projects. This will allow them to benefit from economies of scale and their residents will benefit from living in proximity of goods and services and jobs.

The Low Income Housing Tax Credit has been one of the most successful affordable housing incentive programs since its inception in 1986. However, the federal allocation has been dismally underfunded ever since.

Consider the graphic, below. It shows the appreciation in the value of an average home in an average market (i.e., a home in a middle class neighborhood in Denver, Colorado). As it shows, that house has appreciated 10 times its 1986 value, to date, while the LIHTC has only been increased .65 times.

For the LIHTC to just keep pace with the cost of housing, it would immediately need to be increased tenfold, to at least $68 billion a year.

The method of distributing federal LIHTC allocations, across the country, is archaic. It was created at a time when the LIHTC was the only housing tax credit subsidy and its operations were between HUD and the housing agencies of each state. Since that time, this centralized, top-down methodology has been mimicked for allocations of state tax credits, as well.

As such, tax credits must pass through state agencies (e.g., HCD in California) run by unelected bureaucrats who negotiate directly with and distribute credits directly to private, housing developers. Local counties and cities have almost no say in this process. This situation is ripe for political influence-peddling and strong-armed lobbying by major financial interests.

As a result, the tax credit process favors large developers building large projects. Small and medium-sized local housing developers, essentially, have zero chance of securing tax credits for appropriately scaled, infill-housing projects.

The solution to this is to revamp the program so that a state’s federal LIHTCs are allocated directly to local county and city governments, based on the percentage of their population in their respective state.

The reason this would be so effective, is that not only would it eliminate wasteful and unnecessary state bureaucracies and back-room political influence, but much like federally funded food stamps (which can only be spent on food), housing tax credits can only be awarded for “low-income” housing development. So, why not cut out all the money-wasting middle-men.

This would put a powerful negotiating tool (a “carrot”) in the hands of local governments so they could negotiate with private housing developers who compete to earn those credits.

It is a misnomer that “big money” is always seeking the highest return. Institutional investors, private money managers, pension funds, insurance companies, large foundations, college endowments, sovereign funds, and others are equally concerned with consistent, stable, dependable, and safe returns. And real estate is at the top of that list.

The IRS Section 1031 tax-free exchange rule is used by the majority of real estate investors. It allows the exchange of appreciated, investment real estate for other “like-kind” investment real estate and deferment of capital gains taxes on the profits from a sale. Its purpose is to add liquidity to the real estate markets and encourage investment.

If the tax law was changed to allow tax-deferred exchanges of “non-like-kind” investments if and only if that exchange resulted in an investment in the preservation, development, or redevelopment of low-income housing, investors sitting on gains in other types of investments, such as stocks, artwork, Bitcoin or whatever, could invest in low-income housing projects and defer all taxes on their appreciates gains and benefit from government-subsidized rents, depreciation tax write-offs, and a more predictable asset appreciation.

This could, conservatively, free up tens of billions of dollars for low-income housing development.

There is no mystery

When you take all these factors into consideration, it’s obvious that our housing affordability challenges are not about “local zoning” or “using CEQA to stop development” or “NIMBYS” or overly-simplistic “supply and demand” analysis. It’s much more about disparities in income, wealth accumulation, and equity opportunities.

It is popular to say that people should pull themselves up by their bootstraps. But as Al Franken once said,

“First you have to have boots.”

“Affordability” challenges can’t be solved in isolation, because they are fundamentally about haves and have-nots. And, although it’s impossible to quickly address all of our socioeconomic inequities, what remains true is that far too many people, today, lack…

And too many suffer from the gross inequality of our tax system, whereby the average middle-class worker pays a higher tax rate than most billionaires and pays a much higher percentage of their after-tax disposable income for state and local taxes and fees than the most wealthy among us.

At events I’m spoken at, someone will inevitably ask why they should care about all this or change our system for other people, who in their minds don't have what it takes to succeed. And they argue that we can’t afford it and that it’s unfair that we all should have to pay for someone else’s failure.

To that I can only say that history is replete with examples that have shown if a society doesn’t at least try to bring everyone up, together, those who are left out will eventually bring it all down. Helping others do well turns out to be a good investment. On the other hand, even from a selfish point of view, trickle-down economics is a very bad “investment.”

It undermines our long-term economic prosperity, and our faith in the fairness of our democratic institutions, and corrodes the social cohesion that defines our communities. All these are essential for us all to thrive and for our shared socioeconomic security, health, and well-being.