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Comments on "Paradigm Shift"

Granted, all of us are looking for answers and none of us has a magic bullet to address the current challenges regarding housing affordability, but history shows that there are important economic and financial indicators that we need to respect when we're making housing policy decisions.  That said, comments about my recent blog, "Paradigm Shift," which presented some of those indicators, misconstrued its intentions. This critique, entitled, "What's really driving housing unaffordability, starts out of the gate with an "example" that misquotes me and takes statements out of context.

The author writes,

"For example, the article states that “the reason (that high-rise public housing projects proved unlivable) was simple: Successive administrations and Congress failed to provide sufficient funding for adequate management and ongoing maintenance and operations. This is thoroughly refuted by scholarly study, initially by Jane Jacobs and then by architecture Professors Russ Ellis and Clare Cooper Marcus at UC Berkeley.”

My statement, which did not include the added parenthetic distortions, only referred specifically to one project, Pruitt Igoe, not "high-rise public housing projects." And Pruitt Igoe was not just any project and whether it was high-rise or not is beside the point. "Pencil" skyscraper condos of New York sell for tens of millions of dollars and are among the highest of high-rises in the country, and Stuyvesant Town in New York City was 100% "affordable" and very similarly constructed to Pruitt Igoe, (it was even taller) but it was and remains and extremely successful project because of the way it was financed -- a public private partnership -- and the social equity issues it intentionally addressed (a rent-to-own program).

Pruitt Igoe was most certainly made uninhabitable by lack of maintenance funding and absentee management. This is well-documented. Its demise had nothing to do with high-rise versus low-rise or the psychology of the tenants, who were the victims in that story, as is usually the case in public housing failures.

If one wants to see a present day example of why "public housing" has failed, just look at the last great public housing project in Marin County, Golden Gate Village, which has over $100 million in deferred maintenance and many of its 300 units are basically unlivable.

As noted, my critic cites the work of Berkeley professors and Jane Jacobs. However, we must understand that Ms. Jacobs was born in 1916 and died in 2006 and wrote about housing in 1961 -- a time even before the Equal Rights Act that bares no resemblance, whatsoever, to how or why affordable housing is built today.

My critic goes on to dismiss the entire thesis of my article by saying that the fact that for-profit developers do not build affordable housing without subsidy, is "self-evident." But my point is that not about that. It is that our "affordability" challenges are more holistic than just the cost of housing.

As such, he fails to grasp the subject I am writing about: why those in need, need income and wealth even more than housing: that unaffordability in all things these days is an "income" and a "wealth" problem not an overly simplistic supply and demand problem.

This is not idle conjecture. The economic and statistical data presented in "Paradigm Shift speaks for itself. At the same time, there are no credible studies indicating that supply and demand set "market rate" rental housing prices. See "We zoned for density and got higher housing prices." We don't seem to do this kind of research in this country, perhaps because the results are not politically correct.

Developers build the product that makes money. If affordable housing did, they'd build it. But they won't do that without subsidy financing, so the preponderance of what they do build is high-end housing, which is in high demand because of our wealth inequalities. At the same time, in cities like San Francisco, Palo Alto, and Marin County, a Section 8 housing voucher is essentially worthless because its value is not near enough to pay the theoretical 2/3rds of the rental cost of an apartment.

Housing booms and busts

With all due respect to Berkeley, et all, consider that my assessment is based on 50 years in architecture, planning, and development, not academia. As managing partner of a number of sizable low-income, multifamily housing development projects (90 to 300 units, each), I was responsible for risking tens of millions of dollars of our partnership's money: where the rubber meets the road.

My perspective comes from having lived through and worked in the housing business through the rolling recessions of the 1970s, the Volker rate hikes that shut down all housing development (the prime rate/fed funds rate went to 20% in June of 1981). One of my firms was also an Resolution Trust Corporation workout contractor in the late 1980s, to help sort through the REO ("real estate owned" by the government and banks) carnage of the Savings and Loan crash.

Much of this housing was done with non-recourse loans and project-based bond financing, which has unfortunately come back into favor.

Subsequently, I served as an expert witness for the Office of Independent Council in Washington DC, in the 1990s, when they investigated HUD housing corruption of the Reagan years, something they should do again, this time for it being so incredibly ineffective. In my opinion, HUD remains one of the most dysfunctional government agencies in the country.

Cumulative Challenges

The failures of our housing policies have been cumulative and ongoing and my comments are based on observed history, not conjecture or academic theory. Housing supply and demand is a reflection of a long curve that starts and ends long before buildings go up or stop going up.

My critic talks about how abundant rental apartment housing was in the 1970s, based on personal experience in Berkeley at the time. But that was partially because the income divergence between rich and poor, between CEO pay and average worker pay, didn’t start until the 1980s. But more-so, the 70s was a time of rolling recessions and a huge inflation bubble building boom, built on cheap finance and non-recourse lending. Following that, there were millions of vacant apartments when interest rates/mortgage rates skyrocketed in the early 80s and developers went bankrupt by the scores.

At that time, my brokerage firm represented major national funders like GE Capital and Property Company of America. Valuations seemed bottomless. We couldn't give away portfolios of apartments for $18,000 a unit that ultimately renovated and sold in the 90s for $80,000+ a unit.

Ironically, rental costs and availability and the supply and demand of housing equation in the 1970s really had nothing to do with the market dynamics of supply and demand. It was an artificial market. That's why there were crashes and bankruptcies and tenants thrown into the streets in the 1980s. This is where social sciences miss the mark because they fail to adequately consider economics and finance.

That's why HUD's Moderate and Substantial Rehab programs were available in the mid-80s. That's why Low Income Housing Tax Credits (LIHTC) were invented in 1986. That's why "co-insurance" (government guarantees against losses by private lenders providing construction loans and long term mortgages for affordable housing development) was offered in the 1980s.

In sum, the housing markets of the 70s and 80s had nothing at all in common with anything that is going on today.

And, if anyone believes that the history of our economic system, up to today, has provided everyone with “wide-open opportunities,” equally and equitably, then there’s nothing I can really say.

Finally, I would just suggest that “greedy developers” cannot exist without misguided housing laws that feed their greed... like the housing laws California has today.

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