DO AFFORDABLE HOUSING MANDATES WORK? EVIDENCE FROM CALIFORNIA

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DO AFFORDABLE HOUSING MANDATES WORK? EVIDENCE
FROM CALIFORNIA

• Benjamin Powell, Ph.D.
• and Edward Stringham, Ph.D.
• Department of Economics
• San Jose State University

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Overview

• Long Term Problems
• Income Targeting
• Mobility
• Improvements
• Administration
• Debate
• Density Bonuses
• Housing Cost
• Socioeconomic Integration
• Supply Restrictions

• Motivation
• Housing Market
• Bay Area Supply
• Below Market Rate Production
• Economics of Affordable Housing Mandates
• Costs of Affordable Housing Mandates
• Level of Tax
• Effect on Home Prices
• Effect on Supply

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When I went to grad school in Virginia, I lived
in in this luxury highrise with a classmate for
655 per person.
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When I got a job in California, I figured I could
live an equivalent building like this one.
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The Problem Housing prices are very high

• In San Francisco the Median Priced Home sells for
  735,000
• In Santa Clara County the suburbs, the Median
  Priced Home sells for 670,000
• Source San Francisco Chronicle, October 2, 2005

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The Problem Housing prices are very high

• That means housing payments for these median
  priced homes in Santa Clara County are 3,800 per
  month, 45,000 per year, or 125 per day!
• (Assuming a 30 year mortgage at 5.5 percent)

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High prices preclude many from buying
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Why are prices high?

• Supply has not kept up with demand
• Are we running out of land?
• Housing is unaffordable because of zoning laws
  (Harvard/Wharton study)
• Exclusionary zoning laws mandate minimum lot
  sizes, minimum density, and other restrictions
  that prevent the market from supplying more
  housing

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The proposed solution

• Inclusionary zoning
• A mandatory inclusionary zoning ordinance as
  practiced in California is an affordable housing
  mandate that requires builders to sell a certain
  percentage of their homes at below market rates

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The goals of inclusionary zoning

• The program is touted as a way to make housing
  more affordable
• The program is touted as a way to provide housing
  for all income levels, not just the rich
• Helps create diverse socio-economic communities

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How inclusionary zoning ordinances work

• Varies by city, but most California ordinances
  require 10-20 percent of new units to be sold at
  prices affordable to low income families (defined
  as a certain percentage of median income)
• For example, in Tiburon, California a low income
  family can only afford to pay 109,800 for a home
  so
• 10 percent of new homes in Tiburon must be sold
  at 109,800
• 90 percent can be sold at market rates

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Where do they have it?

• Most popular in California
• Also in place in New Jersey, Virginia, and
  Maryland and are being considered in many other
  places including DC, Chicago and New York

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California cities with inclusionary zoning
ordinances
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What are the results?
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Examples of below market rate developments
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Examples of below market rate developments
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Examples of below market rate developments
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Examples of below market rate developments
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Examples of below market rate developments
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Examples of below market rate developments
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• Looks good right?
• Many people say the programs are a success and
  should be implemented in more cities

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Assessing inclusionary zoning

• How do advocates measure success?
• What evidence do they provide that the ordinances
  are good?
• Whats the normative standard?

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Number of inclusionary zoning ordinances in the
Bay Area
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Role of Economic Analysis

• Just because a policy is becoming more popular
  does not mean it is a good idea
• Hoping something is a good idea does not make
  something a good idea
• Some policies may not be the best means of
  achieving the desired ends of increasing housing
  affordability

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Role of Economic Analysis

• Inclusionary zoning sounds good to many people,
  but my coauthor and I decided to investigate the
  actual results of the policy rather than just
  looking at the expressed intent
• What does economics have to say?

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Some research questions

• Is inclusionary zoning helping increase the
  supply of affordable housing in California?
• How costly is inclusionary zoning?
• Are there any drawbacks that have not been
  considered?

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First lets compare an estimate of housing need
to how many units inclusionary zoning produces
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Association of Bay Area Governments 2001-2006
Estimated Affordable Housing Need by City
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How many units does inclusionary zoning produce?
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Need versus actual production of affordable units
by Bay Area city
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Need versus actual production of affordable units
by Bay Area city

• Fewer than 7,000 units in 30 years
• Only 228 Annually
• Average city produces fewer than 15 per year
  after adopting a program

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Production Compared to Need
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Why does inclusionary zoning do a poor job?

• Despite its attractive sounding name,
  inclusionary zoning is nothing more than a price
  control
• If economists agree on anything, its that price
  controls (price ceilings) on housing reduce the
  quantity and/or quality of housing supplied

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Economics of Affordable Housing Mandates

• Price ceiling on a percentage of units
• Essentially a tax on the remainder of units
• Increases prices for the vast majority of
  homebuyers
• Decreases quantity of housing produced

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Economics of Affordable Housing Mandates

• Price ceiling on a percentage of units
• Essentially a tax on the remainder of units
• Increases prices for the vast majority of
  homebuyers
• Decreases quantity of housing produced

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Inclusionary Zoning Creates Two Markets First
the Price Controlled Market
PRICE OFHOUSING
Supply of Housing
P1
Affordability Control
Demand for Housing
QUANTITY OF HOUSING
Qs w/ control
Qd w/control
Qs w/out control Qd w/out control
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Inclusionary Zoning Creates Two Markets First
the Price Controlled Market
PRICE OFHOUSING
Supply of Housing
P1
Shortage
Affordability Control
Demand for Housing
QUANTITY OF HOUSING
Qs w/ control
Qd w/control
Qs w/out control Qd w/out control
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Economics of Affordable Housing Mandates

• Price ceiling on a percentage of units
• Essentially a tax on the remainder of units
• Increases prices for the vast majority of
  homebuyers
• Decreases quantity of housing produced

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Inclusionary Zoning Creates Two Markets Second
the Market Rate Units
Supply of Housing w/ IZ tax
PRICE OFHOUSING
Supply of Housing
P w/ tax (for market buyers)
P1
Demand for Housing
Q1
Q w/ tax
QUANTITY OF HOUSING
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• Our research was the first attempt to quantify
  the cost of the program
• Without knowing the cost of a program
  policymakers have little idea whether better ways
  of helping low income households exists

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Sample Calculations of Cost Associated with
Providing Units for Low Income
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Average cost associated with selling each price
controlled unit
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Average cost associated with selling each price
controlled unit times the number of units
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Who pays for the below market units?

• Because government does not write a check for the
  below market units, the affordable housing
  mandate is essentially a tax on new housing
• There is no free lunch here but unfortunately the
  tax is hidden
• This hidden tax must be borne by some combination
  of market rate homebuyers, builders, and
  landowners

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Inclusionary Zoning Acts as a Tax on New Homes

• (Cost per BMR unit)( BMR Units) Tax Per
  Market Unit
• ( Market Units)
• For example in Mill Valley one out of ten units
  must be sold at a lost of 750,000 so
• (750,000)(10) 83,000 Tax Per Market Rate
  Unit
• (90)
• In other words, in a 10 unit development the
  750,000 cost would be spread over the 9 market
  rate units.

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Inclusionary Zoning Acts as a Tax on New Homes

• (Cost per BMR unit)( BMR Units) Tax Per
  Market Unit
• ( Market Units)
• For example in Mill Valley one out of ten units
  must be sold at a loss of 750,000 so
• (750,000)(10) 83,000 Tax Per Market Rate
  Unit
• (90)
• In other words, in a 10 unit development the
  750,000 cost would be spread over the 9 market
  rate units.

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Inclusionary Zoning Acts as a Tax on New Homes

• (Cost per BMR unit)( BMR Units) Tax Per
  Market Unit
• ( Market Units)
• For example in Mill Valley one out of ten units
  must be sold at a loss of 750,000 so
• (750,000)(10) 83,000 Tax Per Market Rate
  Unit
• (90)
• In other words, in a 10 unit development the
  750,000 cost would be spread over the 9 market
  rate units.

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Inclusionary Zoning Acts as a Tax on New Homes

• What is the magnitude of the tax in San Francisco
  Bay Area cities?

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Effective tax imposed on new market-rate units
caused by inclusionary zoning
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Economics of Affordable Housing Mandates

• Price ceiling on a percentage of units
• Essentially a tax on the remainder of units
• Increases prices for the vast majority of
  homebuyers
• Decreases quantity of housing produced

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Increases in Price of New Homes Caused by
Inclusionary Zoning (Under Three Different
Assumptions About Who Bears the Costs
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Important lessons that are difficult to convey to
advocates of affordable housing mandates

• Taxes on a product makes that product more
  expensive
• Affordable mandates act as a tax on housing and
  make market rate homes more expensive

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Economics of Affordable Housing Mandates

• Price ceiling on a percentage of units
• Essentially a tax on the remainder of units
• Increases prices for the vast majority of
  homebuyers
• Decreases quantity of housing produced

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How do price controls influence the amount of new
construction?

• We looked at data over the past 30 years to
  compare housing construction in each city before
  and after the imposition of inclusionary zoning.

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Production in San Francisco Bay Area
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Production in Southern California
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If those decreases are indeed attributable to the
price controls the value of homes not built
because of price controls (over a 7 year period
in 8 Southern California Cities)

• 11,000,000,000

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• Example of Fort Ord

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1 Year for Bay AreaComparing the increase in
"affordable" units to the overall decrease in new
construction associated with inclusionary zoning
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7 Years for Southern California
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• Our report has been moderately successful at
  putting some constraints on the claims by those
  who advocate inclusionary zoning
• Advocates of price controls no longer claim
  inclusionary zoning is a full solution as they
  used to, but those who still advocate the
  ordinance claim its a partial solution.
• They say that producing a few units is better
  than none
• They say at least it can benefit a few people

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Some remaining questions

• Still are inclusionary units as good as the
  advocates say?
• Even though inclusionary zoning does not benefit
  most people, could it at least benefit me?

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Some remaining questions

• Still are inclusionary units as good as the
  advocates say?
• Even though inclusionary zoning does not benefit
  most people, could it at least benefit me?

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300,000 Looks like a great deal right?
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300,000 Looks like a great deal right?

• What advocates of inclusionary zoning often fail
  to tell people
• this San Francisco condo will have resale price
  restrictions for the next 55 years
• I am age 30, so that means I would be able to
  sell it at market rate when I am age 85
• Meanwhile, the already higher market rate units
  appreciate at normal rates creating further
  disparity between neighbors

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Other questions aspects of affordable housing
mandates

• Is it really ownership if a person cannot gain
  any appreciation?
• Is it really ownership if a person cannot give
  their home to their children unless their
  children are also low income?
• Is a program that creates two tiers of ownership
  really good for low income families?
• How costly are these programs to monitor?
• What will be the long run effects?

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What do owners of these price controlled units
have to say?
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How Should We Deal With High Prices?

• Worst Idea.price controls
• Inclusionary zoning has many problems that will
  only get worse over time
• Inclusionary zoning does not address the real
  reason why housing has become so unaffordable

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How Should We Deal With High Prices?

• Worst Idea.price controls!
• Inclusionary zoning has many problems that will
  only get worse over time
• Inclusionary zoning does not address the real
  reason why housing has become so unaffordable

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Just say no to price controls!
PRICE OFHOUSING
Supply of Housing
P1
Affordability Control
Demand for Housing
QUANTITY OF HOUSING
Qs w/ control
Qd w/control
Qs w/out control Qd w/out control
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As an alternative to price controls how can we
encourage more affordable housing?

• Better idea

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Allowing supply to keep up with demand
PRICE OFHOUSING
Supply of Housing 1
P1
Demand for Housing
QUANTITY OF HOUSING
Q1
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Allowing supply to keep up with demand
PRICE OFHOUSING
Supply of Housing 1
Supply of Housing 2
P1
P1
Demand for Housing
QUANTITY OF HOUSING
Q1
Q2
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Real Solutions(as alternatives to price controls)

• Eliminate Exclusionary Zoning, Eliminate Growth
  Boundaries, Eliminate Permit Moratoria, and
  Eliminate Inclusionary Zoning.

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My favorite quote on this subject

• Production is the key for being able to have a
  wide range of housing options, said Michael
  Houlemard, executive director of the Fort Ord
  Reuse Authority. If we encourage
  production.that alone is going to either
  stabilize or drive down home prices in the area.
  
• (The Californian, Salinas, CA, January 19, 2004)

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My favorite quote on this subject

• Houlemard draws his assessment directly from a
  study done by two San Jose State economists.
  (The Californian, Salinas, CA, January 19, 2004)

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DO AFFORDABLE HOUSING MANDATES WORK? EVIDENCE
FROM CALIFORNIA

• Benjamin Powell, Ph.D
• and Edward Stringham, Ph.D.
• Department of Economics
• San Jose State University

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DO AFFORDABLE HOUSING MANDATES WORK? EVIDENCE
FROM CALIFORNIA
Based on research with Ben Powell

• Edward Stringham, Ph.D.
• Department of Economics
• San Jose State University
• Edward.Stringham_at_SJSU.EDU

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Inclusionary Zoning Advocates Speak

• The price of housing is not a function of its
  development cost. Rather, housing price, be it
  rents or sale prices, are solely a function of
  market demand (David Paul Rosen 2004).
• Even if their profits are not maximized,
  developers will still realize acceptable profits.
  Therefore, developers will still develop
  (Padilla 1995).
• Institute for Local Self Government states that
  inclusionary zoning helps, Offset the demand on
  housing that is created by new development.

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Advocates of inclusionary zoning speak

• High enough density bonuses create affordable
  units at no cost to landowners, developers, or
  other homeowners (Padilla 1995).
• "Most inclusionary rules are actively sought by
  developers, and can hardly be considered taxes"
  Dietderich (1996).
• Developers often fail to participate because
  they do not understand the economics of the
  program Kautz (2002).

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Long-Term Controls

• Income Targeting
• Mobility
• Improvements
• Administration

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Reaction to our research

• Research has been featured in over seventy
  papers, including favorable stories in San
  Francisco Chronicle, San Jose Mercury News,
  Sacramento Bee, and Miami Herald
• In the past twelve months the report has been
  downloaded from Reasons website 73,364 times

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Reaction

• The Critics
• Their paper suggests that the market will
  solve our housing problems. Funny that it hasnt
  yet! - Gary Patton, LandWatch
• It theorizes but offers no proof, that
  developers pass the costs of the IH units to
  market-rate consumers... In reality, developers
  are not philanthropies and will charge the
  highest price the market will bear, with or
  without IH. - Rob Wiener, California Coalition
  for Rural Housing.

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Reaction

• The Best
• At best, using IZ to provide low-income housing
  is at like fighting a forest fire with a garden
  hose. Under the harsh light this new study
  shines on the policy that hose may be spraying
  fuel, rather than water, on the fire. - Daniel
  Weintraub, Sac Bee.

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DO AFFORDABLE HOUSING MANDATES WORK? Benjamin
Powell and Edward Stringham
Reason POLICY STUDY 318
1Should I do Terry Anderson? 2 Fort Ord story
I know price controls are bad The following
two are in Monterey presentation in The notes
section 3. Sam Farr story about gravity4. Brain
surgeon.