ARTICLE
Is Affordable Housing Beyond Our Reach? Balancing Price vs. Neighborhoods & Environment A January 2017 economics working paper estimates the median price of housing in the San Francisco Bay area, is nearly three times the cost of building and free-market land costs. What accounts for the difference? Land use regulations, process delays, and fees assessed on housing projects. The working paper by Harvard economist Edward Glazer and University of Pennsylvania Wharton school professor Joe Gyourko argues that the economic implications of housing supply not only limits who can live here, but cites a 2015 study that estimates the impact of these and similar new-housing constraints, predominant in coastal cities throughout the U.S., as reducing real US GDP by as much as 13%. The authors site more a conservative 2% per year as the basic cost of these constraints on annual national output. The paper further reports that the “self interest” of landowners in environmental protections and preservation of the value of their properties makes local electoral change of these trends improbable. The working paper, titled The Economic Implications Of Housing Supply, argues that while nearly 75% of the housing in the United States is priced at, near, or below the cost of building similar housing, the most intensively economically-productive areas of the country are increasingly unaffordable. In 1985 more than 90% of U.S. metropolitan areas had prices that were approximately equal to the cost of construction. By 1991 the proportion of metropolitan areas that had similar affordability had fallen below 75%. The dotcom era temporarily “improved” this ratio but quickly trended back to higher costs in the mid 2000s. The great recession beginning in 2007 again significantly reduced the number of metro areas in which housing costs exceed the natural cost of land, construction, and builder/developer profit. But by 2013 one-fourth of the metro areas again significantly exceeded the core costs of building homes... the minimal profitable production cost (MPPC.) In fact, 10% of all metropolitan areas studied by the authors had median housing prices that were twice or more the MPPC. In 2013 the median price of a Bay Area home was $800,000 vs. an MPPC of $300,000. The authors estimate the underlying land cost including building entitlements for this median priced home was roughly $490,000 – about 10 times the unregulated, competitive cost estimate. The authors note: “For some reason, developers in this type of market cannot bring on new supply even though it looks as if they could earn supernormal profits if they did.” The reasons, of course, are land use regulations, process delays, and fees. The authors observe that collateral effects include extraordinary costs imposed upon renters and significant constraints on economic productivity. They also point out: • the unprecedented intergenerational transfer of wealth from younger residents to those who own homes and rental properties • the increasing concentration of value in capital (i.e. land and improvements) • under-performing economic productivity in these areas • the necessarily-significantly-higher wages paid to workers in these areas While the disparity in the price of housing also reflects significantly higher per-capita levels of economic productivity in these metropolitan areas, the authors argue that it also limits both regional and national GDP, the result of excluding workers from these highly-productive economic areas. The Forces At Work There are an array of forces that have generated this disparity. Environmental. Perhaps first these are forces committed to environmental preservation. Climate change, protection of water resources, dedication of land to agricultural purposes, and similar philosophical and social issues motivate much of the regulation that is in place. From the adoption of CEQA to local land-use plans such as Santa Cruz County Measure J, California has been particularly dedicated to ensuring preservation of natural resources. However, the authors of the article argue that there is little evidence that the impacts of additional housing built in coastal areas has greater environmental impact than housing constructed in other parts of the United States. They point particularly to the environmental costs of heating in the Northern states and air conditioning in the Southern as forces inveighing against additional housing in those areas vis-à-vis coastal California. These arguments admittedly ignore the issues related to local control and political willingness to enact such environmental protections. Quality of Life. Issues related to quality-of-life such as the preservation of coastal access, wilderness areas, historical buildings and landmarks, the creation of parks and recreation areas, the density of population, the cost of housing-related investments such as public infrastructure, schools, public services and safety, and neighborhood preservation all motivate local and regional governments to impose restraints and costs on new housing. The authors acknowledge that these are issues not unique to markets with high housing prices. While there may be more land available at a lower cost to provide for some of these resources they impose environmental costs not shared by more densely populated areas. However, from the point of view of optimizing economic productivity the willingness to pay the price of Bay Area housing is a good indicator of its relative economic productivity. Local Control. Perhaps the core political question is the U.S.’s historical reliance on local control to make land-use decisions. While the US could hardly be described as “built-out,” the country has come to a time when it is no longer efficient to expand the land-area of most metropolitan areas. Worker-generated economic productivity is increasingly located in and dependent-upon metropolitan areas – perhaps none more obviously so than in Silicon Valley. These circumstances suggests the intensification of use of existing metropolitan properties. However, local control of political decisions regarding the addition of housing necessary to grow the population in these communities rarely considers economic productivity. Local decision-makers place less value on community GDP and more on environment and qualify-of-life impacts. In part this is a political question determined by the values of the electorate; but it is also a frame-of-reference question (neighborhood-well-being vs. social/economic well-being) and one dependent upon the skills and defined-roles of public administrators. This is amply demonstrated by the emphasis of local governments throughout California on the creation of “affordable” housing – addressing the needs of an existing electoral constituency (renters) – rather than addressing the opportunity to improve economic vitality more broadly, currently constrained by housing prices that are about three times the underlying costs of creating more housing. Homeowner Value. The “bottom line” force at work is of course the preservation of the capital value of homeowners and other property owners’ investments – also significant proportion of the local electorate. The notion, for instance, that property owners in coastal California would willingly permit construction of sufficient housing to reduce the value of their properties to MPPC – a reduction in 2013 from a median value of $800,000 to an MPPC of $300,000 – would be modestly described as “improbable.” The authors of the article express their pessimism that in the absence of national or, at least, state-level intervention any change in these trends is likely to occur. Local Reality What does this all mean for Santa Cruz County? First, it suggests an inevitability of insufficient affordable housing to meet the needs and wants of our community. The hope that an exaction against existing market rate housing development (such as inclusionary housing requirements or in lieu fees) might result in a significant reduction of the shortage of affordable housing is belied by the data. The development of significant quantities of market-rate housing is increasingly improbable. Demand for housing in coastal California and, especially, the Bay Area will continue to outstrip development of housing under current national, state, and local political structures. This will be true at all price levels. It also suggests that local economic development will depend upon two forces: (1) the development of improved transportation systems to “import” labor on a daily basis from lower housing cost areas to local service and other “middle-class” jobs, and (2) the creation of higher earnings corporate, technology, research, and professional jobs. Finally, it recommends continuing efforts to generate both rental and for sale residential properties to accommodate those who are able to afford to purchase local residences or pay high rents. Presuming a continuation of the current trend, these properties represent a significant opportunity for increased tax base, replacement of a soon-to-retire baby-boomer workforce, and the attraction of the entrepreneurs, executives, and other critical employees necessary to the vitality of economic community. Of course lower-probability circumstances such as a substantial decline in the price of Bay Area housing, another more pervasive economic crisis, or a political change in how housing and land use are administer in California and the U.S. could have different effects. All of which beg the question: “What is an attractive, realistic, and politically-viable vision of our community under these circumstances?”
Is Affordable Housing Beyond Our Reach? Balancing Price vs. Neighborhoods & Environment
A January 2017 economics working paper estimates the median price of housing in the San Francisco Bay area, is nearly three times the cost of building and free-market land costs. What accounts for the difference? Land use regulations, process delays, and fees assessed on housing projects.
The working paper by Harvard economist Edward Glazer and University of Pennsylvania Wharton school professor Joe Gyourko argues that the economic implications of housing supply not only limits who can live here, but cites a 2015 study that estimates the impact of these and similar new-housing constraints, predominant in coastal cities throughout the U.S., as reducing real US GDP by as much as 13%. The authors site more a conservative 2% per year as the basic cost of these constraints on annual national output.
The paper further reports that the “self interest” of landowners in environmental protections and preservation of the value of their properties makes local electoral change of these trends improbable.
The working paper, titled The Economic Implications Of Housing Supply, argues that while nearly 75% of the housing in the United States is priced at, near, or below the cost of building similar housing, the most intensively economically-productive areas of the country are increasingly unaffordable. In 1985 more than 90% of U.S. metropolitan areas had prices that were approximately equal to the cost of construction. By 1991 the proportion of metropolitan areas that had similar affordability had fallen below 75%. The dotcom era temporarily “improved” this ratio but quickly trended back to higher costs in the mid 2000s. The great recession beginning in 2007 again significantly reduced the number of metro areas in which housing costs exceed the natural cost of land, construction, and builder/developer profit. But by 2013 one-fourth of the metro areas again significantly exceeded the core costs of building homes... the minimal profitable production cost (MPPC.) In fact, 10% of all metropolitan areas studied by the authors had median housing prices that were twice or more the MPPC. In 2013 the median price of a Bay Area home was $800,000 vs. an MPPC of $300,000. The authors estimate the underlying land cost including building entitlements for this median priced home was roughly $490,000 – about 10 times the unregulated, competitive cost estimate. The authors note: “For some reason, developers in this type of market cannot bring on new supply even though it looks as if they could earn supernormal profits if they did.” The reasons, of course, are land use regulations, process delays, and fees. The authors observe that collateral effects include extraordinary costs imposed upon renters and significant constraints on economic productivity. They also point out: • the unprecedented intergenerational transfer of wealth from younger residents to those who own homes and rental properties • the increasing concentration of value in capital (i.e. land and improvements) • under-performing economic productivity in these areas • the necessarily-significantly-higher wages paid to workers in these areas While the disparity in the price of housing also reflects significantly higher per-capita levels of economic productivity in these metropolitan areas, the authors argue that it also limits both regional and national GDP, the result of excluding workers from these highly-productive economic areas. The Forces At Work There are an array of forces that have generated this disparity. Environmental. Perhaps first these are forces committed to environmental preservation. Climate change, protection of water resources, dedication of land to agricultural purposes, and similar philosophical and social issues motivate much of the regulation that is in place. From the adoption of CEQA to local land-use plans such as Santa Cruz County Measure J, California has been particularly dedicated to ensuring preservation of natural resources. However, the authors of the article argue that there is little evidence that the impacts of additional housing built in coastal areas has greater environmental impact than housing constructed in other parts of the United States. They point particularly to the environmental costs of heating in the Northern states and air conditioning in the Southern as forces inveighing against additional housing in those areas vis-à-vis coastal California. These arguments admittedly ignore the issues related to local control and political willingness to enact such environmental protections. Quality of Life. Issues related to quality-of-life such as the preservation of coastal access, wilderness areas, historical buildings and landmarks, the creation of parks and recreation areas, the density of population, the cost of housing-related investments such as public infrastructure, schools, public services and safety, and neighborhood preservation all motivate local and regional governments to impose restraints and costs on new housing. The authors acknowledge that these are issues not unique to markets with high housing prices. While there may be more land available at a lower cost to provide for some of these resources they impose environmental costs not shared by more densely populated areas. However, from the point of view of optimizing economic productivity the willingness to pay the price of Bay Area housing is a good indicator of its relative economic productivity. Local Control. Perhaps the core political question is the U.S.’s historical reliance on local control to make land-use decisions. While the US could hardly be described as “built-out,” the country has come to a time when it is no longer efficient to expand the land-area of most metropolitan areas. Worker-generated economic productivity is increasingly located in and dependent-upon metropolitan areas – perhaps none more obviously so than in Silicon Valley. These circumstances suggests the intensification of use of existing metropolitan properties. However, local control of political decisions regarding the addition of housing necessary to grow the population in these communities rarely considers economic productivity. Local decision-makers place less value on community GDP and more on environment and qualify-of-life impacts. In part this is a political question determined by the values of the electorate; but it is also a frame-of-reference question (neighborhood-well-being vs. social/economic well-being) and one dependent upon the skills and defined-roles of public administrators. This is amply demonstrated by the emphasis of local governments throughout California on the creation of “affordable” housing – addressing the needs of an existing electoral constituency (renters) – rather than addressing the opportunity to improve economic vitality more broadly, currently constrained by housing prices that are about three times the underlying costs of creating more housing. Homeowner Value. The “bottom line” force at work is of course the preservation of the capital value of homeowners and other property owners’ investments – also significant proportion of the local electorate. The notion, for instance, that property owners in coastal California would willingly permit construction of sufficient housing to reduce the value of their properties to MPPC – a reduction in 2013 from a median value of $800,000 to an MPPC of $300,000 – would be modestly described as “improbable.” The authors of the article express their pessimism that in the absence of national or, at least, state-level intervention any change in these trends is likely to occur.
Local Reality What does this all mean for Santa Cruz County? First, it suggests an inevitability of insufficient affordable housing to meet the needs and wants of our community. The hope that an exaction against existing market rate housing development (such as inclusionary housing requirements or in lieu fees) might result in a significant reduction of the shortage of affordable housing is belied by the data. The development of significant quantities of market-rate housing is increasingly improbable. Demand for housing in coastal California and, especially, the Bay Area will continue to outstrip development of housing under current national, state, and local political structures. This will be true at all price levels. It also suggests that local economic development will depend upon two forces: (1) the development of improved transportation systems to “import” labor on a daily basis from lower housing cost areas to local service and other “middle-class” jobs, and (2) the creation of higher earnings corporate, technology, research, and professional jobs. Finally, it recommends continuing efforts to generate both rental and for sale residential properties to accommodate those who are able to afford to purchase local residences or pay high rents. Presuming a continuation of the current trend, these properties represent a significant opportunity for increased tax base, replacement of a soon-to-retire baby-boomer workforce, and the attraction of the entrepreneurs, executives, and other critical employees necessary to the vitality of economic community. Of course lower-probability circumstances such as a substantial decline in the price of Bay Area housing, another more pervasive economic crisis, or a political change in how housing and land use are administer in California and the U.S. could have different effects. All of which beg the question: “What is an attractive, realistic, and politically-viable vision of our community under these circumstances?”