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The Zen of Affordable Housing

2012 October 15
by dan bertolet

< Often it seems as if the stars must be in perfect alignment for affordable housing development to happen. Shown above, LIHI’s affordable senior housing project on Jackson St. in Seattle’s Central District acquired land for cheap after the real estate bust, and received capital funding of $2.8 million from Seattle and $500,000 from King County. >

Housing affordability is a critical ingredient of sustainable development in cities, but also one of the most vexing challenges. Not surprisingly, it’s also an issue that often gets tangled up in contention and misunderstanding.

If we hope to accommodate growth in a sustainable fashion by creating dense, walkable, transit-rich urban centers that also have economic diversity, it seems we could all use a little Zen-like focus and clarity on what we’re dealing with. And so I invite the reader to meditate on the following wonky koans:

The urban density debate is over. An ever-growing mountain of density research unequivocally demonstrates the benefits associated with energy, greenhouse gas emissions, water, habitat, farmland, economics, human health and safety, etc.  It’s not hyperbole to say that in America, our future prosperity will depend heavily on the densification of our urban areas. Accordingly, high-density housing should be recognized as a public benefit in itself.

Density does not cause higher housing prices. Yes, many densely populated cities are expensive, but that does not imply causality.  In fact, it would be more defensible to claim the converse, that higher prices cause density.  Throughout history, the value that prosperous cities offer to people’s lives has made them desirable and therefore expensive.

High density housing is inherently inexpensive. Compared to typical low-density alternatives (e.g. the single-family house), multifamily housing consumes less material per unit to build, uses less land, is more energy efficient, and requires less utility infrastructure.

The rules of supply and demand apply to housing. This is easily demonstrated by comparing the prices of similar homes located in different cities, say Seattle vs. Cleveland.  It is also borne out in the data that shows how rental rates respond to cycles of apartment production. Because demand is also part of the equation, increasing supply does not guarantee affordability for everyone or even that prices will see a net drop. But more housing supply will drive prices lower than they would have been absent that increased supply, and that helps affordability across the board.

Demand for density is increasing. Massive economic, cultural, and demographic trends are creating increased demand for multifamily housing in walkable, transit-rich neighborhoods. These are the forces that have led to the current multifamily development boom in Seattle’s urban villages such as Capitol Hill, Ballard, and West Seattle. In many locations demand is still outpacing supply, which is driving prices up.

Blocking private development will not stop gentrification and displacement. Most multifamily infill development occurs on empty lots or replaces buildings that have outlived their useful life, but yes, in some cases preventing a redevelopment project may save an existing building with low-rent units.  However, if a neighborhood is desirable, the result will be even greater pent up demand that will inevitably accelerate gentrification and displacement.

The cost of producing housing affects affordability. The expense, delay, and risk caused by over-regulation or NIMBYism increases the cost of producing housing. As with any free market transaction, most owners will charge what the housing market will bear regardless of the cost of production. But when costs are reduced development becomes a more financially attractive pursuit, which the free market ensures will inevitably lead to increased production, and the resultant uptick in supply will exert downward pressure on price.

The private market cannot deliver housing for the lower end of the income spectrum. A variety of economic factors sets a hard lower limit on the rents or sales price of housing produced in the private market.  To convince yourself that’s it not just about greedy private developers, consider the fact that non-profit low-income housing developers have to scrape together every possible source of subsidy they can find to make their developments pencil.*

Private development should not be a primary source of subsidy for affordable housing. In limited cases where value is very high, it is reasonable to extract some of the profit from multifamily development to subsidize public benefits, including affordable housing.  However, in the more typical case, that kind of extraction encumbers the production of multifamily housing for people with incomes in the mid-range. This results in reduced supply, upward pressure on price, and a lost opportunity to gain the sustainability benefits of new multifamily housing.

Other household expenses are a factor in housing affordability. If a certain location offers unique economic benefits or amenities, households can and will spend more on housing to live there. The most important example is transportation—in walkable, transit-rich areas households can significantly reduce their total expenses by not owning a car.

Family housing is inherently expensive. In most urban markets, a multifamily building filled with one-bedroom apartments is substantially more profitable than the same building filled with three-bedroom units. This is a result of construction economics and market rents. However, production of small units can help indirectly by offering childless couples and singles more housing options, thereby reducing demand and putting downward pressure on prices for existing family-sized housing.

Growth changes everything. When population growth stagnates, housing tends to become affordable. But when an urban area is in demand and growing, as is the case with Seattle, housing prices can be expected to rise no matter what. Growth presents a tremendous opportunity to build the kind of  high-density housing that makes sense for future urban sustainability. But growth can also create an affordability gap as demand and increasing wealth inevitably drive up housing prices.

Densification means change. It is human nature to resist change, but change is imperative in the face of paradigm-shifting factors such as global warming and peak oil. There is no getting around the fact that for most of our urban areas, creating compact, walkable neighborhoods means significant change, and we have a collective responsibility to ensure that the burden of that change is not inequitably borne by the most vulnerable. But at the same time, we  should also recognize that these changes have the potential to create something better for everyone.

Income inequality is the core reason why housing affordability is such an intractable problem in the United States. In pretty much every other industrialized nation on earth, greater redistribution of wealth helps ease the problem of affordable housing. This includes social investments that significantly reduce other major household expenses, such as healthcare, education, childcare, and transportation, thereby freeing up more income to pay for housing. Here in the U.S, we will be beating our heads against the wall forever trying to provide enough affordable housing to make up for this underlying inequity.

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No doubt some will have issues with the above assertions, and thoughtful criticism is welcome. But on my interpretation, there are several clear conclusions:

  • Density is a win-win both for housing affordability and sustainability overall—it is self-defeating for affordable housing advocates to bash density.
  • Far greater government subsidy for the production of low-income housing is necessary, especially under conditions of demand and growth—the greater the value offered by a neighborhood, the greater the subsidy needed to provide affordability.
  • We must find sources of subsidy that place the burden of providing affordable housing on society as a whole, because in most cases, taxing the production of market-rate housing to subsidize affordable housing is like robbing Peter to pay Paul.
  • Efforts should be made to reduce financial, regulatory, and political encumbrances to the production of high-density multifamily housing, whether it is market rate or subsidized.
  • Targeted incentives should preferentially promote the development of multifamily housing—both market rate and subsidized—in areas with access to high-quality transit, because such locations effectively make housing more affordable by reducing household transportation costs.
  • Potential displacement should be addressed not by trying to freeze a place in amber, but with targeted subsidies for housing and other social programs that help existing residents remain in place so that they can benefit from the positive change in their neighborhood.
  • If we hope to succeed in giving lower-income households—especially families with children—the opportunity to enjoy all the benefits of living in a prosperous city, then we must start to take on systemic income inequality, and push for the expansion of socialized investments that offset the burden of expensive housing.

Now listen for the soft gong, breathe, and slowly let your mind ease back into normal consciousness…

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*To appreciate the sensitivity of the pro-forma for multifamily housing development, compare the current rate of multifamily development in Seattle’s Capitol Hill—where there are 20-some large-scale private developments in construction or in the pipeline—to the adjacent Central District, where there are none (unless I missed something?). A change in location of maybe a dozen city blocks is enough to sour the real estate development deal. And what this demonstrates is that demand matters a lot more than public policy in determining where and when high-density housing development occurs. There are urban neighborhoods scattered from Everett to Tacoma that are inside designated growth centers and have zoning that allows plenty of density, but that are getting pretty much zip for multifamily development because demand is low, and therefore rents are too low for development to pencil.

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Dan Bertolet is the creator of Citytank and doesn’t meditate enough.

 

 

 

38 Responses leave one →
  1. John of Humdinger permalink
    October 16, 2012

    “…our future prosperity will depend heavily on the densification of our urban areas.”
    Actually our children’s prosperity will depend on how they are going to come up with their $500,000 share of the national debt. Oops, I forgot. They can just “redistribute” it from the big bad rich guys.

    • dan bertolet permalink*
      October 16, 2012

      A bit off topic John, but yes, by all means we should “pity the billionaire,” as Thomas Frank titled his latest book which I highly recommend. So anyway, how is it then, that all those countries in Europe can have such high income tax rates and also perform well economically?

  2. John of Humdinger permalink
    October 16, 2012

    Perhaps unsurprisingly, the country with the lowest marginal tax rate on average income workers — Switzerland, at 20% — also boasts the world’s 7th highest GDP per capita at $43,196

    • Zach permalink
      October 22, 2012

      John, Switzerland has a military budget that is a fraction of the United States. If we would stop trying to control the world we could have a lower marginal tax rate as well. Switzerland also has universal health care. We could provide this benifit to our citizens if we weren’t spending almost $700 billion dollars on our military.

  3. Green Laker permalink
    October 16, 2012

    Another metric to consider is that people are also happier in denser neighborhoods. I have never seen research in this area, but given that you can now walk or take a short ride on mass transit to work/shopping/entertainment, it would outweigh having a McMansion to fill with stuff, alone.

  4. Monster permalink
    October 16, 2012

    still waiting for danny to leave his single family home in the CD… where is your commitment to change danny

    • dan bertolet permalink*
      October 17, 2012

      Hi Monster, where have you been? I’m still waiting for people who leave comments like yours to realize how stupid they sound, not only because what they’re saying is irrelevant, but also because it’s so obvious they are resorting to attacking the messenger because they are at a loss to make any logical rejoinder to the arguments being presented.

      • monster permalink
        October 17, 2012

        im actually for density but the lot your sfh is on could house multiple families. you advocate for this but dont live the life you preach along with many other urban planners (all most as if it is for other people…) you guys are hypocrites.

        • monster permalink
          October 17, 2012

          ive also been good by the way. working on that tunnel project if your intrested.

    • dan bertolet permalink*
      October 17, 2012

      I try to avoid wasting my time responding to anonymous accusers, but since monster has plenty of company out there, I’ll spell out why it’s both bogus and irrelevant.

      Bogus because I have never said that everyone should live in high-density housing, or that those who don’t are bad people. What I do say is that high density housing is a good thing and that there is increasing demand for it, and so we ought to figure out how to build more of it. The idea that me or any other density advocate is forcing anyone to do anything is a figment of paranoid imaginations.

      As for why it’s irrelevant, I’ll go with an analogy: Let’s say I make the claim that it would be good for the City to have more software engineers, and so I advocate for programs that help train more of them. But wait, the critics say, if you think they’re so important, why don’t YOU become a software engineer, you hypocrite!

  5. bailey permalink
    October 18, 2012

    Monster’s argument is ludicrous, and Bertolet (and me too, I guess) gives it too much credit by even responding to it. Can I not advocate for something that I believe to be in the interest of the public good if I am not a direct beneficiary of the outcome of my advocacy? I support the Yes on R-74 campaign…oh, but wait, I’m heterosexual, so do I have a right to voice an opinion on it? I have given money to a variety of cancer charities…oh, but wait, I don’t have cancer, so I should have no investment in cancer research, should I? I am not low-income, so what right do I have to ever promote policies or programs that would benefit those in poverty?
    I am a density advocate, but I live in a single family home. I have lived in multi-family homes in the past, as a kid in a single parent household and as a student and young professional throughout my 20s. I am glad those multi-family options were available to me and my family then. I may want to live in multi-family again when I am older, and I hope those choices will be available to me then too. But whether or not I ever lived in multi-family and whether or not I ever do again…it makes sense—for the reasons Dan belabors above, and for the host of other social, economic and environmental benefits that he doesn’t even mention—for us to make those housing choices available to people in our region.

  6. Nemo permalink
    October 18, 2012

    “Income inequality is the core reason why housing affordability is such an intractable problem in the United States.”

    You are not going to address that issue, locally or nationally, by just accepting the fact that housing cost increases are “inevitable” for the reasons you state, letting developers get subsidies and tax breaks in return for “affordable” units that MAY be affordable in comparison in 10 years, and and not addressing the wages that support those increases. It’s cart before the horse, and if you bulit it, they will not come if they cannot afford it.

    When housing developers move away from the traditional median wage as a primary basis for rents, the reality takes over sooner or later. What becomes a shortage, turns into a glut. Only THEN does it approach affordability.

    You would think the entire country is yearning to move to Seattle. You would be wrong. Jobs and income are “what the market will bear” utimately. And both are in decline. I don’t see it recovering enough yet in Seattle, nor in a sustainable manner, to be confident that the basis for your ubanist assumptions will turn out as you assume.

    The joys of density can just as easily turn out to be the misery of the same when you remove the rose-colored glasses. Unless you are purposely promoting a city that only supports, the young, the upper middle class/wealthy, the mostly childless, and the healthy, who will walk, rent zipcars, ride bikes, and take busses, everywhere they need to go, or order everything online. Density by itself will never provide for that utopia.

    • Michael permalink
      October 22, 2012

      Nemo, if you stay in a single family home, once you’re too old to drive you are either trapped and isolated in your home, or taking unnecessary risks with people’s lives every time you drive.

  7. Matt the Engineer permalink
    October 22, 2012

    Thanks, Dan. This will be a handy link whenever I don’t want to explain (yet again) why density is the answer.

  8. Ari permalink
    October 23, 2012

    Fantastic article. Should be required reading. Your “cost of producing housing affects affordability” paragraph is DEAD ON! Landlords will charge market rental rate, REGARDLESS of how much the construction costs. Why wouldn’t they. Construction costs impact the amount of development, which impacts supply, which – in turn – impacts the market rental rate.

    However, your “income inequality” paragraph is a little off topic. I think your overall argument would be stronger if you took that part out.

  9. October 26, 2012

    Housing is more affordable in Europe? really?

    In fact, several egalitarian social democracies (including Denmark and Sweden) have higher costs than the USA, measured as a share of income
    http://www.unhabitat.org/pmss/listItemDetails.aspx?publicationID=3220 (pp 27-28).

    I realize its easy to believe that the USA has major affordability issues if you live in Seattle or (like me) NYC- but in flyover country American housing is pretty cheap by international standards.

    • Matt the Engineer permalink
      October 26, 2012

      I missed anyone here saying that housing is more affordable in Europe. That said, your link appears to say exactly that.

      On p. 27 you see housing related expenditure as a percentage of total household budget. Only 6 countries are less affordable than the US. But if you consider transportation costs (which this study didn’t), I think you’ll find we would shoot up to the top of the list.

  10. EMD permalink
    November 2, 2012

    As a parent, planner and landscape architect the priorities when selecting neighborhoods are schools (all levels), local religious groups (churches) and access to retail. When these three, especially the first two are highly rated they become active centers of the community that stabilize the social fabric.

    These are often overlooked and ignored factors, however, every parents and family share these common issues.

  11. Morgan permalink
    November 12, 2012

    “These are the forces that have led to the current multifamily development boom in Seattle’s urban villages such as Capitol Hill, Ballard, and West Seattle.”

    What might these forces be? I think that density is one–density of shops, of restaurants, of entertainment, of housing, of jobs, etc.

    Density seems to operate akin to adding road capacity by fertilizing opportunities, diversity, social interconnections, and the like. Just as new road capacity still induces new demand, added residential density induces activity now makes the locale more desirable, thereby driving up rents.

    As a thought experiments, build a dense neighborhood with a complex fabric of amenities and opportunities then locate it on Yesler between 23rd & MLK. I’m guessing that rents and property values would rise within and adjacent.

    If, however, the point is only to say that all-things-equal more housing per acre will place downward pressure on rents, well of course. I’m not sure what the value of that line of thinking might be, as nothing happens in a vacuum, on a frictionless plane, or ceteris paribus. Such exercises are helpful in understanding parts of the system and forming a marginal analysis for a factor, but not much more. In complex systems, this seems to lead us humans toward tenuous conclusions.

    • Matt the Engineer permalink
      November 13, 2012

      In your theoretical scenario you’ve (A) created a set of desirable living conditions and (B) increased the number of housing units. So that specific area will likely increase in price (thanks to A), but you’ve also increased the supply of housing in the city and dropped prices overall (thanks to B). Someone that’s upwardly mobile and living in a run-down apartment elsewhere in Seattle might move into your new complex, dropping the price at the place they used to live. Someone else that was moving to the city was going to buy a run-down house nearby (shedding the 8 tennants that live there now), but decides those are great condos at a reasonable price with excellent food options downstairs. Etc.

      Every new unit built in Seattle allows one more household to afford a home here.

      • Morgan permalink
        November 15, 2012

        Thanks for the reply, Matt.

        To be sure, where we set the bounds of analysis, as your response reveals, greatly influences results. My point, though, was to talk about whether density drives up housing costs. I understand marginal analysis well enough, certainly well enough to appreciate that the neo-classical/Keynesian theoretical asumptions and perspectives , which have gained popularity in our development discussions, are fraught with application problems–sometimes to the point of insidious results, such as most of our ecological problems.

        What if ALL housing became more dense, thus more effecient, more effective, more desirable, and more expensive? What if everyone moved into dense communities and was willing to spend a larger portion of their income on housing? Could we then say that density puts upward pressure on prices? Or, do we just say that density wasn’t the causal factor, the causal factor was desirability or efficiency, which the density caused, because it’s possible to create density without these results? Since I expect the latter a popular answer, I ask, so what? How does limiting analysis like that help us understand likely, actual outcomes, as opposed to these theoretical ones where people quickly move into new units in response to incrimental price changes and do all kind of other things to satisfy the assumptions of marginal theory?

        btw – any time there’s a factor moving price, demand, or supply, the system effects are not going to mitigate that effect to zero. If it did, the system would die, and things would settle to stasis. It’s precisely the inefficiencies and the fabric of system delays that give live.

        • Matt the Engineer permalink
          November 15, 2012

          I highly recommend Ryan Avent’s little book The Gated City, or if you have more time Glaeser’s Triumph of the City.

          You’re looking at only one factor: cost. Affordability is a ratio of income and cost. If you increase cost but also increase income, affordability can stay the same or even increase (as housing cost is only one component of total living costs). Glaeser provides very strong evidence that increasing density increases productivity and as a result paychecks. This comes directly from geometry: shorter distances not only save time during your day, but more importantly connect you to a greater set of services, talent, etc. to be more productive. But this doesn’t just apply to the white collar jobs, it applies across the board. You’ll find that even teachers in Manhattan make 3x the salary that they would elsewhere in the country.

          My point is, if you densify across the board then you increase productivity across the board and salaries across the board. Housing prices go up, but everyone makes more.

          Actually, this is fundamentally why prices are always higher in dense cities than sparse towns. Your earning power goes up dramatically with density, and people with more earning power drive up the price of homes that are in limited supply due to geography of cities (and man-made building policies).

          • Morgan permalink
            November 20, 2012

            I was *intentionally- only looking at price, because there have recently been claims to the contrary. I’m not trying to touch the broader posts.
            I would be appreciative if you’d read my posts more carefully with an eye to understand what I’m getting at rather than focusing so much on making your counter points. I don’t have time for that sort of thing in my online life.

          • Matt the Engineer permalink
            November 20, 2012

            I’ve read your comments carefully before, and I just read them again. I was responding to “Could we then say that density puts upward pressure on prices?” The trivial answer is yes, I just wanted to point out why that answer isn’t complete.

            To be fair, you didn’t mention any “claims to the contrary”, and we’re commenting on a post about affordability.

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