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Getting Real About The Costs And Benefits Of Affordable Housing

2013 November 22
by dan bertolet

One of the many complex facets of subsidized affordable housing is the question of where it should be located. Ideally, every neighborhood should maximize equitable access to opportunity by accommodating a complete and balanced spectrum of household incomes. But the conversation can’t end there, because getting real about that ideal means grappling with thorny cost versus benefit choices.

The first cost reality to consider is that the more expensive the neighborhood, the more subsidy it takes to provide an affordable housing unit—in many cases a lot more. As an example, according to the Seattle Office of Housing, the maximum rent for a 1-bedroom apartment affordable to a household earning 80 percent of area median income (AMI) is $1301 per month. In a typical Seattle neighborhood a new market-rate 1-bedroom might rent for let’s say $1400 per month, which means the required subsidy is about $100 per month. But in an expensive neighborhood such as South Lake Union (SLU) in Seattle, a 1-bedroom unit is more likely to rent for something like $1800, which translates to a subsidy of $500 per month. Assuming a 50-year commitment, for a $300,000 investment the City gets either five subsidized units in a typical neighborhood, or just one subsidized unit in SLU.

On the benefits side, there is no question that when housing prices get too high in successful urban neighborhoods, people with lower incomes may lose access to a wide range of important resources, including jobs, transportation, education, health, safety, open space, community groups, entertainment, and recreation. Access to good transit is particularly important because the expense of relying on a car ownership sucks up a larger portion of the income of poor people (see footnote). These are all very real social justice issues.

The most commonly proposed solution is regulation that requires developers to include affordable units in their projects and absorb the cost of the subsidy—so called “inclusionary zoning.”  Legal opinion differs on the legality of pure inclusionary zoning in Washington State, so the usual alternative is “incentive zoning” that grants “bonus” development capacity in exchange for including affordable housing in the project. Most programs also have the option of a fee “in-lieu” of including on-site affordable units, and in Seattle many advocates want fees raised so high that developers are compelled to choose the inclusionary option, since that is the only sure way to ensure economic integration in expensive neighborhoods. But given that in Seattle some developers are already deciding that the extra capacity is not worth the fee at the current fee levels, a major hike in the fee would all but guarantee that bonus capacity would be left on the table and no affordable units would be built.

The City of Seattle has a goal that 37 percent of all housing should be affordable to households with incomes at 80 percent of AMI and below. It’s a huge leap to assume that that goal should also apply to every Seattle neighborhood on an individual basis, but nevertheless Councilmembers Licata, O’Brien, and many others did just that when recently pushing for higher developer fees in SLU. That scenario might be best in an ideal world, but as discussed above, it’s going to cost a lot more to cover the subsidy for those units in SLU than it would for units located in less expensive neighborhoods. And if it means the City ends up with a lot more affordable housing elsewhere, would it really be such a terrible thing for people to commute to SLU from other neighborhoods, just like the tens of thousands from across the income spectrum who take the bus into downtown from all over Seattle every day?

Once that first dubious leap is made, it leads to another—that the burden of paying for all the affordable housing to be built in SLU should fall on private developers, in the form of either fees, or inclusionary affordable units built into market-rate projects. The City estimates a need of 4,200 affordable units for SLU’s workers by 2031, and if we assume for argument’s sake that these units would have to be subsidized by $500/month for 50 years, that comes out to about $1.3 billion that would have to be extracted from new development—in just this one neighborhood. For perspective, that $1.3 billion is about ten times Seattle’s 7-year housing levy that spreads the tax burden to every property owner in the City.

The above expectations are a recipe for counterproductive results: Incentive zoning simply doesn’t have the capacity to generate that scale of subsidy, and if requirements continue to be expanded in the vain hope of doing so, the resulting encumbrance on development will end up so high that most if not all developers will have no choice but to decline to build additional capacity. And that would result in either zero new inclusionary affordable housing, or zero in-lieu fee revenue to fund affordable housing, as well as reduced housing supply that would aggravate affordability across the board and compromise local and regional sustainable growth goals.

Seattle cannot hope to make real progress on affordable housing when there is such a massive gap between policy goals and the resources available to achieve them. While there is a strong consensus on the need and value of affordable housing, the path to that end remains unclear. Most of the basic questions are unresolved: How much do we need to subsidize and at what affordability levels? How much will it cost? Where will the money come from? What are realistic limits given budgetary constraints? What are costs versus benefits compared to other demands on public dollars? How do we even define what affordability means?

Closing the gap between aspirations and limitations calls for an integrated, system-oriented effort to set realistic goals, establish new funding sources for subsidy, and accelerate the production of housing supply in the private market.

The most straightforward piece of the puzzle is increased housing supply that puts downward pressure on prices across the board and reduces the gap that has to be covered by subsidy. And all it takes is avoidance of policies and regulations that place unnecessary encumbrances on development, so that the private market can do what it does best—innovating to meet demand with efficiency and reduced cost.

Given political sensitivities, recalibrating goals is likely to be more challenging. It might mean acknowledging that subsidy should be focused in less expensive neighborhoods to get the most housing for the money. Or reconsidering whether affordable housing for the 80% AMI income range should even be subsidized at all. Or redefining affordability to account for the reduced transportation costs in transit-rich locations.

But without a doubt, by far the most challenging piece of the puzzle is funding. Step number one for Seattle is to recognize that programs such as incentive zoning that tax new development are not only counterproductive to their own intent, but will never come anywhere close to meeting the need even in the ideal case (that doesn’t exist). The Housing Levy spreads the burden more fairly, but it too falls woefully short of the financial need.

It will be a massive undertaking to establish new sources of funding for affordable housing subsidy that are commensurate with the need, but the simple fact is it must be done. I don’t have all the answers, but hope to expand the conversation in future posts, and I want to challenge everyone to come up with innovative ideas. Because I am sure that Seattle will fail on affordable housing if we don’t start thinking much bigger than we have been.

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Footnote: Another commonly cited reason to support inclusionary affordable housing is the reduction in greenhouse gas (GHG) emissions resulting from fewer low-income people having to commute long distances by car from places with cheaper housing. However, this reasoning overlooks the fact that when an inclusionary unit is produced through incentive zoning,  it replaces a market-rate housing unit. And since the people that would have been living in the eliminated market-rate unit are potential car commuters too, the inclusionary unit is unlikely to result in a net reduction in driving or GHGs. It also overlooks the fact that in a city such as Seattle with good transit, commuting to a job center from another city neighborhood need not involve a car at all.

GHG reductions are primarily determined by the total amount of housing that is added to a transit-rich, mixed-used neighborhood. (And that’s one of the many reasons why it’s so important to minimize policies—such as taxing new development—that impede the production of housing.) At the scale of the entire City, a lack of affordable housing can be expected to lead to greater GHG emissions caused by longer car commutes from beyond Seattle. But at the individual neighborhood scale, climate change is not a defensible rationale for inclusionary requirements. Of course that doesn’t negate the potential equity benefits.

 

 

 

12 Responses leave one →
  1. Matt the Engineer permalink
    November 25, 2013

    The tough part is that I agree with the general concept that a great city needs mixed income levels in neighborhoods, and I completely agree with many of those on the pro-incentive side from an ideological standpoint. But it’s really tough to convince someone with a cost/benefit analysis that *big greedy developers* shouldn’t (and can’t!) be forced to build this dream. It takes a very nuanced argument to bring someone to the conclusion that these policies are harmful overall. I think you’ve done a great job here, but I wonder if even in cerebral Seattle we can communicate that well enough to the masses (or even the council members).

  2. RossB permalink
    December 3, 2013

    Like everything else in government, you need to balance the ideal service with the most cost effective one. Ideally, each neighborhood would have a good mix of people from every level. From a practical standpoint, as this article points out, it is hard to justify. Do you really want to add 10 units of low income housing (or housing subsidies) in Belltown instead of 100 in Greenwood?

    To bet the best value, it makes sense for the city to anticipate housing prices the same way that real estate developers do, and build more housing in areas that are likely to go up in value. We missed a great opportunity with South Lake Union. There is plenty of land there that was really cheap, but has skyrocketed in value recently. Of course, if you put enough low income housing in an area, it might suppress land values. For example, I think there are plenty of areas in the south end that will eventually be very valuable. But if we build new low income housing, it might further segregate the area (economically and racially). Nonetheless, I think there are plenty of areas around town where low income housing could be built fairly cheaply, and with a little investment, the areas could be quite successful. The Aurora corridor comes to mind. As does Northgate.

    Getting back to housing supply, I agree completely — we need to build more housing. However, with the current rules and regulations, this will only reduce the increase in rent, not actually reduce rent (unless a bubble occurs). This is because a developer is forced to build the same type of building as his neighbor. So, for example, a builder looks at the empty lot, calculates the cost of constructing a six story building with a big underground parking lot and then determines that it only makes sense if rent is $1000. Other landlords know this as well. They fear a bubble but they don’t fear the new building. After all, that building cost as much to build as their own building. This is why (absent a bubble caused by miscalculation) rent won’t go down no matter how many buildings are built in a neighborhood.

    But if the cost to build goes down, then the calculus changes. If the parking lot is not required, or the building can be built to 8 stories, then this new apartment building can be built even if rent is only $800. There are various ways that we could reduce the cost of new construction. We could reduce taxes or subsidize equipment or raw material. The easiest, though, would be to reduce the zoning burden on the builder. Do away with parking restrictions — increase the height restrictions and suddenly a building with lower priced units makes economic sense.

  3. Monica permalink
    December 17, 2013

    When you get to a certain point the constructions costs plus all the added process ( i.e. the horrific and getting worse all the time alley vacation process) make doing a simple 5 over 2 woodframe LR apartments or condos a better value for the developer. The risk, uncertainity, additional time and process (not to mention the affordable housing tax) associated with building the higher density housing product is just not worth it. Make it a real incentive to build midrise and highrise and recognize if you want developers to subsidze the costs of affordable housing that you need to make that a real incentive too. There is a reason more then 1/2 of the mid and highrise projects aren’t taking advantage of this suppossed ‘windfall to developers’. If it was such a great deal getting all that extra ‘value’ I’d guess more people would take advantage of it. But they aren’t. Raising the fee will only make it even less of an incetnive.

    • paulh permalink
      December 18, 2013

      True, the cost to build per square foot goes up once Type V construction is no longer an option (above level 7). I’ll add that some developers want to play in the big sandbox of downtown, but are not ready to get out of the comfort zone of Type V construction — a self imposed zoning limit. The risk/return threshold doesn’t fit in their matrix.

      I would contend that if our city/citizens prioritized affordable housing, the requirements should come at a much lower threshold. For example, if all developments above 2-stories were required to include or pay-in-lieu for affordable housing, the “tax” would be more equitably distributed, the the return much greater.

      … and alley vacations should be a horrific process. They are a huge asset to the city infrastructure, and should not be taken away lightly.

  4. ThomasH permalink
    March 6, 2014

    I wonder if having a diversity of incomes in every neighborhood is a good objective.

  5. Andy permalink
    July 21, 2014

    You suggest “avoidance of policies and regulations that place unnecessary encumbrances on development, so that the private market can do what it does best—innovating to meet demand with efficiency and reduced cost.”

    If this approach worked equally well for people of all income levels, no one would have advocated for equitable policies. There would have been no need. You seem to not see the inherently biased outcomes produced by the market. Those for whom wealth is the top priority, and those starting with privilege, benefit. Those starting at a disadvantage, for whom other priorities come first, are progressively disenfranchised or forced further away.

    Your approach suggests that only those focused on making the most money should enjoy the best places (central, with best amenities, transportation, etc). The problem is, people from all income levels are required to build, maintain, and service these areas. Developers do not care whether lower-income people can live in these structures once they are built; it ultimately negatively impacts their bottom line. That is why we have to care, and policies are one way to express that.

    Your mathematical arguments seem sound, and point to the dearth of available housing as the region’s population grows, including more well-paid employees of prospering companies, which increases rents across the board. However, your solution is simplistic and ineffective. The problem is more complex than that.

    It seems you draw your conclusion in order to end the article with some definitive direction, rather than leaving the problem open-ended for now, which would be a more authentic treatment of the conundrum we are in, and allow for examination of larger influencing factors that might help us understand a reasonable path forward.

  6. gauge station pursuits permalink
    August 18, 2015

    What kind of work have you done that may set a true cost vision that defines development relative to improvements in city community planning processes for purposes of modernization and better decision-making when establishing a framework for delineating the limits of local neighborhood control within the reformation process of specific and general plans.

    Sincerely,

    John Scott Alexander

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