Transcript - American Dream Coalition

DO AFFORDABLE
HOUSING MANDATES WORK?
EVIDENCE FROM CALIFORNIA
Benjamin Powell, Ph.D.
and Edward Stringham, Ph.D.
Department of Economics
San Jose State University
Overview



Motivation
Housing Market

Income Targeting
 Mobility
 Improvements
 Administration

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

Long Term Problems

Debate

Density Bonuses
 Housing Cost
 Socioeconomic Integration
 Supply Restrictions
www.sjsu.edu/stringham
When I went to grad school in Virginia, I lived in
in this luxury highrise with a classmate for $655
per person.
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
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
Examples of below market rate
developments
Examples of below market rate
developments
Examples of below market rate
developments
Examples of below market rate
developments
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Examples of below market rate
developments
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?
 What’s the normative standard?

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50
45
40
35
30
25
20
15
10
5
0
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70
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19
98
20
00
20
02
Number of Bay Area Cities with Inclusionary
Zoning
Number of inclusionary zoning
ordinances
the
Bay
Area Zoning
Figure 1: Numberin
of Bay
Area Cities
With Inclusionary
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 let’s compare an estimate of
housing need to how many units
inclusionary zoning produces
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Portola Valley
Fairfax
Yountville
Tiburon
San Anselmo
Corte Madera
Los Altos
Calistoga
Mill Valley
Sebastopol
Larkspur
Clayton
San Carlos
Los Gatos
Benicia
Half Moon Bay
Cotati
Hercules
Healdsburg
Pleasant Hill
Sonoma
Danville
Emeryville
Menlo Park
San Leandro
Petaluma
Palo Alto
outh San Francisco
Berkeley
East Palo Alto
Rio Vista
Union City
San Rafael
Cupertino
Rohnert Park
Morgan Hill
Richmond
San Mateo
Novato
Mountain View
Napa
Sunnyvale
Brentwood
Pleasanton
Livermore
Dublin
Fremont
Santa Clara
Santa Rosa
San Francisco
Association of Bay Area Government’s
2001-2006 Estimated Affordable Housing
Need by City
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
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"Affordable" units
produced through
inclusionary
zoning.
(Calculated for 5.5
years by
multiplying
average units per
year produced
under inclusionary
zoning times 5.5.)
Five year housing
needs according
to the Association
of Bay Area
Governments
"Regional Housing
Needs
Determination".
How many units does inclusionary
zoning produce?
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Portola Valley
Fairfax
Yountville
Tiburon
San Anselmo
Corte Madera
Los Altos
Calistoga
Mill Valley
Sebastopol
Larkspur
Clayton
San Carlos
Los Gatos
Benicia
Half Moon Bay
Cotati
Hercules
Healdsburg
Pleasant Hill
Sonoma
Danville
Emeryville
Menlo Park
San Leandro
Petaluma
Palo Alto
South San Francisco
Berkeley
East Palo Alto
Rio Vista
Union City
San Rafael
Cupertino
Rohnert Park
Morgan Hill
Richmond
San Mateo
Novato
Mountain View
Napa
Sunnyvale
Brentwood
Pleasanton
Livermore
Dublin
Fremont
Santa Clara
Santa Rosa
San Francisco
Produced Under Inclusionary Zoning
Need versus actual production of affordable
Five year housing needs according to the Association of Bay Area Governments "Regional Housing Needs
Determination".
units
by Bay Area city
"Affordable" units produced through inclusionary zoning. (Calculated for 5.5 years by multiplying average
units per year produced under inclusionary zoning times 5.5.)
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
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
"Affordable" units produced through inclusionary zoning. (Calculated for 5.5 years by multiplying average
units per year produced under inclusionary zoning times 5.5.)
Five year housing needs according to the Association of Bay Area Governments "Regional Housing Needs
Determination".
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Portola Valley
Fairfax
Yountville
Tiburon
San Anselmo
Corte Madera
Los Altos
Calistoga
Mill Valley
Sebastopol
Larkspur
Clayton
San Carlos
Los Gatos
Benicia
Half Moon Bay
Cotati
Hercules
Healdsburg
Pleasant Hill
Sonoma
Danville
Emeryville
Menlo Park
San Leandro
Petaluma
Palo Alto
South San Francisco
Berkeley
East Palo Alto
Rio Vista
Union City
San Rafael
Cupertino
Rohnert Park
Morgan Hill
Richmond
San Mateo
Novato
Mountain View
Napa
Sunnyvale
Brentwood
Pleasanton
Livermore
Dublin
Fremont
Santa Clara
Santa Rosa
San Francisco

Figure 2: Housing Needs Versus Expected Units
Produced Under Inclusionary Zoning
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Production Compared to Need
4%
96%
"Affordable" units produced through inclusionary zoning. (Calculated for 5.5 years by multiplying average units
per year produced under inclusionary zoning times 5.5)
Shortfall of affordable units not produced through inclusionary zoning. (Data is only for cities with inclusionary
zoning.)
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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

www.sjsu.edu/stringham
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

www.sjsu.edu/stringham
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

www.sjsu.edu/stringham
Inclusionary Zoning Creates Two Markets:
First the Price Controlled Market
PRICE OF
HOUSING
Supply of Housing
P1
Affordability
Control
Demand for Housing
Qs w/ control
Qd w/control
Qs w/out control=
Qd w/out control
QUANTITY OF
HOUSING
Inclusionary Zoning Creates Two Markets:
First the Price Controlled Market
PRICE OF
HOUSING
Supply of Housing
P1
Affordability
Control
Shortage
Demand for Housing
Qs w/ control
Qd w/control
Qs w/out control=
Qd w/out control
QUANTITY OF
HOUSING
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

www.sjsu.edu/stringham
Inclusionary Zoning Creates Two Markets:
Second the “Market” Rate Units
Supply of Housing w/ IZ tax
PRICE OF
HOUSING
Supply of Housing
P w/ tax
(for market
buyers)
P1
Demand for Housing
Q w/
tax
Q1
QUANTITY OF
HOUSING
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
"Low" price control
Cost associated with selling "Low" unit
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
Sonoma
Solano
Santa Clara
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San Mateo
San
Francisco
Napa
Marin
Contra Costa
Alameda
$0
Cotati
Emeryville
Rohnert Park
Healdsburg
Richmond
Petaluma
Santa Rosa
Santa Clara
Hercules
San Francisco
East Palo Alto
Sebastopol
Rio Vista
San Leandro
Sonoma
So. SF
Novato
Calistoga
Fairfax
Morgan Hill
Yountville
Union City
Sunnyvale
Napa
Brentwood
Livermore
Mountain View
San Rafael
Dublin
San Anselmo
San Mateo
Pleasant Hill
Corte Madera
Fremont
Half Moon Bay
Berkeley
Benicia
Larkspur
Pleasanton
Clayton
San Carlos
Cupertino
Los Gatos
Mill Valley
Danville
Palo Alto
Menlo Park
Tiburon
Los Altos
Portola Valley
Average cost associated with selling each
price controlled unit
$1,300,000
$1,200,000
$1,100,000
$1,000,000
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
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Sebastopol
Pleasant Hill
Sonoma
Yountville
Half Moon Bay
Emeryville
Novato
Corte Madera
Napa
Calistoga
Tiburon
East Palo Alto
Dublin
Menlo Park
San Carlos
Berkeley
San Mateo
Larkspur
Clayton
Danville
San Francisco
Los Altos
Santa Rosa
San Leandro
Livermore
Morgan Hill
Cupertino
Pleasanton
Petaluma
Palo Alto
San Rafael
Mill Valley
Sunnyvale
Average cost associated with selling each
price controlled unit times the number of
units
$250,000,000
$225,000,000
$200,000,000
$175,000,000
$150,000,000
$125,000,000
$100,000,000
$75,000,000
$50,000,000
$25,000,000
$0
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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.
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.
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.
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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Cotati
Emeryville
Richmond
Rohnert Park
Santa Clara
Hercules
Healdsburg
San
Pleasant Hill
Rio Vista
San Leandro
Sonoma
Novato
Petaluma
Santa Rosa
Fairfax
Morgan Hill
Sunnyvale
Napa
Brentwood
Livermore
Mountain
San Rafael
San Anselmo
San Mateo
Corte Madera
East Palo Alto
Yountville
Sebastopol
Benicia
Dublin
So. San
Larkspur
Union City
Clayton
Calistoga
San Carlos
Fremont
Los Gatos
Mill Valley
Danville
Menlo Park
Pleasanton
Half Moon
Berkeley
Cupertino
Tiburon
Los Altos
Palo Alto
Portola Valley
Effective tax imposed on new market-rate
units caused by inclusionary zoning
$220,000
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
www.sjsu.edu/stringham
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

www.sjsu.edu/stringham
$225,000
Cotati
Emeryville
Richmond
Rohnert Park
Santa Clara
Hercules
Healdsburg
San Francisco
Pleasant Hill
Rio Vista
San Leandro
Sonoma
Novato
Petaluma
Santa Rosa
Fairfax
Morgan Hill
Sunnyvale
Napa
Brentwood
Livermore
Mountain View
San Rafael
San Anselmo
San Mateo
Corte Madera
East Palo Alto
Yountville
Sebastopol
Benicia
Dublin
South San Francisco
Larkspur
Union City
Clayton
Calistoga
San Carlos
Fremont
Los Gatos
Mill Valley
Danville
Menlo Park
Pleasanton
Half Moon Bay
Berkeley
Cupertino
Tiburon
Los Altos
Palo Alto
Portola Valley
Increases in Price of New Homes Caused by Inclusionary
Zoning (Under Three Different Assumptions About Who Bears
the Costs Assuming 50%of tax is borne by consumers
Assuming 84%of tax is borne by consumers
Assuming 100% of tax is borne by consumers
$200,000
$175,000
$150,000
$125,000
$100,000
$75,000
$50,000
$25,000
$0
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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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www.sjsu.edu/stringham
www.sjsu.edu/stringham
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

www.sjsu.edu/stringham
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
Figure 13: Average Production of Housing Before and After the Ordinance for
45 Jurisdictions (One Year Before/After Adoption of Inclusionary Zoning)
250
214
200
147
150
100
50
0
Before
After
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Production in Southern California
Production of Housing 7 Years Prior and 7
Years Following the Ordinance for Eight
Jurisdictions Available Data
30,000
25,000
20,000
15,000
10,000
5,000
0
Before
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After
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 Area
Comparing the increase in "affordable" units to the
overall decrease in new construction associated
with inclusionary zoning
1,000
663
500
0
-2,982
-500
-1,000
-1,500
-2,000
-2,500
-3,000
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7 Years for Southern California
Comparing the Increase in
"Affordable" Units to the Overall
Decrease in New Construction
Associated With Inclusionary
Zoning
5,000
770
0
-5,000
-10,000
-15,000
-17,296
-20,000
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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 it’s 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?

www.sjsu.edu/stringham
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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$4,500,000
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$0
Year
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2059
2053
2047
2041
2035
2029
2023
2017
2011
Price Controlled
Home
Market Rate Home
2005
Resale Price
Appreciation of Housing Under Inclusionary Zoning
(Assuming market rate homes appreciate at 3% per year)
Appreciation of Housing Under Inclusionary Zoning
(Assuming market rate homes appreciate at 7% per year)
$35,000,000
Price Controlled
Home
Market Rate
Home
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
Year
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2059
2053
2047
2041
2035
2029
2023
2017
2011
$0
2005
Resale Price
$30,000,000
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

www.sjsu.edu/stringham
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

www.sjsu.edu/stringham
Just say no to price controls!
PRICE OF
HOUSING
Supply of Housing
P1
Affordability
Control
Demand for Housing
Qs w/ control
Qd w/control
Qs w/out control=
Qd w/out control
QUANTITY OF
HOUSING
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 OF
HOUSING
Supply of Housing 1
P1
Demand for Housing
Q1
QUANTITY OF
HOUSING
Allowing supply to keep up with demand
Supply of Housing 1
PRICE OF
HOUSING
Supply of Housing 2
P1
P1
Demand for Housing
Q1
Q2
QUANTITY OF
HOUSING
Real Solutions
(as alternatives to price controls)

Eliminate Exclusionary Zoning,
Eliminate Growth Boundaries, Eliminate
Permit Moratoria, and Eliminate
Inclusionary Zoning….
www.sjsu.edu/stringham
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)

www.sjsu.edu/stringham
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)
www.sjsu.edu/stringham
DO AFFORDABLE
HOUSING MANDATES WORK?
EVIDENCE FROM CALIFORNIA
Benjamin Powell, Ph.D
and Edward Stringham, Ph.D.
Department of Economics
San Jose State University
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
[email protected]
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.” www.sjsu.edu/stringham
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).
www.sjsu.edu/stringham
Long-Term Controls



Income
Targeting
Mobility
Improvements
Administration
$45,000
$40,000
$35,000
Income Per Person

$50,000
$30,000
Median Income
$25,000
Mean Income
$20,000
$15,000
$10,000
$5,000
$0
15-24
25-34
35-44
www.sjsu.edu/stringham Age
45-54
55-64
65+
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 Reason’s website 73,364 times
www.sjsu.edu/stringham
Reaction

The Critics:
 “Their
paper suggests that the “market” will solve our
housing problems. Funny that it hasn’t 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.
www.sjsu.edu/stringham
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.
www.sjsu.edu/stringham
DO AFFORDABLE HOUSING
MANDATES WORK?
Benjamin Powell and Edward Stringham
Reason
POLICY
STUDY
www.sjsu.edu/stringham
318