Monday, March 19, 2018

#78 / What Seems Right May Not Always Be Right

For years, I have read Land Lines, a magazine published by the Lincoln Institute of Land Policy. The Institute advertises the magazine this way: "Land Lines draws on Lincoln Institute research to explore land-based solutions to social, economic, and environmental problems. Connecting the dots between our expertise and major global challenges, Land Lines shows why land policy matters."

In the issue of Land Lines published in January 2018, George W. McCarthy, President of the Lincoln Institute, wrote an article in favor of efforts to provide price controls in local housing markets.

McCarthy's article was titled, "Protecting a Share of the Housing Market," and his recommendations speak to the kind of conditions that exist in my hometown, Santa Cruz, California. By the way, McCarthy's credentials are pretty impressive. Click the link to review his resume.

Here is a key paragraph from early in McCarthy's article (emphasis added):

In his 1949 State of the Union address, President Truman noted that to fill the needs of millions of families with inadequate housing, “Most of the houses we need will have to be built by private enterprise, without public subsidy.” Nearly 70 years later, our collective failure to solve the affordable housing deficit may stem from wrongheaded analysis of the problem, and the conclusion that market-based solutions can be designed to solve the mismatch between the supply of affordable housing and demand for it.

McCarthy, in other words, is telling us that "the market" has not solved (and will not ever solve) our affordable housing problems. Building more houses, in and of itself, will not result in new housing that is affordable to average and below average income members of the community. 

How could this be? Everyone knows about the so-called "law" of supply and demand. If demand exceeds supply, prices will increase. If a greater supply is provided, prices will fall until supply and demand are balanced. Belief in this supposed "law" of supply and demand leads to efforts to deal with our housing affordability crisis by determining that we need to "build more." Yet, says McCarthy, this "build more" strategy won't work to make housing prices more affordable to local residents. It will, though, result in more traffic congestion, more stress on the city budget and city facilities, like parks, and more demand for natural resources, like water.

Let's be clear. McCarthy is a strong believer in the law of supply and demand, but he makes the point, as a matter of economic analysis, that this "law" only works within a single, contained market. If new housing built in Santa Cruz, to use my hometown as an example, were just going to be available to local residents, then building lots of new housing should bring down the price, and make housing more affordable to those who live and work in our community.

That, however, is not the actual situation. McCarthy, who looks at things from an "international" perspective, says that there are really "two" housing markets: the market for housing as shelter and the market for housing as an investment. Here is his comment on this issue (emphasis added):

Perhaps it is time that we question the conclusion that market-based solutions can address the challenge of sheltering a country’s population. Truman concluded that “By producing too few rental units and too large a proportion of high-priced houses, the building industry is rapidly pricing itself out of the market.” But Truman was thinking about the market for shelter, not investment. Remarkably, the number of housing units in developed countries significantly exceeds the number of households. In 2016, the U.S. Census estimated that there were 135 million units of housing in the country and 118 million households. One in seven housing units was vacant. This over-supply of housing characterizes every metropolitan market in the United States—even markets with extreme shortages of affordable housing. In 2016, 10.3 percent of housing units were vacant in New York, 6.0 percent in the San Francisco Bay area, 8.2 percent in Washington, DC, and a stunning 13.7 percent in Honolulu. The problem is that many households have insufficient incomes to afford the housing that is available.

What McCarthy is saying is that those who want to "invest" in residential housing (in Santa Cruz and elsewhere) will bid up the price of housing until the supply of housing for that "investment" market has been satisfied. That demand for housing as an investment is global, and it is HUGE, and by the time supply and demand come into balance for that "investment" market, ordinary working families looking for "shelter" are totally priced out.

In Santa Cruz, there is also another demand for housing that far exceeds the demand generated by local residents and local workers: the demand for shelter housing for persons who do not live or work in Santa Cruz, but who live and work in the greater Bay Area, where demand vastly outstrips supply. Because that demand is also HUGE, and because workers from the greater Bay Area have much higher incomes than residents and workers in Santa Cruz, more housing in Santa Cruz does not solve the local affordability crisis. In  a lot of ways, it actually makes it worse.

It is rather nice to have someone with real credentials back me up. Since my years on the Santa Cruz County Board of Supervisors, I have always contended that building more housing (with all its community impacts) will NOT increase affordable housing in our community unless the new housing is sold with permanent price restrictions, making it available to those who live and work in our community, and who have average or below-average incomes.

If we truly care about getting more affordable housing for our community, we need to insist that any new housing built will have a large percentage of the new units permanently protected for sale or rental to persons with average and below average incomes, as measured by incomes in our own community. This kind of housing is called "inclusionary" housing. Both the city and county used to have a strong commitment to inclusionary housing, but both the city and county have abandoned their strong inclusionary requirements.

I have been making an argument that our community should not allow more development unless and until a large share of the new housing actually constructed will be permanently protected as "inclusionary housing," and made available for sale or rental to persons who live and work in this community. 

Resistance to this idea seems never ending, and not only from the developers, who naturally don't like it. Ordinary community members, too, believe that the "law" of supply and demand means that "building more housing" will insure that there will be more lower-priced housing available for local members of the community.

It's just not true, according to McCarthy. McCarthy is an actual "expert," so check out his article. He says, in essence, that what "seems right" is not always "right in fact."

Unless we provide permanent price restrictions on a very significant share of  the new housing built in our community, the community will get all the impacts that come with "more housing" and none of the affordability benefits that we so desperately need.

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