What Nashville can Learn from NYC: Affordable Housing mandates reduce the supply of affordable housing

The Nashville City Council is considering requiring that a certain percentage of units in new residential developments be priced as affordable. The mandates would apply to multi-unit developments bigger than five units.

While this may sound good, lets think clearly about its effects: mandates reduce the profitability of new development.  This will lead to less new development, or developers will substitute towards smaller developments, not subject to the mandate.  In the former case, fewer new developments would be built; in the latter, lower-density development would take place.  Either way, this represents a decrease in supply.  A decrease in supply would increase price, exacerbating the very problem--expensive housing--that it was designed to ameliorate.   (And don't forget that density is green.)

Housing markets are also subject to what is known as "filtering," apartment rents tend to go down as the apartment building ages.  So today's expensive housing is tomorrow's affordable housing.  This implies that a reduction in the supply of expensive housing today, will reduce the supply of affordable housing tomorrow.

These kinds of zoning restrictions are popular because they drive the price of existing housing above replacement cost, benefiting Nashville's homeowners. But they come at the expense of renters and new residents. As the Financial Times put it:

They are the ransom that renters and recent buyers must pay to existing homeowners – whose homes the rules protect – for use of an artificially limited stock of housing. So severe have those restrictions become that the value of the ransom runs into the trillions. 

Wealth of this kind is far more destructive than the alleged sins of the top 1 per cent. It is wealth created not by improving our living standards but by making them worse; by building too few houses in London and San Francisco, not too many. It is not earned by skill or effort. It is taken directly from the pockets of some – the young, especially those who were born poor – and transferred to others via political regulations on building. This is not wealth, this is plunder. 

The effects of affordable housing are similar to price gouging laws that in Mississippi prevented generators from reaching the Gulf Coast after Katrina. Similarly, affordable housing mandates will prevent new housing from reaching Nashville.  The market wants to help, so let it.

OK, if mandates won't do it, how do we increase the supply of affordable housing in Nashville?  Here I think Nashville could learn something from New York.  In New York, the affordable mandates are triggered only by a relaxation of zoning.  For example, a developer buys up a block of houses and asks the planning commission to re-zone it for a multi-unit apartment complex.  In exchange for the zoning change, the developer agrees to set aside some of the units for lower income tenants.

The crucial difference is that in NY, affordable mandates are triggered only by development that increases supply.  In contrast, the proposed change in Nashville would reduce supply.

[REPOST from 2015] 

What does Jerry Brown know that Mayor Cooper has yet to learn?

Nashville Mayor John Cooper signed a bill to require developers to build affordable housing.  This makes housing more costly, reducing supply, so Cooper also includes incentives to increase supply, trying to give back with one hand what he is taking away with the other.  This is exactly what the Stanford Law Review [see below] called a " 'kludgy' set of policies that can actually prevent new development and end up increasing housing prices."  

Cooper is repeating--rather than learning from--the mistakes of the past.

• Affordable housing mandates reduce the supply of affordable housing
• These kinds of zoning restrictions are popular because they drive the price of existing housing above replacement cost, benefiting Nashville's homeowners. But they come at the expense of renters and new residents. As the Financial Times put it:
  

  They are the ransom that renters and recent buyers must pay to existing homeowners – whose homes the rules protect – for use of an artificially limited stock of housing. So severe have those restrictions become that the value of the ransom runs into the trillions. 

• Nice summary of the affordable housing crisis from Stanford Law Review
• [the cause of the affordable housing crisis] is uncontroversial among urban economists but not broadly understood by low-income families, advocates for low-income families, housing activists, and their allies in academia, policy, and government—in short, the housing advocacy community. In the face of higher housing costs, the housing advocacy community tends to argue for a “kludgy” set of policies that can actually prevent new development and end up increasing housing prices

• This good idea comes from California
• Even Jerry Brown gave up on affordable housing mandates because they have done nothing to increase supply, so he axed California’s approximately 400 redevelopment agencies (RDAs).

To alleviate the crisis, reduce the barriers to expanding housing supply, like local zoning, regardless of what kind of housing it is.  New supply will bring down all prices.  But as the Financial Times notes above, this would be politically unpopular, as homeowners benefit from strict zoning that limits new supply because it raises their housing prices.  

Who gets "affordable" housing?

When the government fixes prices of affordable housing below market rates, there is excess demand, i.e., more people demand the apartments at the low prices than are available for supply.  So how do the apartments get allocated?

"Insiders" use influence to grab the valuable apartments:

But for years, Brooklyn DA Eric Gonzalez charges, the top three execs of the Luna Park Housing Corp. conspired to “sell” units — accepting five- and even six-figure bribes in exchange for faking documents so that a new tenant could “inherit” an apartment as a supposed relative of the old one.

Prosecutors “believe that this was the norm, not the exception,” Gonzalez reports. The 14,000-strong waiting list was a joke.

Corruption this brazen surely isn’t “the norm” at all Mitchell-Lama projects, but it’s hardly cynical to suspect that insiders are pulling scams all across the city’s vast and varied affordable-housing landscape.

An apartment that by law has a rent well below market rate is a valuable commodity; gatekeepers can cash in big by quietly selling access. Not always for actual money: Political or even family connections can be enough.

Similarly, would-be tenants regularly have to pay someone (a broker, a landlord, some fixer) a hefty fee up front to score a rent-regulated apartment.

Anytime the government fixes prices below (or above) what the market price would be, it also creates incentives to circumvent the prices.  What is most damaging, however, is that these bribes are paid by those who want apartments (demand) but the rewards go to people who manage the apartments, not to those who build (supply) them.  As such they reduce supply (as they have done in Nashville), creating "shortages."

BOTTOM LINE:
Next time you hear a politician complain about a "shortages of affordable housing" ask him or her if she thinks there is a "shortage of affordable Rolls Royce automobiles."

More posts on the effects of affordable housing.

I sent Nashville's Mayor a copy of Chapter 8, "Understanding [housing] Markets."

Here's why:  "Nashville voters ... are especially looking to Metro leaders to address the city's affordable housing problem."    

If the mayor and the council honestly look the cause of the crisis, they will find it is caused by zoning restrictions (see previous post) that limit supply.  With 100 people moving to Nashville each day, the only thing that can adjust is price.  

The standard feel-good response is affordable housing mandates on new construction which raises the cost of new construction and limits supply--exacerbating the very problem it is designed to alleviate.  (See What Nashville can Learn from NYC: Affordable Housing Mandates Reduce the Supply of Affordable Housing.)

...mandates reduce the profitability of new development.  This will lead to less new development, or developers will substitute towards smaller developments, not subject to the mandate.  In the former case, fewer new developments would be built; in the latter, lower-density development would take place.  Either way, this represents a decrease in supply.  A decrease in supply would increase price, exacerbating the very problem--lack of affordable housing--that it was designed to ameliorate.   (And don't forget that density is green.)

Nice summary of the affordable housing crisis

in the Stanford Law Review:

[the cause of the affordable housing crisis] is uncontroversial among urban economists but not broadly understood by low-income families, advocates for low-income families, housing activists, and their allies in academia, policy, and government—in short, the housing advocacy community. In the face of higher housing costs, the housing advocacy community tends to argue for a “kludgy” set of policies that can actually prevent new development and end up increasing housing prices— campaigns to impose building moratoria, for example, or downzonings, community benefits agreements and other exactions, lengthy approvals procedures that disadvantage developers relative to NIMBYs, various forms of rent control, and a focus on affordable housing to the exclusion of other types of development. …. 

In the suburbs, the politics of exclusionary policies are hopeless: the cartellike interests of suburban “homevoters” are well-served by current exclusionary policies, state and federal courts for the most part won’t intervene, and there is very little interest among state legislators to impose regional or state-wide solutions.11 The picture is less bleak in exclusionary cities: renters, who would directly benefit from lower housing prices, are a majority in many of these cities, and advocates for affordable housing already form a politically influential bloc—but they use their power to ends that are often counterproductive.12 While there are other serious obstacles to expanding housing supply, the housing advocacy community could and should become an important part of the fight against urban land use regimes that systematically privilege a city’s wealthiest and most powerful residents. … 

A city’s ability to remain affordable depends most crucially on its ability to expand housing supply in the face of increased demand. Among the people who care most about high housing costs there is a lack of understanding of the main causes and the policy approaches that can address them. The central message of this Article is that the housing advocacy community—from the shoeleather organizer to the academic theoretician—needs to abandon its reflexively anti-development sentiments and embrace an agenda that accepts and advocates for increased housing development of all types as a way to blunt rising housing costs in the country’s most expensive markets.

HT: Campbell

Who cares more about affordable housing, Democrats or Republicans?

Much has been made of the census data showing that Republican-leaning "red" states grew more than Democratic-leaning "blue" states in the last ten years.   But Ed Glaeser looks closely at the numbers and concludes that it is cheap housing, caused by fewer housing restrictions, that accounts for the changes:

My interpretation of Red State growth is that Republican states have grown more quickly because building is easier in those states, primarily because of housing regulations. Republican states are less prone to restrict construction than places like California and Massachusetts, and as a result, high-quality housing is much cheaper.

There is a strange irony in this: more conservative places do a much better job in providing affordable housing for ordinary Americans than progressive states that are believed to care about affordable housing.

How is Nashville like SF?

Both have restrictive zoning that drives up prices which leads to calls for more affordable housing, which results in further restrictions on supply, or vouchers that increase demand, both of which further drive up prices.

A surprisingly clear report from California noted much the same:

“Many housing programs — vouchers, rent control and inclusionary housing — attempt to make housing more affordable without increasing the overall supply,” the report said. “This approach does very little to address the underlying cause of California’s high housing costs: a housing shortage.”

So, why does this happen?  Reason blames self interested home owners, renters in rent-controlled apartments, and the politicians who kowtow to them at the expense of largely poor people who cannot get subsidies and would-be homeowners:

Homeowners have a strong economic incentive to restrict supply because it supports price appreciation of their own homes. It’s understandable. Many of them have put the bulk of their net worth into their homes and they don’t want to lose that. So they engage in NIMBYism under the name of preservationism or environmentalism, even though denying in-fill development here creates pressures for sprawl elsewhere. They do this through hundreds of politically powerful neighborhood groups throughout San Francisco like the Telegraph Hill Dwellers. 

Then the rent-controlled tenants care far more about eviction protections than increasing supply. That’s because their most vulnerable constituents are paying rents that are so far below market-rate, that only an ungodly amount of construction could possibly help them. Plus, that construction wouldn’t happen fast enough — especially for elderly tenants.

Marin residents say they care about affordable housing but don't act like it

Housing prices are prohibitively expensive because we enact strict zoning that prevents other people from building more of it. These restrictions on new supply drive up the price of housing. No where is this more evident than in Tiburon, just north of San Francisco, with its own temperate micro climate and beautiful views of all three bridges across the Bay. When owners tried to develop a property to create 43 single family homes, the project was stalled for decades by lawsuits filed by neighbors.  Recently the county purchased the property under the pretext that it would "preserve open space."

Jenny Silva of Sausalito, a volunteer pro-housing watchdog who's been monitoring the creation of housing elements in Marin, said ... "there’s a housing crisis, not an open-space crisis." She noted that 31% of respondents to the county’s 2023 Community Survey said housing should be the No. 1 priority, ... Silva called it “frustrating” that Marin’s latest budget then dedicated more than twice as much to open-space expenditures than to its affordable-housing trust: $11.23 million versus $5 million.

BOTTOM LINE:  Marin residents say they care about housing but don't act like it. Instead, they have "revealed a preference" for open space which increases their own property values. But they are not the only ones (see previous blog posts on housing).  

If you subsidize homelessness, you get more of it

This article

The Way Los Angeles Is Trying to Solve Homelessness Is ‘Absolutely Insane’ misses the big picture in two ways:

1. It ignores the simple idea that if you subsidize anything, like homelessness, you get more of it; and
2. The NIMBY wars over zoning that raise the price of housing is one of the causes of homelessness.  

On the plus side, it describes the costs of the NIMBY wars in LA in ironic detail:

When do Angelenos want affordable housing? Now! Where do they want it? Not here!

And it documents the added cost of the zoning which reduces supply.

“If you look at the inflated cost [$500,000/unit] that comes along with all of the regulation and rules and restrictions and limitations,” Galperin said, “then basically all of this money is going to feed the beast of covering the cost of the regulations. ... We’ve created an absolutely insane system.”

PREDICTION: Nothing will get done, despite Homelessness being voters' #1 concern: "The politics of the affordable housing crisis are terrible. The politics of what you’d need to do to solve it are even worse."

Former student Mike Saint (deceased) said as much a while ago in his book NIMBY Wars: The Politics of Land Use

HT: MarginalRevolution.com

Rents fall ==> new supply falling ==> rents will increase

 WSJ:

Apartment Construction Is Slowing, and Investors Are Betting on Higher Rents 

For more than a year, apartment renters in many cities have been getting some relief from price increases because of the enormous amount of new supply being delivered by developers.

Now, big investors are betting that downward pressure on rents from new supply is coming to an end and the market is shifting back in landlords’ favor. At the heart of their reasoning: the critical metric of new construction starts, which began slowing last year and now are falling even further.

Apartment developers are stepping on the brakes, especially compared with the building frenzy in the early years of the pandemic. Across the country some rental-construction projects are getting stalled, as developers struggle to obtain the financing needed to complete them. Other investors are pivoting to more lucrative alternatives.

...

Most apartment developers today build high-end units for middle- and upper-income households, which have little impact on the affordable-housing shortage. Lower-cost rentals—the kind most in need by low- and moderate-income households—remain scarce and are rarely built without a government subsidy.

Strategy is simple: "become a monopolist"

It looks as if Peter Theil has read Chapter 10:

The problem with a competitive business goes beyond lack of profits. Imagine you're running one of those restaurants in Mountain View. You're not that different from dozens of your competitors, so you've got to fight hard to survive. If you offer affordable food with low margins, you can probably pay employees only minimum wage. And you'll need to squeeze out every efficiency: That is why small restaurants put Grandma to work at the register and make the kids wash dishes in the back.

A monopoly like Google is different. Since it doesn't have to worry about competing with anyone, it has wider latitude to care about its workers, its products and its impact on the wider world. Google's motto—"Don't be evil"—is in part a branding ploy, but it is also characteristic of a kind of business that is successful enough to take ethics seriously without jeopardizing its own existence. In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can't. In perfect competition, a business is so focused on today's margins that it can't possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.

Where the working class can NOT afford to live

There is a lot of recent rhetoric about socialism and class conflict (see NY Times on The New Socialists).  Housing is one reason so many young people are so disaffected (article behind the grim map above).  

• San Antonio is the only one of the top 10 most populated cities where a working class family can enjoy a decent living without taking on more debt. Out of the top 50, only 12 qualify. 

• Geography obviously plays a big role as well. Newark, New Jersey, Chesapeake, Va., and Jacksonville, Fla., are the only coastal locations where a worker can support his or her family. How many on the West Coast? Shocker: Exactly zero. You probably don’t need a map to tell you, but the more landlocked, the more affordable.

•  The best place to live from a financial perspective on an Average Joe’s salary is Fort Worth, Texas, which would leave a working-class family with a $10,447 surplus at the end of the year. On the flip side, that same family would need an additional $91,184 just to break even in New York City.

White House Is Taking On NIMBYs With New Zoning Proposals

Good for the President for taking this on, as this splits his coalition by pitting the “open space” and “anti-development” crowd against their “forgotten” or invisible victims, i.e., renters and would-be homeowners.  A more self interested politician would support keeping the zoning laws in place as they enrich homeowners and landlords, in addition to keeping out out new development.  

In this respect, we are much more enlightened than the Swedes, who not only have much more restrictive zoning (What happens when you allow residents to veto new building plans?) but also allow politicians to jump to the front of an 8-year queue for “affordable housing.”   

According to the Aftonbladet daily, Foreign Minister Margot Wallström was one of the left's "high-profile figures" who in deference to their positions were rented apartments in the Swedish capital, bypassing a wait of on average eight years like ordinary renters

Did the government cause the affordable housing crisis?

"Yes," says the Washington Post, for three reasons:

1. Restrictive zoning reduces the profitability and therefore the supply of housing:

The White House’s calls for local policymakers to expand by-right development (where allowable building projects can proceed administratively, without years-long public hearing processes) and accessory dwelling units, to repeal or reduce minimum parking requirements, and to rezone neighborhoods for greater possible density all amount to restoring landowners’ rights to develop property as they and the market see fit. As the tool kit notes, inappropriate parking requirements, in particular, can raise the expected rent in a new development by as much as 50 percent, while depriving towns of socially and commercially productive land.

2. Regulatory delays and requirements raise costs to the point where only high-end apartments are profitable (Nashville's problem):

Establishing by-right development and streamlining local permitting processes will allow developers to respond nimbly to market demands and will relieve the “guilty until proven innocent” status of new building development, which depresses construction starts across the country by delaying and inhibiting housing projects. What’s more, adopting leaner codes would remove obstacles to the countless smaller developers and would-be builders who want to invest in strengthening their local communities, but currently can’t afford to navigate the vast regulatory burdens and uncertain futures awaiting anyone who tries to build in America today. Trulia economist Ralph McLaughlin found that these regulatory delays may have an even bigger impact on housing production than zoning restrictions.

3. FHA loans prohibit mixed use, further reducing the profitability and supply of housing:

To this day, FHA standards for loans, which set the market for the entire private banking sector, prohibit any but the most minimal commercial property from being included in residential development. As a groundbreaking report by New York City’s Regional Plan Association found, these standards are “effectively disallowing most buildings with six stories or less.” And depending on the program, a building could have to reach to 17 stories before it is eligible for participation in the normal housing markets. Without the FHA’s blessing, projects are granted the “nonconforming” kiss of death unless their developers can persuade a local bank to write an entirely customized loan for them, one whose risk the bank would have to keep entirely on its own books.

What happened when Tennessee kicked 170,000 out of medicaid?

They started looking for jobs:

We ... find an immediate increase in job search behavior and a steady rise in both employment and health insurance coverage following the disenrollment. Our results suggest a significant degree of “employment lock” – workers employed primarily in order to secure private health insurance coverage. The results also suggest that the Affordable Care Act – which similarly affects adults not traditionally eligible for public health insurance – may cause large reductions in the labor supply of low-income adults.

HT: Larry

How do we control healthcare costs?

Just say "no."

Governor Deval Patrick is seeking sweeping authority to review and reject rates charged by hospitals, physician groups, medical imaging centers, and insurers, in a broad new effort to make health care more affordable, particularly for smaller companies and their workers.

Misnomer: The Affordable Care Act

Why do we spend so much on health care?

Its the incentives, stupid!  The Atlantic has a nice summary of the problem.

Ten days after my father’s death, the hospital sent my mother a copy of the bill for his five-week stay: $636,687.75. ... but why should my mother care? Her share of the bill was only $992; the balance, undoubtedly at some huge discount, was paid by Medicare.

And what about President Obama's Affordable Care Act?

Like its predecessors, the Obama administration treats additional government funding as a solution to unaffordable health care, rather than its cause. The current reform will likely expand our government’s already massive role in health-care decision-making—all just to continue the illusion that someone else is paying for our care.

A better solution would limit the government's role to catastrophic insurance:

...a threshold of $50,000 or more ... (Chronic conditions with expected annual costs above some lower threshold would also be covered.) ... But the real key would be to restrict the coverage to true catastrophes—if this approach is to work, only a minority of us should ever be beneficiaries.

But what about poor people who cannot afford catastrophic insurance?

...the government should fill the gap—in some cases, providing all the funding. ... If we abolished Medicaid, we could spend the same money to make a roughly $3,000 HSA contribution and a $2,000 catastrophic-premium payment for 60 million Americans every year. That’s a $12,000 annual HSA plus catastrophic coverage for a low-income family of four. Do we really believe most of them wouldn’t be better off?

Why have re-admission rates fallen?

The Affordable Care Act ("Obama care") began imposing penalties, and it seems as if hospitals have responded.  Mother Jones is skeptical about the results, as this would represent an almost perfect response to the ACA penalties:

the chart is almost too perfect. For four years the readmission rate is dead stable. Then, in a single month between December 2010 and January 2011 it suddenly drops by a full percentage point, and continues dropping for two years. This decline started about eight months after the passage of Obamacare, and it's hard to believe that hospitals could react that quickly. 

Then, the very instant that penalties begin for high readmission rates, everything stabilizes again. Apparently America's hospitals unanimously decided that once they'd hit a certain level, that was good enough and they wouldn't bother trying to improve even more.

I can think of several explanations, e.g., it may be that:

• Hospitals are refusing admission to particularly sick patients, likely to get re-admitted; 
• Patients are getting re-admitted to other hospitals; 
• Hospitals are giving patients prophylactic antibiotics,  which reduces re-admits, but also creates new antibiotic-resistant superbugs.  
• Hospitals are steering them to clinics and outpatient services, (the "good" outcome).

I would love to hear from former students (pls post in comment section) as to what they think is causing the change.  

Who will come back to New Orleans?

NY Times:

Before the storm, more than half of the city’s population rented housing. Yet official attention to help revive the shattered rental home and apartment market has been scant. ... Last week, the city housing authority approved the demolition of 4,000 public housing units at five projects damaged by the storm. In their place, the authority plans to build mixed-income projects, large parts of which will not be affordable to previous residents.

One of the more striking changes to appear lately in New Orleans is the highly visible number of homeless men and women living under bridges and in parks. Social service groups say about 12,000 homeless people are living in the city, about double the number before the storm.