Inclusionary Zoning Heads to the United States Supreme Court

Last year the California Supreme Court upheld a San Jose law similar to the one being proposed here in Seattle. A lower court had found differently and now the case against the law has been appealed to the United States Supreme Court. The Court will decide whether it will hear the appeal. One thing different about this case from Seattle’s proposal is that the San Jose law applies to for sale housing product. Other courts in California have ruled against inclusionary zoning unless it comes with upzones or fee options, clearly the thinking behind Seattle’s proposal. Those are being challenged too, but it’s unclear exactly how California will proceed with some of it’s inclusionary laws already on the books. There is a great summary of the issues in California by Andrew Faber in a paper he presented to the League of California Cities. I want to quote, though, from a great op-ed in the Los Angeles Times about the inclusionary case going to the Supreme Court.

If you think affordable housing mandates can’t do much harm in regions where home prices are already among the highest in the nation, think again. In a Reason Public Policy Institute study that investigated the impact of housing set-asides in the San Francisco Bay Area from 2003 to 2007, economists Benjamin Powell and Edward Stringham found that the volume of new home construction dropped on average 30% in the first year after such a law passed, and prices rose 8%.

In a study looking at Southern California, Stringham and Powell found that housing starts in eight cities dropped off significantly after the inclusionary zoning went into effect. In the seven years before the law, over 28,000 new homes were built. In the seven years after? Only 11,000. Yes, 770 “affordable” units were constructed, but what’s more important is the 17,000 homes that weren’t built at all, making the housing shortage more acute and pushing up prices.

Exactly what we’ve been saying. Far from helping housing prices, inclusionary schemes just reduce supply making housing scarce and therefore, more expensive. The author, Gary M. Galles, a professor of economics at Pepperdine University, also uses a great analogy. 

Suppose there was a law that if you opened a new supermarket you had to sell 15% of your groceries to low-income people at far-below market prices to improve their access to good nutrition. This would clearly be an unfair burden. Those wanting to open new supermarkets did nothing to cause the problem; on the contrary, they intended to increase food accessibility.

Those eligible to buy the cheap food would benefit. But if this regulatory “tax” led to fewer new markets, many more people would lose. To cover the cost of this forced charity, new supermarkets would charge higher prices for the remaining 85% of their groceries. Existing stores might, in turn, decide to raise their prices because the new stores would provide no price competition on most goods.

Our society recognizes the downstream consequences of forced charity policies when the product is food; that’s why the food stamp program doesn’t constrain suppliers or meddle with free-market rates. (Instead, it helps low-income consumers afford full-price goods.) We should notice the same consequences when the product is housing.

 

Latino Politics from the A’s to the Z’s

A version of this post appeared yesterday in Publicola.

In 1992 I returned to the Seattle area after two years in graduate school in Southern California. Before that, I was an undergraduate at the University of Puget Sound in Tacoma. I paid very little attention to local politics; I was more likely to be reading Karl Marx than Emmett Watson. After I left academics, I got involved in local politics as staff and a volunteer. Almost immediately I discovered and joined a growing movement to elect Hispanics to local offices. Does the election of Lorena Gonzalez and Deborah Juarez mean we made progress in those twenty-three years?

In 1993 I sent a query letter (yes, a letter in an envelope with a stamp on it!) to David Brewster at the Seattle Weekly asking to write about the Hispanic (that’s what we called ourselves then) community’s changing demographics and efforts to turn the growth in numbers into political power.

At that time there were only two Hispanics in the Washington State legislature even though, at the time, the state’s population of Hispanics was the fastest growing in the state. Brewster accepted my proposal and I wrote a few hundred words about efforts to organize a political action committee in Pierce County and the general demographic trend.

For that piece I interviewed State Senator Margarita Prentice. Prentice called herself the “only openly Hispanic state legislator.” The joke was at the expense of State Senator Emilio Cantu, a Republican from Mercer Island who, although Hispanic, hardly identified with the issues associated with the Hispanic community, education, immigration, and economic development.

Today, the Hispanic population is now the largest minority group in the state with more 700,000 people in every county of the state. (US Census)

		U.S. Rank
Total Hispanic Population in Washington	790,000	12
Hispanics as Percent of State Population	12%	15
Hispanics as Percent of U.S. Hispanic Population	1.5%	12
Native-Born Hispanics (Percent of Hispanics)	65%	27

Those numbers were on the upswing throughout the 90s, but really didn’t translate into political representation. Phyllis Gutierrez Kenney joined Senator Prentice in the legislature in 1997; Kenney took an open seat through an appointment process and was subsequently reelected. My own efforts to get elected failed in 2002, and others had mixed results in the legislature in spite of redistricting and promises from Democrats to increase the numbers of Hispanic legislators.

Today, in Yakima, there are now three Latina (I’ll start using Latino/Latina now) City Councilmembers, which makes sense considering that Yakima County has one of the largest Latino populations in the state. And now, Councilmembers Gonzalez and Juarez join those three women on the Council of the state’s largest city. But at the State level, there are still only three Latino legislators.

In 1993 when I was recruited to help re-elect an appointed municipal judge Sergio Armijo, he faced a tough race in Tacoma in what, generally speaking, should have been a walk. Part of it was his “strange” name. This adverse name association was a problem in counties without lots of Latinos, but also in places where the dominant political establishment worried about the local offices being taken over by Spanish speaking people, immigrants, or the children of immigrants. We found that appalling and something that cried out for change.

What hasn’t happened is a successful, organized and statewide effort to elect Latinos at all levels of government in spite of worry about the names on the yard signs. This was my dream as a young person starting out more than 20 years ago in public life. However, the local election of Latinos cannot be attributed to a single organization or fundraising effort. In fact, it’s likely such a thing just doesn’t exist and perhaps never will (in the 90s we formed a Hispanic Political Action Committee in Pierce County and there was one in Seattle too). Such efforts never seemed to get very far in our community.

But what has happened in the intervening 20 years is that many, many Latinos have gotten the education, practical experience, and connections to get elected to local office on their own. Latinos have made themselves a presence at all levels of government and now they are getting elected like all other politicians. While the numbers of Latino people in office may not have grown proportionally with our population, there has been an increase in the depth of penetration of Latinos in government and with jobs related to government. And perhaps, that means we, and our names, aren’t so strange anymore.

While there is no Latino block vote, I think the Latinos getting elected and part of the process are far more sophisticated and their presence more sustainable than if they all got there as the consequence of a machine. Gonzalez and Juarez are more than qualified for their jobs and bring decades of professional and practical experience to a wide array of issues facing the City. Both are lawyers. And it matters that they are both women who came to Seattle from somewhere else from economically challenging circumstances. They’ll understand the challenges faced by newcomers to our city and what it is like being an outsider on the inside.

I find myself very skeptical about Councilmember Gonzalez’ claims to being an “Urbanist.” But, whatever doubts you might have about identity politics (and I have many), I am happy that she is there to be the object of my skepticism. And whatever people say about me, I’m glad that I am here to be the skeptic. The ‘z’s’ in our names matter as an emblem of broader progress toward Seattle being that great city that gives everyone from everywhere, strange or not, a chance to contribute and improve our world.

George Lucas on the Down Side of Star Wars: “There’s More to it Than That.”

You didn’t think you’d be reading about Star Wars here did you? Well, here’s my Star Wars post. Why Star Wars? Well, George Lucas, the creator of the epic series of films, did an interview with Charlie Rose at the end of last year talking about his feelings about saying goodbye to Star Wars (he sold the Star Wars series to Disney for billions of dollars). I found his comments about creativity and imagination very resonant with what’s going on in the ongoing discussion of housing and development in Seattle. What Lucas says about the film industry could easily be said about decision makers who finance and regulate housing. What matters to banks and investors is getting a return on investment and planners and regulators want one-size-fits-all code. If you don’t like what’s getting built in Seattle, don’t blame developers but the need for investors to avoid financial risk and the Seattle City Council to avoid political risk.

At 35:30 in the interview, Lucas says that after Star Wars became a blockbuster, two things got abused. First, Lucas points out that the industry obsessed over the technology in Star Wars, forgetting that the whole idea of film is telling a good story.

Everyone went out and made space ship movies and they were horrible and they all lost tons of money . . . There’s more to it than that. You can’t just go out and do spaceships . . . You’re telling a story using tools, you’re not using tools to tell a story.

The analog in development are the planners who fasten on a particular approach to townhouses, for example, requiring a certain number of windows on each side of the home and setting that requirement with a formula. Same thing with parking requirements, set backs from the street, and things like requiring front and back yards. All those things might have worked well once, but just mandating them everywhere all the time doesn’t mean that buildings will tell a good story. Not all films should be space ship movies and not every building should be a bread loaf with setbacks.

The other aspect of the housing discussion that I personally find more frustrating than any other is the perception that the building industry is awash in money. Yes, lots of money is being invested in new construction to meet housing demand, but builders and developers are more like the directors in the film world than the fanciful Rich Uncle Pennybags featured in myths about development. Investors expect a return from building, and if rents aren’t high enough to support land acquisition, construction, and operation they’ll take their money somewhere else.

The other thing that got abused, naturally in a capitalist society especially an American point of view which is, the studios and everything said, “Wow! We can make a lot of money. This is a license to kill.” And they did it. And of course the only way you can really do that is not take chances. Only do something that is proven. You gotta remember Star Wars came from nowhere . . . There was nothing like it. Now, if you do anything that isn’t a sequel or not a TV series or doesn’t look like one they won’t do it . . . that’s the downside of Star Wars. And it really shows an enormous lack of imagination and fear of creativity on the part of an industry.

And when it comes to the regulators, they are truly the ones lacking imagination. The proposed scheme in the Grand Bargain is as formulaic as it gets, with zero room or any imagination or creativity only ‘performance’ and the generation of set, round numbers of units on an annual basis with no measures for whether those units are having a beneficial impact on the wider housing market.

If we want creative design and policy solutions it isn’t going to happen with imposing formulas and design review. But that’s what characterizes the City’s approach to the construction of needed housing. Councilmember Sawant’s proposal to use the City’s debt capacity to build housing on City owned land has gone nowhere; it doesn’t fit the City’s template. It’s just too hard for City staff to figure out so instead of moving forward with that idea, it sits on a shelf. Let’s make space ship movies!

Part of the reason I have long been an advocate of getting rid of zoning all together is that when a formula is created so is certainty, and certainty tends to foster repetition, and, in the end, laziness. If you want to know why people are annoyed by new development of housing and the growth that is happening in Seattle it is less from the discomfort created by change and more by the absolutely unimaginative approach we’ve taken to change. Rather than welcome new ideas and collaboration, the City has chosen to impose fees on change (Wow! We can make a lot of money!) rather than encouraging it. Im pretty sure that if the City made Star Wars the Wookie would be wearing pants and the Millennium Falcon would have been half the size and had a parking lot.*

*The truth is the executives really wanted Chewbacca to wear pants, something Lucas fought against. The story is little known, but an important one in explaining how something so much a part of the fabric of American culture almost got ruined by regulators. From a post at blastr:

One of the initial problems Fox had with Star Wars was the depiction of Chewbacca. Despite the fact that the character was covered in fur, studio executives were concerned that the bandolier he wore around his chest highlighted his lack of clothing, which could have alarmed the censors and potentially harmed the film’s distribution.

Mark Hamill, the actor who portrayed Luke Skywalker, recalled to Space.com:

“I remember the memos from 20th Century Fox, ‘Can you put a pair of lederhosen on the Wookie [sic]?’ All they could think of was, ‘This character has no pants on!’ This went back and forth. They did sketches of him in culottes and baggy shorts.”

Folkenomics: McArdle Takes Down Bernie Sander’s Economics

I’ve heard it and seen it over and over on Facebook and in person and on the streets: we should just cut people loose of their student loan debt or their mortgage debt because it’s the right thing to do. One thing progressives and socialists are fond of doing is lashing out at The Banks as if the banking system was some external, inchoate, evil threat. On the contrary, as I already pointed out, the banking system is essential for taking ordinary people’s hard earned money, protecting it, investing it, and increasing it all while making money available to others who are creating new jobs, buying homes, or building housing. Megan McArdle takes on the folkenomics of presidential Bernie Sanders in a concise post at Bloomberg. Why can’t we just forgive everyone’s student debt or offer low rates?

The short answer is: “Loans are not priced in real life the way they are in Sunday School stories.” In a Sunday School story, the cheapest loans would go to the nicest people with the noblest use for the money: single mothers who need money to buy their kids a Christmas present, say.

That’s splendid for the recipient. But what about the lender? Let’s say you had $150 that you really needed to have at the end of the month, say to pay your rent. Would you want to lend it to the single mother whose income is stretched so tight that she needs to borrow money for Christmas presents, or would you want to lend it to some heartless leech of a securities litigator with an 800 credit rating who happens to have left his wallet at home? C’mon. You know the answer; you just don’t want to say it. If you really need the money — if you cannot afford to turn your loan into a gift — then you lend it to the better credit risk with the higher income, not the person who may find themselves too short to pay you when the loan comes due.

In aggregate, most of the money in your savings account is loaned out using this cold calculus, and unless you could afford to have the contents of that account suddenly vanish, you want it to be. That’s why poor people, on top of all the other unfairness heaped upon them, pay higher interest rates. And that is why secured loans, like mortgages, get lower interest rates than unsecured loans, like credit card balances and student loans.

The money that people have a hard time paying back is, in the end, owed to all the rest of us. The money that is used to expand the economy, ironically for socialists, a collective investment in the future by millions of investors. To simply say, “Don’t worry about it!” means lots of other people will lose parts of their savings, pension funds or face reductions in services when government bails them out.

The interconnected nature of the economy and financial system–and it’s collective nature, both in terms of risk and reward–is easy to ignore for socialists. They’d rather point out the instances when individuals or groups act irresponsibly or violate the law and say the financial system is itself corrupt. But this is the indictment issued by an angry mob, not a reasoned approach to dealing with the systems shortcomings.

When it comes to housing, in general, developers and builders get paid for their work as a percentage of overall project cost. The money they make for their companies pays them, their employees and serves as the basis, often, for further investment in housing projects. What about the investors, who range from private parties to banks to huge pension funds? They are all responsible to create a return. If the City tries to dip it’s ladle in the supposed gravy train created by new housing all they do is increase overall project costs which must be offset by more rent or sales revenue. I pointed out how a Debt Credit Ratio (DCR) works in another post.

What the City does when it tries to tax profits from housing or punish developers for building housing with financial exaction doesn’t work. Even if City could reduce the rate of return to investors, they aren’t hurting anyone but lots of hardworking people who have aggregated their money in the form of savings or retirement accounts. What will the City Council tell the retired teacher who’s monthly pension check goes down because her pension fund was forced to take fewer dollars in “profit” from investing in new housing in Seattle? The truth is that the pension fund wouldn’t make that bad investment, so either the rents go up to offset the cost of the project or the project doesn’t happen and that pension fund money goes somewhere else.

There are really fair and efficient ways of collectively subsidizing lower rents, including the Multifamily Tax Exemption (MFTE) program and the Housing Levy each of which have created thousands of housing units priced affordably for individuals and families. The sooner progressives and socialists recognize that we’re all in this together, the sooner we can actually come up with constructive solutions to housing issues in Seattle. Until then, all we’re going to do is add more costs and more hassles to building housing which will reduce supply, increase costs, and discourage production, a recipe for higher housing prices.

 

What Was Under Your Tree This Year?

The following appears in this months edition of Master Builder, a regular publication of the Master Builders Association of Snohomish and King Counties. 

If builders in Seattle were hoping to find a Christmas present under their trees from the City of Seattle through the so-called Grand Bargain they are likely to be disappointed. In fact, if they check their stocking, they might find a big lump of coal instead. The Grand Bargain was a compromise struck between high-rise developers downtown and City officials to avert the imposition of per square foot taxes on all new development of housing in the city of Seattle. The deal that was struck was as follows: citywide upzones in exchange for a program of mandatory inclusion of rent restricted housing units in new construction. Smart Growth Seattle has been looking at the numbers, and they simply don’t work. The Bargain ends up making projects infeasible because of added costs.

First, we’ve always been against inclusionary zoning on economic principle. If there are 10 loaves of bread and 100 people with money to buy bread, the price of bread, in the words of the local press in Seattle, will “skyrocket.” On the other hand, if there are 100 loaves of bread and 10 people looking to buy, sellers are likely to be offering deals, like buy one loaf get the second loaf for half off. As much as ideologues in Seattle want to claim it’s more complicated with housing, in the end it isn’t. When demand outpaces supply, prices will rise for homebuyers and renters. When prices start to climb beyond some established norm for affordability, lowering those prices starts with building more housing.

Second, the idea of forcing builders to include rent-restricted units along with market units might sound like a good idea. After all, the units would only be a small percentage of all the units built, say 10 percent. In a 100-unit building, that would mean 10 units would have their rents controlled by the City based on a standard set by the federal government. The problem is, in order to make financing for a project work, rents are also highly programed and controlled by lenders who want to be sure to get paid back. This means that higher rents in the remaining 90 units are the only way to offset the lost revenue from the 10 units that have rent restrictions. How does raising the price of 90 units to create 10 help lower overall housing prices? The truth is, it doesn’t. Inclusionary zoning is a form of rent control and is always inflationary.

Third, when we actually ran the numbers on a Small Efficiency Dwelling Unit, or SEDU, the numbers simply don’t work. Whether the additional square footage “given” to builders comes in the form of an additional floor or a 10 percent increase in Floor Area Ratio (FAR), the additional floor required would add construction costs to the project. In most cases, a fifth floor changes the whole building, because it requires concrete construction instead of wood. This additional cost would have to be absorbed by – you guessed it – higher rents in market units. Our sample pro forma showed that keeping the rents the same wasn’t enough. Don’t forget also that a 60 unit building with an inclusion requirement of seven percent would make for locked-down rents far below market rates in four of 10 new units created. The math says that the project wouldn’t work.

Smart Growth Seattle has been expressing skepticism and working on behalf of builders in Seattle to either send the bargaining team back to the negotiating table to get a deal that makes economic sense; or, alternatively, a deal that actually creates upzones that in turn create projects with new housing, or a fee for affordability that doesn’t increase overall prices or make projects infeasible. As unlikely as that may be considering basic economics, the holidays are a season of miracles – maybe one will happen in Seattle for housing.