Thursday, December 1, 2016

Housing: Part 189 - Below Market Rate housing

One of the ongoing battles between YIMBYs and NIMBYs is the extent to which below market rate (BMR) housing should be part of the solution to a more functional housing supply.

In a recent post, I argued that the seen part of a healing housing supply at market rates would be rising housing expenditures at the high end of Closed Access cities, because those are the households who have been reducing their real housing expenditures and who naturally would be willing to expand their real housing consumption.  For households with lower incomes, their reaction to a healing housing market will be to maintain their real housing consumption but to take advantage of moderating rents to reduce their nominal housing expenditures.  Millions of them have been moving out of the Closed Access cities in order to reduce their nominal housing expenditures, and it would be a huge win to stop that migration flow.  The benefits of a healing housing market on the low end of the market would mostly come in the form of things that would stop happening.

That's a tough rhetorical argument to win, though.  "Look!  Our new housing expansion programs are working because rich people are moving into new fancy apartments and low income families are staying in the same apartments they had!"  It's a losing argument, even though that outcome is a vast improvement over the current state of affairs, where a high income family moves into the low income family's house and the low income family moves to Las Vegas because they can't afford to stay.

It seems as though the better solution would be to build BMR units so the low income family can move into those units instead of moving to Las Vegas.  But, the main difference between this solution and the market rate solution is simply to move the pieces of the puzzle between the seen and the unseen.  Now, unseen in the city somewhere, on the margin, there is a low income family priced out of the housing market as market rates are bid up, and the seen part of the policy is that, on the margin, a low income family moves into a BMR unit.  The family in the BMR unit might have especially affordable rent, but families in the rest of the city will likely have marginally higher rents because supply in market rate units will be more constrained.  This is simply a ratcheting up of the incongruities that define Closed Access polities.

The main goal is the expansion in total units.  The composition of the city's population isn't going to change because we insist on building units that are "affordable" instead of "luxury".  The reason high income households are bidding up the housing stock isn't because Closed Access cities are full of magnificent units.  It's because those units are located in Closed Access cities.  The only way to eliminate the demand for "luxury" units is to eliminate the Closed Access policies that make them exclusive.

But the main point I want to make here is that the existence of BMR units and the expectation that they will continue to be part of a city's housing stock is, a priori, a description of a housing problem that hasn't been solved.  There are many cities in this country with function housing markets, where families spend a normal, comfortable portion of their incomes on rent.  For most families, there are a range of options for real housing consumption, and they tend to settle on a level of housing that fits in a comfortable range of spending for a given income level.  What characteristics do cities have where this is the case?  Universally, they have policies that allow adequate building of market rate housing, and they don't have BMR units as part of the city housing policy (except for units that qualify for typical federal rent subsidies and other programs directed at poverty relief).

To propose BMR units as part of a housing plan is to perpetuate a housing policy that has the character of Closed Access.  The point of a functional housing plan would be to reduce the market rate.  This is the only way, at a fundamental level, to achieve a functional housing plan.  Imagine that we try to fix a city's housing problem by perpetually building BMR units.  Is there any conceivable future scenario that isn't characterized by stress and incivility?  In those scenarios, market rates would still be high.  The justification for BMR units is that market rate units would accommodate unmet demand for units from high income households, and that BMR units would target lower income households.  As I argue above, this is incorrect.  But, even if we agree that it's correct, then the very presumption of the policy is that there will continue to be a perpetually unmet demand for housing from high income households.  The future of a city with a BMR policy will be just as stressed as the present.  What would have changed?

The way to make housing affordable is to stop piling a bunch of idiosyncratic costs (taxes, fees, logistics, delays, inflated construction costs, etc.) on new units.  The city has complete control over allowing "BMR" units simply by refraining from these impositions.  If new housing could be built at cost, it would be affordable.  At this point, though there are a variety of paths that take them to their shared conclusion, it seems that, at bottom, the one thing that many constituencies of Closed Access cities don't want is affordable housing, writ large.  They all (homeowners, renters, advocacy groups, etc.) want unaffordable housing, and they want to engage in interest group battles that carve out exceptions that make their housing affordable (property tax limits, rent control, BMR units, etc.).

The reason that the city can't remove all those extra impositions from new units seems to, in part, be due to the fact that all those special interest carve outs prevent them from funding the city budget without them.

I wonder how much of the motivation for BMR policies comes from a sense of the sanctity of homes and the vulgarity of market prices.  This same sense seems to populate opinions about things like education and health care, too.  While these attitudes come from an understandable motivation, I am afraid that a lack of appreciation for the power of market prices to undergird an affordable and civil economy is leading to policies that are causing these sectors to eat us alive.  Because housing is local, it may be the best example we have of the damage that can be done in the name of sanctity.  There is an undeniable correlation between places where this sense of sanctity has a strong hold on local policy choices and where vulnerable families are stressed out by high costs and a lack of choices.  But, this sense of markets imposing vulgarity on transactions that have an element of sanctity causes many people to be more comfortable with demand that is routed through a local commissar who doles it out in a fashion that explicitly is sanctified by an organized program of desert and fairness than by an uncaring landlord, in spite of the stresses that this program clearly causes at the macro level.


  1. I used to work for an investment group that provided equity for development, including apartments. One thing I noticed about affordable units was that they looked crappy and cheap. Yet they only cost like 10% less to build. And if you just built them without the subsidies or tax credits or because you had to to get the market rate units approved, they would lose money. That is, they cost 10% less to build but might have rented for 30% less in a free market. This means that they were truly a waste of resources because the units value upon completion was less than the cost (but still profitable once the tax credits were factored in).
    You are 100% right about housing policy. We just need to allow more building and more density. And to all the folks who oppose density I say, "there are really only two options - density or sprawl."