Who’s wrong? This time, not us

One of the many reasons the Merry-Go-Round never will be invited to join the Inner Ring is that we’re willing to acknowledge, albeit begrudgingly, that we’re not always right.

We always have pooh-poohed the proposition – accepted as an article of faith by Those Who Know Best – that the high-end residential development projects planned for Alameda, now and in the future, will have the effect of alleviating the shortage of “affordable” housing in the City.  Indeed, in a recent column on alternatives to rent control, we argued that this notion was fanciful at best.

Then this week, a short in the Chronicle alerted us to a recent report from the state Legislative Analyst’s Office entitled, “Perspectives on Helping Low-Income Californians Afford Housing.”  Having downloaded the document, we saw that the LAO promised to “present evidence that construction of new, market-rate housing can lower housing costs for low-income households.” Indeed, the report claimed, “Building new market-rate housing . . . indirectly increases the supply of housing available to low-income households in multiple ways.”

Uh oh.  If the LAO – invariably preceded by the epithet “non-partisan” – says it’s so, maybe we were wrong after all.

Well, we’ve now read the entire report, focusing on its relevance to Alameda, and we’re not ready to confess error quite yet.

(And neither is San Francisco Supervisor David Campos.  More on that later).

The LAO report makes four arguments.

First, the report contends that building new market-rate housing now will increase the supply of lower-cost housing “in the future.”  This is because “[n]ew housing generally becomes less desirable as it ages and, as a result, becomes less expensive over time.”

Oh, really?  We’re accustomed to reading about the dramatic increase in housing prices over time.  But the LAO apparently believes that housing prices, at least for newly constructed housing, actually decrease as time passes.  Frankly, we find this hard to accept.  (If it’s true, woe to those well-off folks plunking down a million bucks for a newly built home at Alameda Landing.  They’re going to lose their shirts).

Nor are we persuaded by the “evidence” cited in support of this assertion:  an “analysis” of data about housing built between 1980 and 1985 in San Francisco and Los Angeles leading the LAO to conclude that “[h]ousing that likely was considered ‘luxury’ when first built declined to the middle of the housing market within 25 years.”  (Don’t share this conclusion with any original home buyers at Harbor Bay Isle.  They might not like to hear about their homes’ fall in status, not to mention value, since they bought them).

In any event, 25 years seems like an awful long time for low-income households to wait before they can reap the benefits of the new market-rate housing being built today.

The second argument is the familiar “trickle down” – or, as we like to call it in homage to “The Jeffersons,” the “movin’ on up” – theory:

When new construction is abundant, middle-income households looking to upgrade the quality of their housing often move from older, more affordable housing to new housing. As these middle-income households move out of older housing it becomes available for lower income households.

(The report also argues that the converse is true:  when new construction is “limited,” middle-income homeowners will stay put and, rather than “upgrading by moving to a new home,” they will remodel their current one).

The LAO report cites no evidence that the movin’ on up phenomenon in fact ever has occurred and led to the result alleged.  More fundamentally, we question that people actually behave as the theory assumes.

According to Trulia.com, the median sales price of a home in Alameda as of December 2015 was $768,500.  The movin’ on up theory posits that, as new $1 million+ homes hit the market, the owner of the median-priced home will want to “upgrade” by buying a more expensive abode.  But why?  Suppose her current residence is perfectly adequate – right size, nice neighborhood, good schools.  (This is, after all, Alameda we’re talking about).  Is it really likely that an otherwise satisfied homeowner will spend an extra quarter of a million dollars to procure the “prestige” of owning a fancier home?  Thankfully, we know few such people.

And that’s not the only problem with the argument.  Even if an Alamedan who owns a median-priced home has a legitimate reason for wanting to buy a more expensive house, who’s to say she won’t be outbid by someone from San Francisco or Silicon Valley who regards a $1 million+ house as a bargain?  Given the demand in the Bay Area, new high-end residential projects built in Alameda may not increase the overall supply of housing for local residents at any income level, much less for low-income Alamedans.

Finally, the movin’ up phenomenon has to repeat itself several times before it does any good for low-income households:  Homeowner A needs to move to the $1 million house, leaving the $768,500 house available for purchase by Homeowner B, who in turn leaves a $500,000 house available for purchase by Homeowner C, etc.  But the game of musical chairs will have a long way to go to reach the “affordable” level.  According to the 2015-23 Housing Element, the most expensive house that a four-person low-income household can afford costs $278,713.  How many single-family homes, or even condos, in Alameda sell for that price?  How many preceding sales of higher-priced properties will it take before such a residence, if it exists, becomes available?

We don’t think the movin’ on up theory works any better for renters than for homeowners.  Maybe, someone renting a $2,750 a month two-bedroom apartment on Shoreline Drive (check the current listings) will prefer the view from the Seaplane Lagoon and decide to move to a new, more expensive unit at Alameda Point.  But there still will be a lot of further moves that must occur before an apartment affordable by a low-income household becomes available as a result.

The LAO report suggests otherwise, but we find its reasoning perverse.  According to the LAO, when new rental housing construction is “limited,” current landlords of “aging” buildings “may elect to update their properties so that they can continue to market them to middle-income households.”  As a result of these “updates,” the report asserts, “less housing transitions to the lower-end of the housing market over time.”

But what happens when the new apartment buildings get built?  Do landlords no longer “elect to update” their “aging” buildings?  That would be an odd strategy for holding onto tenants.  And if landlords do let their buildings deteriorate, will low-income households in fact choose to live in the lesser-quality properties?  Even if so, that hardly seems an appropriate way to make housing more affordable.

The “evidence” cited by the LAO on this point is a study described as showing that rental housing “generally depreciated” at a lower than average rate between 1985 and 2011 in regions “with relatively limited housing supply.”  We’re not quite clear what this proves, and even less clear how it applies to Alameda, where median rents have risen – not declined  – by 54 per cent between 2000 and 2013 (according to the recent Bay Area Economics rent study).

The third argument made in the report seems equally inapplicable to Alameda.  According to the LAO, if “more affluent households” aren’t able to find new, expensive housing, they’ll turn their attention to “neighborhoods and housing units that historically have been occupied by low-income households.”  This will “reduce[] the amount of housing available for low-income households.”

This sounds to us a lot like “gentrification,” and maybe it has occurred in places like, say, Brooklyn Heights.  (Interestingly, the “evidence” cited by the LAO on this point is a study by the Federal Reserve Bank of New York).   But is it happening, or will it happen, in Alameda?  Housing prices in the less expensive neighborhoods around town surely have gone up (as they have everywhere else).  But we doubt that the explanation is that “more affluent households” are grabbing up homes owned by middle-income residents in central Alameda because there aren’t enough high-end townhouses at places like Alameda Landing.

Finally, the LAO report asserts that, “When the number of housing units available at the lower end of a community’s housing market increases, growth in prices and rents slows.” That observation, of course, is straight out of Econ 101, but it doesn’t answer the question: Does an increase in the number of housing units available at the higher end of a community’s housing market lead to a slowdown in prices and rents at the lower end?

This raises what antitrust lawyers call an issue of market definition.  If the “housing market” is homogenous, an increase in supply will lead to lower prices across the board.  But if it’s not, it won’t.  And not all markets are homogenous:  Just to irritate our friends on the Planning Board, we’ll pick automobiles as an example.  An increase in the supply of BMWs won’t lead to a reduction in the prices of Honda Fits.  If the “consumers” of housing are like car buyers, with different groups preferring (or being able to afford) different products, an increase in the supply of one product – luxury homes – won’t lead to lower prices for another – modest apartments.

The LAO offers no contrary evidence.  The report cites a study comparing “housing expenditures” of low-income households living in “slow-growing” communities to those living in “fast-growing” areas.  Between 1980 and 2013, rents paid by the former group grew three times faster than rents paid by the latter group.  And this proves exactly what? Unless supply is the only factor determining rents, it doesn’t follow that slower growth in supply caused a greater increase in rents.

To us, the LAO report fails to prove the case that building new market-rate housing is an effective way to reduce housing costs for low-income households.  And we’re not the only skeptic.

In our column on alternatives to rent control, we quoted San Francisco Supervisor Campos, who has led the fight against high-end residential development in the Mission District.  After reading the LAO report, we wondered what Mr. Campos thought about it, so we sent him an email to ask.  He called us back the same afternoon.

Mr. Campos, too, found the report’s reasoning unpersuasive and its conclusions unconvincing.  And he offered independent support for his view.  At Mr. Campos’s request, San Francisco’s Budget and Legislative Analyst estimated the number of new housing units needed to lower housing prices in San Francisco.  Relying on an earlier LAO report, the analyst concluded that for San Francisco to have achieved lower housing prices by 2010, it would have needed to build 15,300 new units per year – a total of 459,000 units—since 1980.  This would have more than doubled the existing housing stock in the city during that period.  And even this enormous increase in supply would not have lowered housing prices; it just would have slowed the rate of price appreciation.  And the future?  It would take even more than 15,300 new units per year, the analyst said, to yield a reduction in housing prices.

We suppose the conclusions reached by San Francisco’s budget analyst can be reconciled with the LAO report this way:  Sure, building new market-rate housing may result in lower housing costs for low-income households – as long as you build twice as many housing units as you have now.  But we wonder:  Is that even possible, much less desirable, in the island city of Alameda?

This probably isn’t the last we’ll hear about the LAO report.  One of these days, we’ll bet, an Inner Ringer will get up before Council and proclaim that, as “everyone knows,” “studies prove” that building new high-end residential developments will solve the “affordable housing” problem in Alameda.

Fortunately, our readers will know better.


Legislative Analyst’s Office, “Perspectives on Helping Low-Income Californians Afford Housing”: LAO report on affordable housing

Legislative Analyst’s Office, “California’s High Housing Costs: Causes and Consequences”: LAO report on housing costs

San Francisco Budget and Legislative Analyst, “Policy Analysis Report” (October 27, 2015): BLA.MissionDisplacement.102715.Final






About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
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6 Responses to Who’s wrong? This time, not us

  1. Steve Gerstle says:

    Why would developers want to build and banks be willing to loan on an immense increase in the housing supply that would drive prices down? Market rate construction will not drive down the price of housing. One option is to construct housing that is not part of the market rate economy.

    One way to lower the cost of market rate housing is to make the housing undesirable. For example, create enough congestion or crime in a community and housing costs will likely lower. Offering more parks, libraries and public transit will make the neighborhood more desirable. Cut those and prices will drop.

  2. There may have been some thread of truth to the LAO assertion connecting market rate housing with an increase in affordable housing when redevelopment agencies were in existence. According to defenders of the now defunct redevelopment agencies, the money spun off by redevelopment agency sanctioned market rate developments was the single most important contributor to the construction of new affordable housing. We’ll get significant new affordable housing, not token amounts, when our state government decides to either fund such construction or help facilitate it.

    • David says:

      Richard – at the expense of K-12 schools. It’s long been documented, and Gov. Brown justified killing redev. agencies on the same basis, that the redevelopment agencies siphoned property tax dollars away from K-12 schools.

      There’s much talk about using the density bonus for Site A at Alameda Point, which, by definition, means building affordable housing along with market rate housing.

  3. BMac says:

    Just like the effort to curb greenhouse gases, building enough supply of housing in the Bay Area to make it generally affordable is somewhat of a prisoner’s dilemma.

    Of course Alameda’s additional supplies of market rate housing is not going to make housing affordable on its own, since the housing market is a regional one. If nobody else adds “their fair share” of housing, and Alameda adds housing, any potential drops in prices for housing in Alameda get sucked up by people relocating w/in the region before prices can drop appreciably. Also, we have made housing the primary investment vehicle in this state and country, which enhances the natural tendencies of property owners to want to enact policies restricting supplies and preserving and increasing their own incumbent property values.

    San Francisco would have to build “2x” number of units to “solve” the affordability problem on their own. If regional or statewide jurisdictions force local municipalities to each build their fair share, then San Francisco only has to build “x” units to help solve the problem.

    Of course, incumbent property owners are very politically powerful and prevent this top down supply solution from being imposed, which results in a watered down housing allotment process and supply additions only going part of the way needed to really address the supply issues. Then you end up with people like our author of this blog seeing new supply (not enough!) that doesn’t solve the problem it aims to, but adds to problems incumbent property owners hate (congestion).

    The author of this blog and Supervisor Campos see a bucket of water being thrown on an engulfed structure not putting out the fire and conclude: “see! water does not put out fires.” I say: “get lots more water!”

    • West End says:

      The author of this blog, I think, sees a report drawing conclusions without citing any evidence. I imagine he sees the same in your comment.

      The burden of proof — rigorous studies with real data — is on you and the LAO, not this column, for one simple reason. Building houses does irrevocable damage; not building houses doesn’t. You need to be much more sure you are right before you do a irrevocable thing that most people don’t want.

      • AN says:

        West End: I’m not sure you’re right about what BMac is saying. His point is that, while increasing Alameda’s supply of housing won’t in itself address the housing shortage, we shouldn’t free-ride and expect others to do all the work (hence the reference to the well-known prisoner’s dilemma problem). What are you after? A rigorous study with real data to show that increasing the supply of a good reduces its price, ceteris paribus? Maybe you would require a rigorous study with real data on the effects of gravity to reassure you you won’t float away before going for your morning stroll.

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