Greater Greater Washington

Development


Urbanist economists should cheer inclusionary zoning

Is inclusionary zoning just another inefficient government subsidy? Not at all. It's actually a clever program that creates some permanent affordable housing and also builds political support for more density.


Photo by afagen on Flickr.

Last week, Matt Yglesias expressed reservations about DC's inclusionary zoning law. IZ lets develo­pers of apartment and condo buildings over a certain size build more density than they otherwise could. In exchange, they have to set aside some of the units as affordable.

People must earn less than a certain income level to be eligible for these affordable units. In DC, that level is 80% of area median income (AMI)not that low of an income. People eligible for the units can enter a lottery for them. Someone who rents such an apartment will pay lower-than-market rent in perpetuity. Someone who buys such a condo can resell it later, but at a rate that keeps the unit at a below-market level, while still letting the seller enjoy some gains.

Is this economically inefficient? Yglesias wrote:

But the fundamental issue here is that IZ is an extremely cumbersome way to try to help people. Instead of giving one family a $120,000 discount on a condo and giving another family a $130,000 discount on a condo the city could just hold a lottery. Look at the list of DCPS students eligible for free school lunches, select two of them randomly, and cut each family a check for $125,000.

There'd be little need for paperwork, no need for loans, and the families could decide for themselves how they want to use their bounty. If the city wants to obscure the cost of the lottery, they could simply say that developers of market rate housing projects need to stage the lotteries.

It's true that unlike IZ, my "give lots of money to people in need" initiative would not ensure the existence of economically diverse neighborhoods. But a question people have to ask themselves is what's the purpose of these policies. Are they supposed to help low-income families or are they supposed to make upscale yuppies feel better about their neighborhood?

I think the giveaway is that the lucky inhabitants of these "affordable" units aren't allowed to sell the units at market prices. Imagine a low-income family faced with high medical bills. Luckily for the family, it actually owns an apartment that's pretty expensive. But perversely, no matter how badly they need the money they're not allowed to sell the apartment to raise it.

The encumbered sale is perfectly reasonable

Yglesias' last argument is the simplest to address. Certainly a family owning an IZ unit could sell the apartment. They simply have to sell it at a discount to the current market price, just as they bought it at a discount. That's not really that strange.

We can draw an analogy to a small company. Say you have a business idea but you need to buy some equipment. You could borrow money from the bank, or you could get investors and sell them part of the company. Let's say someone agrees to invest $250,000 in your company for 50% of the equity. Your company is now worth $500,000 and you own half.

You and your employees do a good job and the market opportunity turns out to be a good one, and your company grows in value to $1 million. Your share is worth $500,000. Say you need money for the medical costs in Yglesias' example. You can sell some or all of your share. But you couldn't say that it's not fair you can't sell the whole company for a million; you only own half.

An IZ unit is like a little company where the city owns a share. You get to control the unit itselfthe city has no voting stockbut if you sell, you can only sell your share, to someone else who can come in and assume the same business arrangement you had.

There's nothing intrinsically wrong with this, other than that it's not the way housing has traditionally worked. But the condominium (and before that, the co-op) was unheard-of for a long time, as well, and then it existed, because it met a particular need.

Anyone who doesn't like this kind of arrangement doesn't have to buy such a unit, just as the company owner could borrow money, or put in his or her own money, or try to make the business work with less capital, if they don't want to give an investor such a big share.

Why not give people cash instead of housing?

Yglesias' first point basically asks, instead of subsidizing housing, why not just give some poorer people some cash, and then they can buy housing on the open market?

This is a fairly common economist response to a government program giving something away. If having a free market is generally better than not, then rather than giving people some good, why not give them money and let them make the choice? Maybe they can actually consume less of the good, and this creates an incentive to do that.

This is the argument for a parking cash-out. Rather than giving a bunch of office workers free parking, why not give them money equal to the cost of renting that parking in a garage? Given the money, the office workers have an incentive to take transit or carpool instead, and keep some of the money. The cash option doesn't cost the employer any more, and transportation gets more efficient.

On the other hand, we don't do this with, say, food stamps. The government has a certain interest in making sure people buy food instead of buying booze or drugs and going hungry. Moreover, food is a basic necessity and the food stamp money doesn't go so far that people will end up overconsuming food (unless it's overconsuming junk food, which is excessively cheap thanks to corn subsidies).

The main difference between IZ and the "give them cash" principle is that "give them cash" requires the government to come up with some money, which it might not make back in taxes. IZ takes the cost of some affordable housing out of the producer surplus for the developer. The developer is making some profit on each unit. The bonus density adds additional units and thus additional profit, but IZ restricts those so that much of the profit goes to the homeowner rather than the developer.

As long as the amount the buyer pays for the affordable unit exceeds the incremental construction cost and taxes, the developer will still make money on these additional units, all of which they wouldn't have been able to otherwise build.

The building industry negotiated on the original IZ law to reach levels that didn't wipe out all their producer surplus and turn affordable units into a net cost. They probably pushed for more than necessary, so that some producer surplus remains, giving them some buffer and giving us confidence that the law isn't excessive.

Unlike cash, IZ protects affordable units in perpetuity

Yglesias suggests alternatively having the developer run a lottery to give out the difference between the market-rate and affordable unit. This would take the money out of the producer surplus, and have the same effect as IZ... at first. But unlike cash, this unit has restrictions on salethat "investor" who owns some of your "company."

If I give you $25, it's yours. If I invest $25 in your company, such as by buying some stock in a public offering, you still get the $25 to spend today and can use it toward equipment or hiring or office rent, but I got something of value back in return.

The net result of this policy is that someone gets to live in some housing while shelling out fewer dollars, but the city also keeps some of the value of the transaction for itself in the form of this equity. That serves the social goal of maintaining a stock of affordable housing over time as well. In the end, IZ creates affordable housing but at lower cost to society than by other means.

Some affordable housing organizations don't like this system. They prefer to have a juris­dic­tion create affordable housing, lottery it off to needy families, and then let those families resell in the future at market rates. When the family sells, they have to pay back the subsidy, but they keep most of the appreciation.

The problem with this system is that it doesn't preserve the affordable housing in the long run. People who receive units can flip them after a number of years and pocket at least a large percentage of the difference. Meanwhile, the unit stops being affordable for the next person. In this way, it actually is more like the lottery in Yglesias' hypothetical, or to extend our analogy, it's like financing the company with a loan instead.

Under that kind of system, you create affordable units, but they quickly evaporate out of the city's stock of affordable units. IZ creates a pool of these units that stick around, keeping at least some inventory of less expensive housing for the future.

IZ is a way to get extra density

Inclusionary Zoning is a program that Yglesias and other economically-minded urbanists should actually be very excited about. Yglesias wrote a whole book on how restrictions on supply are holding our cities back. These restrictions stem mainly from resident opposition to added density.

IZ builds political support to do what might otherwise be impossible: allow more density under zoning. The political calculus might not favor such a change on its own. Just upzoning a property gives extra value to the property owner, creating a producer surplus, but little benefit to residents beyond the vague promise of more "eyes on the street" and more shops and restaurants.

But there is some political power behind doing more to create more affordable housing, and a group of people who stand to benefit from such a policy. Add that to the equation, and it becomes possible.

In other words, even if IZ is imperfect, it might be the most politically feasible way to achieve higher density.

Yes, IZ is somewhat imperfect

There are indeed some challenges with IZ. Like any program, has some transaction costs, which the "give them cash" hypothetical alternative largely avoids. There have been some obstacles to getting mortgages for IZ condo units, though this problem is actually easily solved: other jurisdictions simply agree to let the affordability policy expire if the property goes into foreclosure. The city agrees to give up its "call option" in this case to get lenders to buy in.

Some IZ units may be going to people who are just temporarily low income, like recent college graduates who have every ability to soon earn much more than the area median income. Appropriately tuning the law could probably address most of these abuses, and while it does increase administration costs, it shouldn't be a deal-breaker.

IZ also has only limited impact. DC is only creating a small number of IZ units so far, largely because Mayor Fenty delayed the program for years while many new buildings gained permits without IZ. Those buildings are just now being built.

Also, the federal height limit constrains the amount of bonus density that DC can grant. IZ can only let developers build more when local zoning is more restrictive than the height limit, which is the case for most of the District but not in the densest areas with the most growth. Other jurisdictions can grant far more in incentives, as in the White Flint plan.

Is there a free market solution to housing affordability?

It would be much more satisfying to devise an economic system that creates housing choices at all points on the income spectrum inherently, by market forces, rather than through government mandate. I simply don't believe that removing all zoning caps would do this, however.

Buildings cost a lot to construct, and taller buildings cost more per unit than smaller ones because they require more expensive materials. Lenders only want to fund the projects with the highest return, and capital is scarce, especially now. There is enough demand near the top of the income spectrum to consume all of the units that could get financing.

As it is, developers tell me that there is considerable development, already approved, that is just not happening yet because of financing constraints. If things aren't getting built which have no zoning barriers, then removing zoning barriers won't solve all problems.

It's still worthwhile to push to reduce barriers for the long term, and there are plenty of examples where zonng rules or historic preservation limits do indeed take away needed housing opportunities.

But in the meantime, there is indeed value in creating mixed-income communities. It's far more than just a way to "make upscale yuppies feel better about their neighborhood." In a future part, I'll discuss the many advantages to mixed-income neighborhoods, for both wealthier and poorer residents.

David Alpert is the Founder and Editor-in-Chief of Greater Greater Washington and Greater Greater Education. He worked as a Product Manager for Google for six years and has lived in the Boston, San Francisco, and New York metro areas in addition to Washington, DC. He loves the area which is, in many ways, greater than those others, and wants to see it become even greater. 

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by Michael Hamilton on Jun 19, 2012 1:33 pm • linkreport

It would be much more satisfying to devise an economic system that creates housing choices at all points on the income spectrum inherently, by market forces, rather than through government mandate. I simply don't believe that removing all zoning caps would do this, however.

I don't think anyone is suggesting that it would for all incomes. However, the current housing prices are well in excess of the cost of construction. If the housing market were functioning more efficiently, the price of new units would be much closer to the cost of construction. And, if that were the case, then the market rate for those new units would be substantially lower than what it is now.

To the extent that affordable housing is defined as below-market-rate housing, then yes, you'd still need below-market-rate subsidies of some kind in this kind of efficient market, but you'd need them for a much smaller portion of the population.

The supply has to increase, and it has to increase massively. Likewise, it will take a long time for DC's market to adjust to a reasonable equilibrium point.

Buildings cost a lot to construct, and taller buildings cost more per unit than smaller ones because they require more expensive materials. Lenders only want to fund the projects with the highest return, and capital is scarce, especially now. There is enough demand near the top of the income spectrum to consume all of the units that could get financing.

Financing is tricky, no doubt - but the cost of housing is still far above the cost of construction in DC. The fact that denser construction methods cost more than wood frames is not the reason for the high costs. Not even close.

As it is, developers tell me that there is considerable development, already approved, that is just not happening yet because of financing constraints. If things aren't getting built which have no zoning barriers, then removing zoning barriers won't solve all problems.

This would seem to mistake the current situation from the broader issue. Just because stuff is stalled now for financing reasons doesn't mean the additional costs due to the regulatory burden don't exist. They do.

Likewise, it is a mistake to confuse the real estate market, quarter to quarter, with the discussion about broader regulatory burdens that have been in place for decades.

As for IZ specifically, one thing that bugs me about it is the need to mesh home ownership with affordability, and preserving that affordability long term. I think there are far better tools available to accomplish that task than covenants on condos - limited equity co-ops are one. Limited equity co-ops would offer all the benefits of IZ condos with none of the hassles of mortgage lending - and since an IZ condo doesn't allow the owner to realize the upside of appreciation, then there's no need to own in the first place when a limited-equity co-op achieves the same goals (stability on price, longer terms, maintain affordability over time).

by Alex B. on Jun 19, 2012 1:41 pm • linkreport

I'm not sure you need an argument for density as all cities are begining to densify for the miriad of reasons elaborated on this blog daily. If we want more density, let's just up-zone areas of the city, loosen up the restrictions, and speed up the permit process to encourage more building. The only problem I see with this plan is

"They simply have to sell it at a discount to the current market price, just as they bought it at a discount."

How does one determine a market price when so much about sales is based on intangibles, variables and unscrupulous methods?

by Thayer-D on Jun 19, 2012 1:42 pm • linkreport

As it is, developers tell me that there is considerable development, already approved, that is just not happening yet because of financing constraints. If things aren't getting built which have no zoning barriers, then removing zoning barriers won't solve all problems.

So you don't think that zoning barriers are having any effect on the profitability of proposed multifamily developments? If all of these added restrictions do have an effect, then they would in fact make it harder to get financing.

Though I guess you're right that "removing zoning barriers won't solve all problems." Therefore, we shouldn't consider removing them?

by Gray on Jun 19, 2012 1:45 pm • linkreport

Gray: That's why I said yes, we should remove the barriers. But that doesn't remove the need for IZ. Plus, IZ may make it easier to remove or reduce them.

by David Alpert on Jun 19, 2012 1:52 pm • linkreport

@David Alpert: I apparently wasn't clear: IZ is one of those barriers.

by Gray on Jun 19, 2012 1:54 pm • linkreport

Gray: Why?

by David Alpert on Jun 19, 2012 1:54 pm • linkreport

One of the items that rarely gets discussed when it comes to affordable housing in market-rate buildings is that it is to the benefit of the city, its citizens, and its future, to not have the poor concentrated in just a few neighborhoods, but rather spread throughout the city.

With the ease of access to employment, the increased opportunity for upward mobility, and the more efficient use of public resources (e.g. public schools, police), every market-rate multi-unit building should include a couple affordable units.

by cmc on Jun 19, 2012 1:54 pm • linkreport

David Alpert: If we simply allowed for the greater density that is currently only allowed with more "affordable" units, we could remove one of the artificial barriers. This in turn would increase supply and eventually have the price-lowering effect that most people seem to agree we want.

by Gray on Jun 19, 2012 1:57 pm • linkreport

Gray: I still don't see why this has to do with IZ. So we add 10% of extra density and create 10% more housing units. That satisfies some demand. What does it matter if the demand it satisfies is at the top or bottom of the curve? We've accommodated X new residents and thereby reduced the pool of people wanting to live in the city and competing for units by X.

by David Alpert on Jun 19, 2012 2:07 pm • linkreport

I'd have to agree with Gray that the simpler the zoning the better. Saying that "The supply has to increase, and it has to increase massively." is creating a problem where there is none. We have a healthy economy, and as more people come, they will populate more neighborhoods that have little density. There was a time people wouldn't step foot in Logan Circle, but the lack of affordable housing in nearby Dupont led the market to self correct. What's to say that same pattern can't and isn't repeating itself today?

by Thayer-D on Jun 19, 2012 2:09 pm • linkreport

"Buildings cost a lot to construct, and taller buildings cost more per unit than smaller ones because they require more expensive materials. Lenders only want to fund the projects with the highest return, and capital is scarce, especially now. There is enough demand near the top of the income spectrum to consume all of the units that could get financing."

In the presence of extremely restrictive zoning and high demand we should expect to see mostly high-end properties being developed. In this restrictive system, where buildings only get started with political approval it allows builders to capture rents.

Per-unit costs aren't the obstacle to cheap housing, it is the restrictive zoning. The land costs in DC should bear this out.

Imagine we are talking about any other industry for a moment: If GM, Ford, and Chrysler were only allowed to build 100 cars each year, what kind of cars would we expect?

by Michael Hamilton on Jun 19, 2012 2:11 pm • linkreport

David Alpert: It matters because selling/renting those apartments to whoever is willing to pay market rates makes it easier to obtain financing, while restricting the sales price or rent makes it harder to obtain financing.

You said that you would like to remove restrictions that make it harder to obtain financing. So why insist on IZ? Why not just allow greater density?

by Gray on Jun 19, 2012 2:11 pm • linkreport

We have a healthy economy, and as more people come, they will populate more neighborhoods that have little density.

Little density, sure. But they're not abandoned. Adding density means adding supply. Which is exactly what I said in the first place.

by Alex B. on Jun 19, 2012 2:13 pm • linkreport

I am curious if any of the proponents of high density here consider any limits to density, or if they believe more is always better, and more of that is better still.

It is disturbing that proponents of high density seem to have little regard for the concerns of residents regarding excessive densities in the places they live.

by Andrew Pigeon on Jun 19, 2012 2:15 pm • linkreport

David Alpert: And I should add that I don't think you're really relying on standard economics when you ask if it matters "if the demand it satisfies is at the top or bottom of the curve." Those restricted, cut-rate units in a building at Gallery Place aren't satisfying any of the demand for market-rate units at Gallery Place. They're satisfying a small amount of demand for pricey units at below-market-rate prices (and only a slight portion, necessitating a lottery), but they aren't fulfilling the demands of any of the thousands of people looking for housing outside of government programs.

Effectively, there is a market for these "affordable" units operating completely independently of the market for housing for everyone else.

by Gray on Jun 19, 2012 2:16 pm • linkreport

@Andrew Pigeon: It is disturbing that proponents of high density seem to have little regard for the concerns of residents regarding excessive densities in the places they live.

How is that disturbing? And how are you so sure that these proponents aren't also residents?

by Gray on Jun 19, 2012 2:17 pm • linkreport

Gray: Because the point of greater density is not greater density per se, but to make housing more affordable. And even in the optimistic scenario, this greater density will only make a very small dent in affordability and do so only over a long time horizon. In the meantime, IZ produces a small amount today of what we want to see more broadly in the long run.

by David Alpert on Jun 19, 2012 2:17 pm • linkreport

"I am curious if any of the proponents of high density here consider any limits to density, or if they believe more is always better, and more of that is better still.

It is disturbing that proponents of high density seem to have little regard for the concerns of residents regarding excessive densities in the places they live."

There are, of course, limits. Those limits are set by profitability, which is by definition a function of the preferences of residents.

by Michael Hamilton on Jun 19, 2012 2:19 pm • linkreport

David Alpert: And even in the optimistic scenario, this greater density will only make a very small dent in affordability and do so only over a long time horizon. In the meantime, IZ produces a small amount today of what we want to see more broadly in the long run.

Okay. So an incremental change that will have a small effect on housing costs for all (allowing greater density outright) is not worth doing, but an incremental change that will have a small effect on housing costs for a small slice of residents (IZ) is worth doing?

This doesn't seem to be logically consistent.

by Gray on Jun 19, 2012 2:21 pm • linkreport

Did I somehow give the impression that I don't support giving some extra density? I do think we should, outright. However, I only think that should be to a certain point, and it might not be enough to satisfy all the demand and bring down prices to the point that some people think it will.

We can do IZ now, and we can also push for some density increases at the same time. It's not either-or.

by David Alpert on Jun 19, 2012 2:23 pm • linkreport

@Gray
You said that you would like to remove restrictions that make it harder to obtain financing. So why insist on IZ? Why not just allow greater density?

Because just allowing for greater density alone doesn't solve the problem of lower-income people not being able to afford a place in the city TODAY, and we recognize that there is a benefit to keeping those people in the city and spreading them out (rather than concentrating them in housing projects.)

I dunno where you guys are getting this idea that David has somehow argued against zoning for higher density but that is way off the mark. This post on IZ is separate from the "should we zone for higher density across the board?" question. Where in here did David say we don't need to zone for higher density?

For those of you opposed to IZ, how much is IZ actually raising the cost of other housing? Because plenty of us think that the answer is "very little or almost not at all." If developers thought they could make more money by not doing IZ and building at the lowered density they would do that instead; isn't that how the market works?

by MLD on Jun 19, 2012 2:25 pm • linkreport

"Did I somehow give the impression that I don't support giving some extra density? I do think we should, outright. However, I only think that should be to a certain point, and it might not be enough to satisfy all the demand and bring down prices to the point that some people think it will."

If it is "only up to a certain point" and that certain point is lower than what the market would determine in the absence of limits then it will not satisfy demand, and will not bring prices down to the equilibrium level.

by Michael Hamilton on Jun 19, 2012 2:26 pm • linkreport

David Alpert:

We can do IZ now, and we can also push for some density increases at the same time. It's not either-or.

But I thought your whole point was that economists should accept that IZ is a great policy. I'm simply pointing out what any economist will tell you: it's a counterproductive policy, and instead of spending time arguing about how counterproductive it is, we should be pointing out the obvious policy solution.

That just happens to be (as you pointed out) removing zoning restrictions, particularly those that artificially limit density--because those restrictions make construction less profitable, make it harder to obtain financing, restrict the supply of housing, and ultimately make housing more expensive for everyone.

by Gray on Jun 19, 2012 2:29 pm • linkreport

Gray is probably correct that the issue isn't the zoning side but on secondary markets and financing.

by charlie on Jun 19, 2012 2:37 pm • linkreport

"There are, of course, limits. Those limits are set by profitability, which is by definition a function of the preferences of residents."

I meant the residents of the neighborhood in which the high density development will be built. "Profitability" must never be the only limit on density. The effect of residents' lives must always come before profit when considering the appropriate level of density.

by Andrew Pigeon on Jun 19, 2012 2:42 pm • linkreport

@Gray
I'm simply pointing out what any economist will tell you: it's a counterproductive policy

That depends on what your policy goals are. If you think the goal of IZ is to lower housing costs across the board then yes, it is counterproductive. That is not the point of IZ, however.

Removing zoning restrictions (which we ARE DOING in places as part of the zoning rewrite) works from the top of the income scale down (those with higher incomes benefit from its effects first). IZ works from the bottom of the scale up.

Which zoning restrictions should we get rid of? How do you propose doing so given the current political/public climate?

by MLD on Jun 19, 2012 2:45 pm • linkreport

"I meant the residents of the neighborhood in which the high density development will be built. "Profitability" must never be the only limit on density. The effect of residents' lives must always come before profit when considering the appropriate level of density."

Residents meaning the incumbent owners, at the expense of everyone else. This policy is why there isn't affordable housing for the poor.

by Michael Hamilton on Jun 19, 2012 2:49 pm • linkreport

I agree strongly with David.

There are several reasons IZ is desirable.

1. There are benefits to poor people in living in a diverse community, benefits they may not recognize, and we can encourage them (hopefully being an economist no longer means automatically assuming that personal preference curves must always be the basis for policy because of some assumed "rationality")

2. There are external benefits to everyone of having a diverse community

3. There is an energy/GHG cost to pushing low income people to longer commutes - the very people who are most likely to be carfree if they live in walkable/urban

4. There are political obstacles to allowing redevelopment densification that can be overcome with a "bribe" (and cashing it out might not be politically palatable) Again, hopefully being an economist no longer means having to ignore political realities.

Re Ownership - I agree with Alex B, IF we insist on combining IZ with ownership, the NY model of coops works better than condos. We may need to look more flexibly in general at how we implement IZ.

by AWalkerInTheCity on Jun 19, 2012 2:52 pm • linkreport

@Andrew Pigeon:

The effect of residents' lives must always come before profit when considering the appropriate level of density.

I understand why residents should be able to control the amount of density on their own property. But why is it absolutely imperative that our foremost concern in decisions about other owners' property be these residents' preferences for number and type of neighbors?

by Gray on Jun 19, 2012 2:53 pm • linkreport

I don't think the small business investor analogy holds any water because it's not the same thing. The government doens't "buy into" the business, but rather it comes in, sets an arbritary limit as to how profitable the business can be, and then lets that profit go up in certain instances in exchange for ownership. A better analogy is Paulie from the Sopprano Crew showing up and asking for a 25% stake in exchange for "protection."

by Econ101 on Jun 19, 2012 2:56 pm • linkreport

"Because the point of greater density is not greater density per se, but to make housing more affordable."

As a city lover, the point or greater density is to enliven the city streets, but if you mean the need to support it through government action, then I think it would be to generate economic activity like Mayor Williams did. This would stimulate construction, which in turn would address demand, and by your logic, make housing more affordable.

Grease the path to getting permits, have a clear way to handle nimbyism obstruction, and incentivise developers with good infrastructure such as good light rail or BRT throughout underserved markets and you will let the market do what it does best.

by Thayer-D on Jun 19, 2012 2:59 pm • linkreport

" They're satisfying a small amount of demand for pricey units at below-market-rate prices (and only a slight portion, necessitating a lottery), but they aren't fulfilling the demands of any of the thousands of people looking for housing outside of government programs. "

If you assume that the people who will only buy/rent at below market prices have a lesser preference than those looking at market prices, than the "utility" they get is lower. IF you assume that their willingness to pay is purely a function of lower income, than its not clear that there is lower social benefit to their having a dense location.

Now IF we could transfer the cash to them to EQUATE their income to the folks in the market rate market, you could go back to assuming willingness to pay equalled some kind of "utility" (leaving aside the externalities)

If you think theres a chance of that kind of redistribution happening, I have a bridge to sell you.

by AWalkerInTheCity on Jun 19, 2012 3:01 pm • linkreport

The market has already solved the "problem" of affordable housing. There is plenty of affordable housing available right now for rent or sale. It is in places that people generally don't want to live, but it is there. You pay less, you get less. That is the way it is with nearly every product on the market, why not housing?

That is also the way it is with labor. People are poor (generally) because they lack the skills needed to compete for higher paying jobs. In other words, there is no demand for them as workers, so they get paid less. Similarly, there is no demand for housing in certain parts of the city or country, so prices are lower.

Guess what, this works, without government intervention or urban (central) planning.

by dcdriver on Jun 19, 2012 6:44 pm • linkreport

Ultimate irony:

That building in your photo will not have IZ.

by Tom Coumaris on Jun 19, 2012 7:21 pm • linkreport

The case for IZ can very clearly seen in the debate over the Columbia Pike streetcar. One person who comments frequently on that topic opposes it because the development that would follow wpuld destroy one of the best sources for affordable housing in Arlington. Surely concerns is representative of many othet residents who oppose development in columbia pike (or alexandria's bureaugard plan). IZ would be a great way to share the benefits of economic development with residents who are not land owners and to achieve their buy in on a fundamentally profitable plan. This way everyone benefits -- land owners and renters, making it a win-win and making the plan much morr likely to move forward.

Good negotiation isn't about keeping all the spoils for yourself because that's not sustainable. Eventually the people losing out will protest and bring the whole project down. Good negotiation is about creating a win-win for all stakeholders and IZ is a great way to do that (better than handing out checks to the people losing out because mixed housing has positive externalities to the community that handing out checks does not).

by Falls Church on Jun 19, 2012 10:17 pm • linkreport

"You pay less, you get less. That is the way it is with nearly every product on the market, why not housing?"

because housing drives the very nature of the communities we live in - who our neighbors are, who we interact with, how our polity is shaped. We can CHOOSE to leave that to the market, or we can choose NOT to. The notion that the market should decide such things is actually rather recent in human history.

by AWalkerInTheCity on Jun 19, 2012 11:35 pm • linkreport

I assume the first two IZ condo units in last week's CP story are still on the market with no takers.

by Tom Coumaris on Jun 20, 2012 12:06 am • linkreport

wrt alex b's point about co-ops, fwiw, I have been making that point, more broadly, for years. (not just co-ops, portfolio investment by nonprofits, land trusts, different housing types, ADUs, etc.).

Basically IZ is just an eensy weensy element of what should be a comprehensive housing plan. IZ only affects new production. So it doesn't address affordability in terms of the overall market, or the housing stock that already exists, doesn't address the issue of a dearth of particular housing types serving different market segments and how to achieve their provision.

And yes, as WalkerintheCity points out, it's bad policy for a lot of reasons to push the poor farther out. One way the poor deal with it is by doubling up. So that means having nicer and high quality public facilities (like parks etc.) that serve gathering functions.

by Richard Layman on Jun 20, 2012 11:59 am • linkreport

"because housing drives the very nature of the communities we live in - who our neighbors are, who we interact with, how our polity is shaped. We can CHOOSE to leave that to the market, or we can choose NOT to. The notion that the market should decide such things is actually rather recent in human history."

In Soviet Russia, home chooses you!

by Michael Hamilton on Jun 20, 2012 12:29 pm • linkreport

It's a shame Matt doesn't come over into the comments to discuss this here. I wonder if he's contractually obligated to write responses in his column to keep pageviews up.

by Geoffrey Hatchard on Jun 20, 2012 1:43 pm • linkreport

This statement gets the logic precisely backwards: "As it is, developers tell me that there is considerable development, already approved, that is just not happening yet because of financing constraints. If things aren't getting built which have no zoning barriers, then removing zoning barriers won't solve all problems."

In fact, it is the zoning restrictions that artificially drive up the value of land. This makes obtaining financing that much more difficult. Relax the zoning restrictions, and land for housing will becomes more abundant, prices will fall, and the financing barriers will correspondingly diminish.

It's important to recognize that "affordable housing" is a goal shared by everyone. The question is: which policy mechanism most efficiently and fairly achieves it? Distributing under-priced housing units to a few lucky lottery winners seems like a strange way to deliver "affordable housing" to the maximum number of people.

by Mesbah on Jun 20, 2012 4:41 pm • linkreport

I found the whole conversation here confusing and awfully inattentive to the multivariate nature of the phenomena here. Indeed, my major criticism of GGW is that David and others seem to be looking for panaceas in an environment that is relatively complex. It sounds like financing rather than zoning is the most proximal driver. Given that there is concern on the part of real estate people and probably bankers on the amount of housing (perhaps too much relative to the demand) due to come on the market, there may be some reasonable caution behind that. This is an election year and a radical change in the federal govt could easily affect the real estate market, as it did in the mid-90s when prices dropped and demand was anemic.

Density accomplishes many things but it can have corrosive effects if done wrong--take a look at Rosslyn, for example. It also can have rather null effects. The area where I work at White Flint has many new high rises and yet the blocks around them are absolutely dead, despite there being many amenities nearby.

The market is distorted by many factors---DC, which lacks the indigenous industries of other cities, has always had large developers accounting for enormous proportions of the new construction market. In DC, they seem to have specific niches in terms of neighborhoods and target audiences--the barriers to entry imposed by oligarchy have to be considered here, along with the tremendous political clout of developers. Whatever constraints they have from zoning or other regulation may or may not distort the market less than the nature of who competes in the market and how they constrain information on how to successfully compete through their presence and political clout.

Getting rid of the height limit, incremental changing of zoning, streamlining permits--I suspect none of these will address the diminishing number of housing units that are affordable to entry level white collar workers let alone the poor. There's really no evidence that I can see that this has happened anywhere. Removing rent control in Manhattan was supposed to make housing more affordable in the long run--it hasn't.

If you're going to talk about markets, you have to talk about the full range of externalities that distort the market and the limited ability of markets to compensate for these on their own.

by Rich on Jun 20, 2012 11:11 pm • linkreport

@Rich:

It sounds like financing rather than zoning is the most proximal driver. Given that there is concern on the part of real estate people and probably bankers on the amount of housing (perhaps too much relative to the demand) due to come on the market, there may be some reasonable caution behind that.

I don't think this is an accurate portrayal. What many have been saying throughout this discussion is that the many restrictions placed on housing construction make obtaining financing more difficult, which is a major limitation right now. This is not due to the threat of other supply being built, though.

Whatever constraints they have from zoning or other regulation may or may not distort the market less than the nature of who competes in the market and how they constrain information on how to successfully compete through their presence and political clout.

I guess this is true. They may or may not. Many have argued above that in fact they do. Are you basing an argument to the contrary on anything other than gut feeling?

Getting rid of the height limit, incremental changing of zoning, streamlining permits--I suspect none of these will address the diminishing number of housing units that are affordable to entry level white collar workers let alone the poor.

And I, on the other, suspect that allowing a significant increase in supply would in fact allow for lower housing prices relative to a future with the current policies. Unfortunately, modest increases in supply would not be enough to yield absolute decreases in price, but they would still be better than doing nothing.

But my suspicion is based on basic economic theory, not merely a gut feeling.

If you're going to talk about markets, you have to talk about the full range of externalities that distort the market and the limited ability of markets to compensate for these on their own.

Okay, I'll bite. What is the "full range of externalities" operating in the DC housing market?

by Gray on Jun 21, 2012 7:54 am • linkreport

There's been a few references so far to what I think is the other major reason for IZ. It's not just about making "yuppies feel better about their neighborhoods." It's one more tool to deconcentrate poverty (and joblessness, which is obviously related, but conceptually different).

If you want to put it in an economic framework, the argument goes like this: There are negative externalities associated with creating neighborhoods in which a high percentage (above 40 % ish) of residents live in poverty. The market, left to its own devices, won't correct that, which argues for a government intervention to make the market more efficient.

What are the negative externalities? Lower quality of life than would exist if the same amount of poverty were redistributed caused by, more crime, including violent crime, more drug abuse, less social capital, among other things.

There's a vast body of academic literature regarding the socially corrosive effects of a housing policy that concentrates poverty. So IZ can be seen as one more tool to address some of the historically most intractable social problems we face in this country.

by Mark Jordan on Jun 21, 2012 12:11 pm • linkreport

@Gray---the full range of externalities. Well I mentioned the oligarchical control of of property development and management, which is a biggie and major source of distortion. You also could look at the ceiling on what people can pay---federal salaries, which serve as benchmarks for many contractors haven't gone up in several years. There are certain limitations in, for example, downsizing--an efficiency apartment costs almost as much to build as a 1 bedroom, because of plumbing and electrical requirements.

As for a glut in new housing, it was the subject of

The problem with "economic theory" is that assumptions, like transparency are almost never met and there often is distortion at many points in a pipeline due to scarcity of labor or materials, land, etc. Moreover, the "rational man" model of decision making has been largely disproven by many different lines of evidence, in part because of limitations in human information processing and limitations of available data. The simplistic market economics that pass for discourse tend to be a Randian or Friedman-lite fantasy.

by Rich on Jun 21, 2012 2:26 pm • linkreport

@Rich:

the full range of externalities. Well I mentioned the oligarchical control of of property development and management, which is a biggie and major source of distortion. You also could look at the ceiling on what people can pay---federal salaries, which serve as benchmarks for many contractors haven't gone up in several years. There are certain limitations in, for example, downsizing--an efficiency apartment costs almost as much to build as a 1 bedroom, because of plumbing and electrical requirements.

These aren't externalities. These might be characteristics of some market actors, but they aren't externalities.

The problem with "economic theory" is that assumptions, like transparency are almost never met and there often is distortion at many points in a pipeline due to scarcity of labor or materials, land, etc. Moreover, the "rational man" model of decision making has been largely disproven by many different lines of evidence, in part because of limitations in human information processing and limitations of available data. The simplistic market economics that pass for discourse tend to be a Randian or Friedman-lite fantasy.

I'm not sure where you're going with that other than attempting to discredit all economic theory by calling it "Randian or Friedman-lite fantasy." But how can we have a serious discussion about market failures if you call everything you don't like an externality?

Also, "transparency" isn't an assumption necessary for efficient markets. Or do you mean perfect information? We can talk about information problems as an example of another type of market failure, but I'm not seeing how there are huge information problems in housing markets.

by Gray on Jun 21, 2012 9:31 pm • linkreport

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