Comments on DC area incomes fall behind skyrocketing housing costs - Greater Greater Washington

Comment by Michael Hamilton

Mon, 08 Oct 2012 11:43:09 EDT

Zoning got three sentences in this post, but it should have been 80% of the content.

In a functioning market we shouldn't see long-term shortages or price spikes. Most of this post focused on demand-side issues, but that shouldn't cause the problems we're currently seeing.

Developers like making money, and the fact that needs aren't being met suggests that something is getting in the way. It might be time to admit that zoning, community input, smart growth, historic preservation, and other controls are barriers to affordable housing.

Comment by Tom Coumaris

Fri, 05 Oct 2012 12:22:25 EDT

In most cities I visit when a close-in location becomes desirable new vertical gated communities are built by corporations because that's what they know how to do profitably. The existing housing stock is often neglected because big corporations aren't geared to that. Maybe it leads to eventual renovation of close-by existing stock, but often not very much. Richmond and Baltimore are close cities people often say we should be more like and I see examples of upscale towers-in-the-slums in both, both commercial and residential.

In any area you're going to have a certain demand for each type housing. Buyers want turn-key units with everything finished and included. DC is rare in having a decent renovation industry that knows how to convert existing stock into marketable units. It's not outlandish to assume that 90 units in a new-built subtracts 30 townhouses that could have been divided into the same number of units in a renovating neighborhood and done just as turn-key by small local businesses.

And the pay is so much greater in the small businesses. I know someone who works for a corporation that prefabs for projects at a factory in Stafford and the employees make just over minimum wage. Except for the rare government union-scale jobs, manual workers I talk to on large projects in DC joke about how low their wages are.

OTOH I know that my roofer (who has 2 employees) has sent 4 four children to college and that my electrician (1 employee) has a beach house in Rehoboth. Besides renovating homeowners, they also work for a neighborhood contractor who renovates and are recommended by a neighborhood architect who does renovations. There are many of us in my neighborhood who live off rentals of converted existing units where the housing is at least as good as new-built and the rents are much lower. And Lord knows there is a huge cottage industry here of real estate agents who make extremely nice incomes off selling renovated housing (sometimes I wonder if they could ever manage any other decent employment).

Comment by AWalkerInTheCIty

Fri, 05 Oct 2012 11:12:45 EDT

Im not sure what city is building towers in the slums these days. If you mean large publicly subsidized towers in the park, thats been out of fashion for a while, and quite a few have been torn down.

if you mean the construction of new midrise and hirise units in gentrifying neighborhoods, that seems to happen alongside of rehabbing of existing stock, and seems to mostly be mutually supportive of it.

Comment by Tom Coumaris

Fri, 05 Oct 2012 11:02:10 EDT

I realize all markets aren't like DC. And I also realize that the housing employment market has nationally gotten "stuck" on providing jobs with new-built housing. But that's where we have to move to a "greener" market of rehabing existing stock. And, at least in DC, there are a tremendous number of jobs developing devoted to rehab and they pay extremely well. They also concentrate on smaller rehab firms instead of large corporations.

As an Urbanist, an Environmentalist and a Preservationist, I'd rather DC keep renovating the huge good existing stock we have (and creating density by sub-dividing into more units) than either building more exurbs or building "towers-in-the slums" as most American cities do.

Comment by H Street LL

Fri, 05 Oct 2012 08:27:45 EDT

Most people I know who own homes own stock as well.

How many jobs are created from owning stock? I own quite a lot and don't feel like I have created jobs. As a homeowner/investor, you certainly often employ people for maintenance work or improvements.

Not saying one way or the other is better, just saying its open for discussion.

Other than directly starting a business (which is quite risky itself, also), how is capital allocation creating jobs?

Comment by charlie

Fri, 05 Oct 2012 08:19:18 EDT

@Tom; my parents bought a house in 1972, a bit outside your window, for $22,000 in Cleveland Heights. It sold recently for $76,000. And yes, it is two blocks from Whole Foods. different markets, different result.

when housing is your best peforming asset class there is something very wrong with your economy. How many jobs did your house create in those years?

Comment by Tom Coumaris

Thu, 04 Oct 2012 22:40:39 EDT

35 years ago I bought my home for $25K plus $75K in renovations. My last appraisal was $1.3M. Friends rented and put some savings into mutual funds. The economy stalled and houses stalled in appreciation but mutual funds tanked. I'm better off by a long shot.

Today young people are paying $500K for houses in renovating neighborhoods in DC. Will they get the same percentage appreciation, especially if home mortgage deductions are eliminated? Maybe, maybe not. But they will probably get the same dollar appreciation. The risk in other investments is too much greater.

(I am not a realtor).

Comment by charlie

Thu, 04 Oct 2012 15:52:07 EDT

@NocanDo and RIch; and that is my macro point: Once we treat houses as wealth, we are in trouble and asking for this sort of appreciation.

The problem with housing at wealth it is a highly imperct market (pricing) and tranasactions costs are incredibly high (5%?).

When I say productive, however, I am contrasting the trillions we have invested in housing over the past 40 years vs investments in factories, roads, airports, or machine goods.

As I said, we made a collective decion to have the best housing in the world. Turns out that isn't so great.

Comment by Tom Christoffel

Thu, 04 Oct 2012 15:48:26 EDT

This condition is the inherent outcome of the inefficiency of suburbanization. Home building cannot be the basis of a County economy. Residential housing requires more in services than it can pay in taxes. Land subdivision appears to create value; $x value/acre land becomes $20x/quarter acre. The taxable value increases, and a housing unit increases the value even more, but the service liabilities of the future were never acknowledged. The tax increment should have been banked, but wasn't.

A facilities deficit ensues. Developers put in the infrastructure and dedicate it to the County. Developers never pay for anything; it goes into the unit price. So homeowners paid for public infrastructure at market rates, rather than if the infrastructure were funded through a municipality. All housing values then rise to reflect this fact. Developers don't maintain a grid road system - that is too (long term) expensive (to pass on to buyers).

The suburbs give privacy (really isolation). This is all because people "can't live close to one another," e.g. efficiently (densely), although throughout human history, that is how we did live. Rural and city households were large, due to family size, but the practice of “manners” enabled populations to get along.

Suburban style housing, in county suburbs and suburbanized cities and towns, is two dimensional. Little use is made of the vertical, either above or below ground. Grid road networks are costly, yet they also are the grids for utilities, so they bring more and more value to any parcel. That enables the burying of lines so they are not subject to, say, falling trees in windstorms. This was advocated in the 1950's by utility directors, but what could they have known? So, real cities are 3D in their use of the land to support civilization. There is some of this in the U.S., but the suburban value system and its inherent dependence on the automobile is the primary value proposition.

The grid system of municipal services is high maintenance, but more importantly of high value. There really isn't anything of high value that isn't high maintenance. Even dumb gold requires lots of high maintenance security.

Cost are high relatively speaking and getting higher due to both long term cost of living inflation plus the asset inflation supported by easy credit/debt. Everyone is in the equity game, but there's not enough to go around.

The land use patterns are, in some respects, a dead hand. The zoning laws were designed to protect value for the lenders and that has become the game for homeowners too. The only way to make any money in a housing market like Greater D.C. is to cash out and go to a market where housing is cheaper. Of course, those areas will be remote from Greater D.C. amenities and will have far fewer amenities themselves.

Historically, cities grew because there was an expansion in employment. Housing came in response to that and within the corporate territory. The service liabilities of residential housing were offset by the tax base of the employers. New housing proposals did not have to answer the question: "Will the tax revenues pay for the cost of the new children in the school system?"

Balance is achieved where employment and housing are within the same taxing jurisdiction. That is why annexation is so important to keeping tax revenue and service costs, including the maintenance and improvement of the infrastructure in perpetuity within a municipal geography. The County function is law and order, the sheriff, courts and deed book. The municipal function is the provision of services which enable a high-wage economy in the always global world. In many areas, the county and municipality are coterminous. The importance of the County function is illustrated by the formation of Broomfield County by the City of Broomfield in the Denver Metropolitan area.

Since consolidation or merger result in loss of identity, these paths will not be taken. Functional consolidation of services to achieve economies of scale is the route for Greater D.C. or any multi-jurisdictional region in the world. This can be achieved by recognition that we all hold multiple identities related to our political geography. If you have a vote, pay direct taxes and get direct services, that is an identity.

It may make sense to abandon the terminology of urbanism and metropolitanism and instead work on the existing political geography of cities, counties, towns - and states/district to focus on functional efficiency. The suburban/exurban large lot dream and a vehicle for every driver in the household has given us long and fragile supply lines and is, net net, malinvestment for the society. Neither the housing nor the vehicles make one more productive, only more indebted. That is the huge problem of the balance sheet applied to the household economy. The things purchased with credit/debt have no enduring value. Those manufactured collectibles gather dust in the closet.

A way forward is to sideline the "profit motive" and bring to the fore what I posit as the "community motive." Community is what has enables survival, perpetuation and improvement in life. It works for free because life is an unfunded mandate. It is the basis for cooperation, the method for solving problems, of which security is first and foremost. It now requires a multi-layered world view where we are citizens of a county/city/town/state/nation and humans on our local planet, Earth. So, we need think local planet and act regionally, across borders to meet the efficiency demands of nature.

Getting to equity and balance will be difficult. Many solutions are in the past, things we might have done better or should not have done at all. Where we to be able to come back to the area in 300 years, we’d find that the geographic features and infrastructure of roads, cities and towns still in the same place and usable. That is the nature of human settlements. Those that endure, build on centuries of investment by waves of communities. The planning horizon should be 300 years. That is the sort of vision the early settlers had, based on the known history of Europe and the world.

To learn about the connection of suburbanization to security, read: "The Reduction of Urban Vulnerability: Revisiting 1950s American Suburbanization as Civil Defence" by Kathleen A Tobin, Purdue University, Cold War History, Vol.2, No.2, January,2002. This is a UK publication, so defense is “Defence.”

Comment by Rich

Thu, 04 Oct 2012 15:38:46 EDT

Not a productive investment? For many people it's their one opportunity to lower their expenses in retirement, while also providing capital. Things like automobiles are not productive investments--they rapidly depreciate from day one and the return on investment in terms of greater income or access to less costly goods is probably nil for a great many people.

Comment by no can do

Thu, 04 Oct 2012 14:54:34 EDT

@charlie

Not sure how you figure housing isn't a "particularly productive investment" when home value constitutes the largest portion of most Americans' net worth. It's certainly a more productive investment than the alternative: renting.

Comment by charlie

Thu, 04 Oct 2012 14:03:35 EDT

@RLayman, we tangled about this on your blog a few days ago (whether houses are investments) but sometime in the 1970 we set about a national goal having the best housing in the world. We successed, but among the costs is we kind of threw the community part out.

It is also cleaer in retrospect that we decided to give people perceived wealth in terms of housing assets but that was it was mostly based on debt. Housing is not a particularly productive investment although it keeps Home Depot in business.

Comment by AWalkerInTheCIty

Thu, 04 Oct 2012 13:49:24 EDT

"there is"

Comment by AWalkerInTheCIty

Thu, 04 Oct 2012 13:48:57 EDT

not to derail things, but a more moderate and feasible version of MWs idea would simply be to have a higher rate on land than on improvements (ultimately this is derived from Henry Georges "single tax" idea) The notion being that high taxes on improvements disincentivize their production - land can't be "built" anyway, so their is no downside to raising tax rates on it. DC has this in a limited way with their punitive charges on abandoned properties. Of course to the extent that what we need is local property holder buyoff on new transit and similar changes, and a high land tax would confiscate some of the windfall profit landowners get from things like that, it could change the political dynamic in negative ways.

Comment by AWalkerInTheCIty

Thu, 04 Oct 2012 13:44:37 EDT

While I generally support changes to regs that artificially raise the price of housing, I am not sure that returning income/housing ratios to 1972 levels is either possible or desirable. As the posters point out, this is a much larger metro area than it was then, and larger metro areas (even ones that have done great things in cheapening via densification, like Chicago) will have higher rent to income ratios than smaller metros.

I am glad the posters mentioned the drive till you qualify issue, as I have never seen that mentioned in other work I have read by CRA, or in anything I have seen by Prof Stephen Fuller, CRA's founder. The impression one sometimes gets is that Fuller and CRA advocate for more housing develpment in the region period, without much concern for the kinds of issues frequently raised on GGW. I look forward to the next post in this series to see how these issues are addressed.

Comment by tmtfairfax

Thu, 04 Oct 2012 13:41:51 EDT

A comprehensive posting. Well done.

Comment by Richard Layman

Thu, 04 Oct 2012 13:24:46 EDT

Given that housing is taxed on current value, which has nothing to do with "realized" value, it already is weighted, or at least not flat.

2. re charlie's point, during the real estate boom I used to say that the boom, counterintuitively, was produced by the fact that the economy wasn't doing well, which is why interest rates were so low, assisted of course by international flows of capital to the US, which saw the US as a safer place to invest.

So yes, cheap interest rates, tax credits, mortgage interest tax deductions, among others, significantly shape the market.

Yes though, for profit development firms aim to produce the most profitable "product" which usually targets upper income buyers and renters.

Comment by Tina

Thu, 04 Oct 2012 13:03:34 EDT

@MW-i don't know anything about "progressive land tax". How would this affect someone who has lived in a house for 50 years and is currently retired, and planned to pay ~x amount of annual property taxes on the house they paid off 30 years ago?

Comment by MW

Thu, 04 Oct 2012 12:31:07 EDT

So glad you are focusing on this. It is the single most important issue and the largest portion of the budgets of most families.

I love the GGW is pulling in more academics.

I have always felt that we should have a progressive land tax rather than a flat housing tax. Such a tax would change little for condo owners, but would be focused on SFH west of the park or close-in jurisdictions. Any SFH within walking distance of a Metro would get hammered and thus governments could capture money back from the rent-seekers.

Comment by charlie

Thu, 04 Oct 2012 12:22:26 EDT

You can't have a discussion on this without looking at the credit side. Making credit easier to get obviously has a huge inflationary effect on housing prices. It creates a double whammy on the bottom (unemployed) end: if you don't have a steady job you can't get a loan, and the existing renting stock is being upgraded around you.

Comment by Tom Coumaris

Thu, 04 Oct 2012 12:15:38 EDT

Maybe we'll get lucky and incomes will crash to bring housing prices down?