Affordable / Accessible Housing

The question was asked, and I cannot help myself...

How do we build more affordable housing? Do it in a couple points. Make it simple so everyone could get it. Make it so we can implement it and boom, solve the vexing political problem.

I am used to tall orders, but this one is impossible. As an elected once said to me about an idea I was proposing, “maybe unicorns are real too.” Well, I guess I am unicorn hunting.

Never to back down from a challenge. I cannot solve it in one Substack. I cannot solve it in one simple one pager. The reason is we are all stuck down an Alice in Wonderland Looking Glass. Tens of billions of dollars are spent annually to address the question of affordable housing, but to what end? Bills are written at the State and Federal level, but again, more of the same.

Instead of going down the criticism of what is out there other than to say, there has to be a better way, I wanted to put out a couple points I would like to see discussed more often.

First thing first, I think we need to address a question of language. Affordable Housing is a broad term. It incorporates Low to Moderate Income (LMI) housing and it also incorporates Accessible housing. Accessible is for those who are not low-moderate income, but cannot afford to live near where they work. The “affordability” also encompasses those who need accessible housing. So, when we talk about Affordability, it is a broad spectrum. We have to be distinct about which part of the conversation we are talking about too because many can conflate one with the other. Workforce housing for teachers and firefighters has its role, as does the need to get those with low to moderate incomes into homes as well.

Let’s be sure we discuss it like we do Great Britain. There is England. There is Scotland. There is Northern Ireland. There is Wales. However, while they are all Great Britain, one must be sure to be distinct about which part you are talking about when you are discussing areas.

“Affordability” in housing means different things to different people and has separate interest groups affiliated with them. There are incentives for Low to Moderate Income and supports like Section 8 which do not apply to accessible, workforce housing. They are all affordability though.

At the most macro level, there is the question of supply and demand. Eric Jaye wrote a great piece on Substack on this matter. Jaye is a political consultant who works with electeds up in the Bay Area. We spoke on the issue. The challenge is Bay Area workforce housing so affordable accessibility is a big part of the equation. It is not about LMI per se, though that is a part of it. It is also about how do they house those who work in the Bay Area affordably? His point is, which is the paradox of affordable housing, that land price is a key component of the cost of building, and the use of the property depends on the land price. In other words, adding more units to a property will increase the value of the land underneath in acquisition costs. Single Family Homes might be on a plot worth $1 million. But if that lot is now a multi-family home, the lot goes up in price accordingly. The underlying unit costs will increase and thus affordability stays out of reach. Therefore, while supply and demand are part of the equation, it is what supply and what demand is needed that matters.

Based on Jaye’s thesis, I thought about Vancouver and Toronto, two very expensive real estate markets, and markets I have lived in and visited extensively as I attended high school in Vancouver and my in-laws live in Toronto. Their “bubbles” have popped, or rather deflated some. Two keys affected housing prices in those cities and other Canadian cities which bear reflection.

First, there is the issue of the government “taxing” non-residents who own properties in Canada and holding them as an investment. Since many people coming to Canada use homes there as an “anchor” property but never move to the cities, the non-resident taxes increased the cost of the tactic of parking “offshore” funds in Canada’s real estate, making the proposition less attractive. The second issue is Canada’s mortgage rates reset every 5 years, which has a wide-ranging effect on the markets. When the real estate market became overheated (like ours), the mortgage rates were under 1%. Now, those same mortgages are going for over 4-5%, a 4-5x increase in cost to borrow. The cost trickles through to other investments. The condo market is the first to feel sensitivity. Then it is single family homes. Values have not collapsed to levels from before the bubble started, but the values have slowed and come down by over 10% or more. I hear stories about people who “cannot sell their houses” which means, they can but they cannot get the asset value they expect because the market is collapsing and the price is one component- the debt coverage is the other. To Jaye’s point, a lot of the value of real estate is affected by the ability to pay the cost. The price itself is relative to what the income in the area is.

Another consideration in our mind which is not discussed is “liquidity.” I have had conversations with electeds on this matter. “Liquidity” means there is likely more existing supply, thus do we need to “build more,” than people realize. Supply is not entering the market, thus increasing the diminished homes left for a reason, creating more competition for the limited number of homes which are available, thereby increasing cost.

Mortgage rates are part of the problem because we have had very low historical rates and now they are more than double what they were two or three years ago. The liquidity is affected because people are not willing to sell their homes because rates due to the calculus of, if they move, rates are higher than what they have already.

Another driver of liquidity is baby boomers not selling their homes as they want to live in those homes longer than previous generations. Part of the historical “push” is the increase of property tax relative to the fixed income of the homeowner. The economics would not work out historically to stay in the home, but with Prop 13, those incentives do not exist. Boomers are a huge component of those who “own” homes. If they were to move to different housing, those changes could put more supply on the market, alleviating the “bulge” needing housing. Because boomers will not leave, their homes are a “double tax” in that not only do we lose available homes, but now we have to find land and build another unit to replace what would likely be a consumer of multi-family units instead of a family struggling to find homes. How much would we have to build if we unlocked this asset pool? That question does not help builders and those in the “affordable housing business,” but it is a real question we need to look at as we cannot get enough built quick enough, whereas these homes already exist and are available (unlocking illiquid assets seems to be a theme here).

Adding to this question is whether California’s population is peaking or whether it will continue to grow unabated. Much of the issue is local as economies are varied in the Bay Area versus LA. How much do we actually need to add or how much can be unlocked?

A good test case will be Altadena and the liquidity question because of the number of seniors who lost home and how many of them rebuild versus how many move on. What does that “liquidity” do to the market as time goes on. We obviously do not want disasters to create liquidity, but what pressures can be created by Prop 13 reform to address these liquidity questions without pricing people out of their homes? The distortions are real. In other words, people have had to absorb higher prices to acquire their homes, so the values increase unabated but others stay in their homes because the values are so low.

What if they reset every 10 years at a certain level to keep the values increasing? Just throwing out an idea.

These are issues I would like to see discussed more in the conversation about affordability. How to get the projects built? What incentives work? What can be restructured? Those are all questions which we can explore further.

I leave this post with something which troubles me every day I drive downtown to drop my boys at school. I see the empty towers, encased in graffiti, sitting there, over downtown, with their company in bankruptcy. The example is one of symbolism to the dysfunction of the housing market. There are towers, available in bankruptcy, partially finished, and can put “needed” units on the market, and yet they have sat vacant for years, and why? Is supply really the issue? Is there truly a need or is it something else? Instead, covered with graffiti, the towers taunting drivers through downtown, viewers of Los Angeles, attendees of the Convention Center and LA Live, telling us more than anything, we are dysfunctional in so many ways.

You know these towers…

Let’s think about this question differently. I tried to scratch the surface, redefining the question to understand maybe these themes can shape how we need to start to think about Affordable / Accessible housing. And like everything in these Substacks, we see how Altadena serves as a laboratory of how we can address these questions, the “traps,” the political questions, and what will be the issue, beyond the pilot as we are talking about some Shibboleths which will upset some real constituents. If we want to have a discussion, let’s do it.

Ok, now I am sure I will get some nasty grams for these thoughts.