Responding to “Why Is ‘Affordable’ Housing So Expensive”

I’m writing this piece in response to Joe Cotright’s “The High Cost of Affordable Housing.”

I’m writing because Cotright’s piece leaves enough to the imagination to paint a picture that affordable housing in the U.S. is dramatically too expensive and over subsidized.  In some cases this may be true, and where true, it is likely the result of decades of regulators slowly introducing new incentives and requirements on affordable housing providers. One advocate described housing in California to me as being like a “Christmas Tree,” because it offered presents for every other interest group: transit pass requirements, solar energy requirements, gray water requirements, proximity to grocery store requirements, etc.  In this piece, without minimising the significance of what I now call the ‘Christmas Tree Problem,’ I am going to use data on over 500 affordable housing projects gathered for a recent peer reviewed paper to push back on Cotright’s presentation of the magnitude of the cost issue.  He’s right that we need serious innovation to reduce costs, but we shouldn’t base the conversation on cherry picked, extreme examples.

1950Mission
This San Francisco Project may cost $850,000 per apartment.  Thankfully, very few affordable housing projects in California are actually this expensive.  It turns out developing affordable housing post-gentrification is costlier than doing it before the hipsters arrive…

First, the $850,000/door number Cotright pulls from San Francisco is scary and real, but it is hardly representative of affordable housing across the state of California as a whole. The 2017 applicants for housing tax credits in California advanced projects that, in Cotright’s lingo, “clocked in” at an average of $378,612/door (1). High? Maybe. $850,000 high? Not so much.  That’s less than half the per-home cost of Cotright’s San Francisco example, actually.

Second, much of the ‘cost’ in these projects isn’t actually a direct cost to taxpayers, or if it is, it’s not ‘cost’ as most residents understand it. When a city leases land to an affordable developer for free, the developer will count the estimated value of the land as a ‘cost’ that is ‘paid for’ by the city.  This ‘cost’ of the free land is added to the Total Development Cost of the project–the final number the state of California and Joe Cotright both use.  But the city didn’t actually spend that amount of money, they just donated land for free–with their opportunity cost essentially added to the cost of the project (2).  Waived impact fees are also similarly counted as ‘costs’ that are ‘paid for’ by cities.  California includes these as ‘costs’ on projects’ balance sheets to properly measure local support for affordable housing, as state agencies strive to align their subsidies with local funding priorities. There is ongoing debate in California over this strategy, but the point is “cost” isn’t always a direct cost.

Third, some share of the cost of these projects is absorbed by the projects themselves  — particularly when projects mix higher and lower income households.  This absorption can range from 0% of a project’s budget, to almost 80%. There are sometimes hidden subsidies here–for example, if the hard debt is leveraged through tax exempt bonds, or if some of the units receive rental subsidies like project-based Section 8. I’ve measured the percentage of each project’s budget carried by the project itself using data from a recent paper.  This is sometimes called “hard debt,” or cost the project is paying back through rent and rental subsidies. I’ve plotted the distribution of this percentage across the 500 projects I have data on (2008-2016) below:

HistogramHardDebtPCT

Most projects support between 0% and 30% of their costs (although these numbers above include rental subsidies like Section 8, so the true distribution will be even lower).  But in general: the lower the rents charged, the less the project can support itself–so the fact that some projects can cover 40% of their costs with rents could be a good or bad thing, depending on your goal.  Many affordable housing agencies across the country prefer to get the rents on these sites as low as possible, making the subsidy requirements high.  Why would they do this?  Because what is affordable to a “low income” household will still be un-affordable for someone who has been homeless for years.

But let’s get back to the questions that Cotright’s piece might lead a reader to ask: How do we get costs down? If you’re a fan of Joe Cotright you already know some of the answers.  Here are hard numbers from a suite of studies using the data of hundreds of actual projects and parcels to prove what works:

Let Developers Build Up, Especially Near Transit.   In a recent study, a colleague and I attempted to measure the impact of building near rail transit on affordable housing construction costs.  We found developers were absorbing the higher land costs near rail by building taller on their sites, a policy goal of the state’s TOD program.  We also found that for every 10% increase in the total number of homes in a project, costs went down by 1.8%, on average.  A forthcoming study in the Berkeley Planning Journal by researcher Scott Littlehale suggests the effect is higher: a 10% increase in homes reduces affordable project costs by 5.7%, on average.  This concept applies to all housing, too: Berkeley’s Terner Center for Housing Innovation found that increasing site densities by 20% increases the likelihood sites will be developed by 25%.  Density bonuses are an excellent way to take advantage of these effects.  It’s worth noting these economies of scale work in reverse at certain points, e.g. when another story requires switching to more expensive building materials.

COSTEFFICIENCY
Economies of Scale! From the State of California’s Affordable Housing Cost Study: https://www.novoco.com/sites/default/files/atoms/files/ca_development-cost-study_101314.pdf

Reduce Parking.  Most planners know this by now, but the magnitude of parking’s impact on development costs is not fully appreciated.  The Berkeley Planning Journal study estimates that parking ratios can increase affordable housing development costs between 25% and 40%.  The Terner Center study of market rate and affordable units finds that reducing parking requirements by only 20% can greatly improve the likelihood a site gets developed by up to 87%.  These are astounding statistics that should upend how local governments zone for housing.

Waive Impact Fees.  Cities charge new developments for impacts to services like water, transport and storm-water.  California jurisdictions charge some of the highest impact fees in the country. In a preliminary study, I find these fees equal roughly 4.8% of affordable housing development costs in California, while Littlehale places the impact around 4%.  This may seem small, but when you add this cost on top of every other local requirement and charge, local government fees can add up to a big impact. The Terner Center suggests impact fees in some Bay Area jurisdictions are as high as $40,000 a door.

There is real hope modular housing will help, which Cotright mentions.  There’s also an entire study on the topic by the state of California’s housing agencies that mentions other options.

But if were going to talk about costs, though, we should really think about the historical context that’s led us to this point–why affordable housing financiers and providers are sometimes so eager to overload projects with bells and whistles. The answer is painfully obvious yet somehow easily forgotten by many “urbanists.”

NIMBYTOWN
Thanks to the OC Weekly for this one

So why the regulatory overload?

Whenever talk of affordable housing comes up in our leafy suburbs, neighbours begin to worry that it will ruin the neighbourhood. Even today, in  2017, people drag up the haunting specter of old public housing estates–like Cabrini Green and Pruitt Igoe, two old projects criticized by the mainstream for being aesthetically displeasing hotbeds of crime and drugs.  This historical narrative, accurate or not, feeds the perception that affordable housing is dangerous, unsightly, unhealthy and ultimately a threat to neighbourhood character. With this history in mind, the choice of an affordable housing provider to include a zen garden in a project appears less like excess and more like a thoughtful preempting of NIMBYISM and its associated bigotries: “look at what nice things we are bringing to the community! Please don’t kill our project!”

Why did Cotright not consider this? I’ve always believed that, to locate affordable housing in those exclusive and privileged suburbs, these developers generally have to pay some kind of penalty to get projects approved–by only serving ‘deserving’ populations (seniors), providing more parking, adopting higher setbacks, or, hey, putting in a zen garden.

Don’t get me wrong, I’m also a bit of a utilitarian who would rather we focus on making affordable housing more cost effective rather than aesthetically pleasing to rich neighbours.  I’d love to see policy move in this direction, and have governments ram these projects down the arterials of every suburb in the country. But I’m not god, and this isn’t Singapore.

So in reflecting on Cotright’s piece on “Why is Affordable Housing So Expensive To Build?” I agree we need to reign in costs where possible, but I feel his piece exaggerates the problem and avoids answering the hard questions.   In reviewing pieces like his, I wonder if we are on the cusp of a new cycle in housing policy–the ‘newness’ of housing tax credits has worn off, and thought leaders are now assaulting it the way they assaulted public housing.

(1) I used both the first and second round of 9% projects, New Construction applicants only.  Average development cost is weighted on a per unit, not a per project, basis. 

(2) I’m using opportunity cost loosely here.  The ‘value of the land’ is usually determined under the assumption the land would serve affordable housing.  The true ‘opportunity cost’ might be another use.

Published by mattdpalm

Doctoral Student UC Davis USDOT Graduate Eisenhower Fellow 2014-2015

3 thoughts on “Responding to “Why Is ‘Affordable’ Housing So Expensive”

  1. Matthew, thank you for referencing my paper. A clarification: the stat that you quote from my paper comes from my *replication* of the model created by the State of California consultant for the “Affordable Housing Cost Study.” The consultants created a model that included *both* a project’s total # of units *and* a project’s total building area (net structured parking). Having both muddles the ability to Interpret scale-economies cost saving effects. In my models, I include only project Square Feet (net structured parking), along with a number of other project characteristic variables. My estimated savings are much closer to those in your study. I find that increasing a project’s scale by 100% increases costs by only 85%. The way you put your finding was that a 10% increase in the number of units leads to a per unit cost savings of 1.8%.
    Best,
    Scott

    Like

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