Housing Costs Controversy and the Math of BMR Ownership
My posts on housing costs have gained a lot of attention in the last week or two, and there have been a lot of comments. I decided to respond to Peter Cohen’s comments in this post, because his comments are similar to others I have heard on Twitter and elsewhere from people in the housing advocacy and progressive community in San Francisco. Peter is the Executive Director of the Council of Community Housing Organizations in San Francisco.
His comments are in italics.
Your calculations of cost for producing a 800-s.f. housing unit are revealing (previous blog post), and clearly demonstrate that even at most stripped down expenses and minimum developer and equity-investor IRRs, typical market rate housing in SF simply can’t be made affordable to middle-income residents.
If you subtract the cost of the BMR subsidy out, most of the other numbers look exactly the same for building subsidized affordable housing units (and in reality affordable housing projects often cost more because of increased common area requirements and larger accessible facilities). This means that if we cut the cost of construction by 30% we could potentially build 30% more affordable units with the same pot of money. I should also point out that those costs accurately reflect a 640 square foot unit once building efficiency is accounted for, which I updated in a later post.
However, you still then advocate for de-regulation as the primary “solutions” for the structural unaffordability of SF real estate — streamlining the public process for entitlements, eliminating the share of responsibility for affordable housing on developers, upzoning without extracting public benefits. These proposals may be beneficial for market rate developers, but they will do nothing to increase affordable housing or housing affordability.
How will they do nothing for housing affordability? If we actually built a sustained amount of housing, affordability would be improved over time. Supply and demand exists, even in San Francisco. If you don’t believe it, look what happened in the early 2000s when the last tech bubble crashed: rental housing prices dropped over 40% when demand dropped. Market rate housing being built now will be with us for a long time, and the more we can build now the better. When the economy isn’t as good, we will still have that housing in the market.
The way we produce affordable housing in this high-priced real estate town is through locally funded housing development for low and very-low income residents and through developer requirements to contribute middle-income “inclusionary” housing in their market-rate projects. That’s pretty much it. The irony is that the beautiful picture at the top of this blog post is of Richardson Apartments which is a 100% affordable project by Community Housing Partnership that serves formerly homeless residents. I’m glad you are proud to display such an attractive and successful housing project, but using that image to headline an article arguing for de-regulation and incentives to build more market-rate housing is, at minimum, an odd juxtaposition.
I am very familiar with Richardson Apartments, I was working at David Baker’s office while it was being designed and built and I have visited it several times and know about the funding process and the demographics of the residents. I am completely in favor of building housing for formerly homeless people, but I also believe that building much more market rate housing should be a goal for the city. Increasing housing supply in a time of increased demand has little downside- especially since increased market rate development means more money for affordable housing and more tax revenue for the city. Also, it may be a small point, but the majority of the post was not about de-regulation (“find other ways to fund subsidized affordable housing” was the last item on a list of 7).
You are also incorrect in statement that “the affordable housing requirement for new construction is the biggest source of affordable units.” The inclusionary requirement is but a portion of local resources for affordable housing, and moreover and most importantly, the inclusionary requirement on market rate projects is intended to compel developers to build the units on-site as mixed-income housing, it is not at all intended as an in-lieu fee program (unfortunately that is how developers treat it–just another check to write to the City rather than seeing their role in being able to actually produce affordable units for middle income people).
In the previous paragraph you argued that affordable housing was produced “through developer requirements to contribute middle-income “inclusionary” housing in their market-rate projects. That’s pretty much it... ” but now you’re saying I’m incorrect when I make the same assertion? Fees from market rate construction are the biggest source if I am reading this presentation given by the Mayor’s Office of Housing correctly. Luckily, Proposition C passed last year (which you and I both worked on together) so that will help replace the portion that has disappeared with the elimination of the Redevelopment Agencies and will create a fund of approximately $50 million/year once it is fully implemented.
I know that on-site inclusionary housing is a goal for many housing advocates, but I am not convinced it is necessarily any better than off-site BMR units. One of the biggest complaints I have heard from BMR buyers is that the market rate owners in that the building don’t mind expensive HOA dues and vote to increase them without caring whether or not the owners of the affordable units can pay for them. It is a small city, I just want to see housing built somewhere.
It is great that you have creative ideas for market rate housing–prefab, construction technology, small units, zero-parking, etc. Architects are the creative thinkers about the built environment and typologies of housing. But it is a different agenda when these interesting ideas masquerade as “solutions” for affordable housing needs. These are simply new ideas for market rate housing, and market rate housing is very expensive both to build (as you have demonstrated) and to buy/rent. It is unfortunate that you see the need to challenge and undermine current public policy in laying out your ideas for how market rate developers can build cheaper urban housing.
In my mind our currenet public policy efforts to produce “affordable” housing in San Francisco have been a dismal failure for middle-income people seeing as we now live in the most expensive city in the United States, even edging out New York. Seattle has seen a similar boom in high tech jobs, but has also done a great deal more to encourage market rate housing production, and they have seen a lower increase in housing costs than San Francisco by addressing demand (they still make the list of the ten most expensive cities, but the average studio apartment there is about $1,000 cheaper). Subsidies are not going to solve this housing market, especially for people making near the median income. A combination of subsidized housing, particularly for low and very-low income people, and a sustained boom in housing construction would do a lot more that our current system.
I would love to hear additional ideas for funding subsidized affordable housing, it doesn’t have to be an either/or with market rate housing. If we think affordable housing is important, why not levy a progressive city income tax that diverts money to the Mayor’s Office of Housing which could be used to fund future affordable housing development? Why not tear down I-280 and put the land into a housing trust to eliminate the land cost from the construction proforma? Better and cheaper regional transportation would also make housing cheaper, as people could choose to live in cheaper housing further away from where they work. How about re-inventing the housing authority and building government-owned rental housing that would be open to anyone with monthly rent charged based on income (common in some other countries)?
Making home buyers shoulder most of the cost of the BMR program does not make sense to me, and it makes market-rate housing more expensive. It produces too few units for middle income people and it is only marginally better financially (if at all) for many people than renting a rent-controlled apartment. I challenge current public policy because I don’t think it is working for a large part of our city’s population. At least part of the solution for addressing our housing shortage has to come from the market.
While we are discussing the current system, let’s look at how a big part of the City’s efforts to produce middle income housing actually works:
The Math of BMR Ownership
5% downpayment (there are also some down payment assistance programs): $15,587
30 yr montly mortgage payment based on mortgage of $296,164: $1,562
Monthly HOA dues: $393
Property taxes (approximate): $3,100 yearly or $258/month
Insurance (approximate): $1,000 yearly or $83/ month
Total montly cost of an “affordable” BMR unit: $2296/ month
A person making $70,000 a year would just be able to qualify under the limit for this unit (the cutoff is at $70,850), yet it would cost $27,552 a year to live in it- nearly 40% of the buyer’s income! This is to own a unit that needs to be sold back to another BMR buyer, meaning the amount you can sell it for tracks inflation. Your downpayment, which could have been invested in a more lucrative investment for retirement, is also tied in to essentially tracking inflation of the duration of ownership. If you rented a market rate apartment for that same price (yes, it’s still possible in my neighborhood) you would be protected by rent control, you would have more flexibility if you needed to move, and you would also not have to tie up your savings in a non-investment. I looked in to buying a BMR unit myself two years ago and once I ran those numbers, why bother?