Affordable Housing

California “Inclusionary Zones” Exclude Most People From Affordable Housing

The quest for affordable housing drives up costs for many for the benefit of a few

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California's housing prices plummeted after the bubble burst in 2008, but now are approaching levels not seen since the market's height—especially along the Southern California coast and around San Francisco Bay. This has reignited the perennial question: What should policy makers do to promote "affordable" housing?

Earlier this month, the state Supreme Court heard arguments in a Northern California case that could have statewide impact, given that it ponders the constitutionality of one way officials promote the construction of lower-cost housing. Whatever the court decides, it's unlikely to have any noticeable effect on prices.

The issue is "inclusionary zoning." In exchange for allowing builders to construct houses, officials require them to set aside a percentage of the new houses that would be sold at below-market rates.

In San Diego, homebuilders must sell at least 10 percent of their houses at reduced rates to people who meet an earnings formula. According to the code, "The intent is to ensure that when developing the limited supply of developable land, housing opportunities for persons of all income levels are provided."

In San Jose, the subject of the court case, the city requires builders of more than 20 housing units to set aside 15 percent of them at these lower prices—or build 20 percent as low-income housing elsewhere in the city, or pay the city a fee of $122,000 for each "inclusionary" unit. The city requires the buyers of these reduced-price houses to sell them to other lower-income buyers in the future, or turn over price gains to the city.

The legal issue isn't solely about housing, but about whether cities have unlimited power to extract concessions from homebuilders for things that are not "impacts" from the project. In other words, it's legitimate for government to require new developments to pay to mitigate the effect of the new residents on local infrastructure (roads, sewers, fire service), but is it OK for cities to require affordable housing just because officials want to see more of it built?

"Under basic constitutional principles, government may not single out specific individuals or groups of property owners to bear the burden of paying for needs they didn't create, and for general social programs that are the responsibility of the entire community," said Anthony Francois, an attorney with the conservative Pacific Legal Foundation, which represents the California Building Industry Association in this case.

That's a significant constitutional issue and an important property rights issue for builders, but the policy issue is a bit different. "Builders are always going to make their margins," said Wendell Cox, a St. Louis-based housing consultant. But these rules raise the prices of market houses. "Let's talk about the people who are excluded by inclusionary zoning."

In its amicus brief, the National Association of Home Builders noted that, nationally, "a $1,000 increase in home price leads to about 232,447 households priced-out of the market for a median-priced new home. … The priced-out effect is exacerbated through government regulations and constraints on housing development. Already, regulations imposed by government at all levels account for 25 percent of the final price of a new single family home built for sale."

In a March report, the Legislative Analyst's Office reports that officials have approached the housing affordability problem in recent decades largely by subsidizing the construction of lower-cost housing — but it barely makes a dent in the problem. This suggestion is the key: "broader changes that facilitate more private housing construction."

In San Jose's county of Santa Clara, median home prices in February were $915,000. Forcing builders to sell a few units at $795,000 isn't going to do much other than give a break to a few families at the front of a waiting list.

The real answer is the one hinted at by the LAO: Make it easier for builders to build more homes of every kind and let the "housing ladder"(e.g., when people move up to fancier houses, their less-fancy houses are bought by someone else) work. However the court rules, policy makers ought to look more at markets and less at dictates.

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30 responses to “California “Inclusionary Zones” Exclude Most People From Affordable Housing

  1. So, after this bubble bursts, will we bail out (some of) the lenders again?

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      1. Totally a Dick on Camera?

  2. So rather than reduced rents, the builders have to give away equity? Isn’t that taxable income?

  3. California; Where bad ideas go to get fat sucking the very marrow from the bones of liberty.

  4. If the bank doesn’t give everyone a $million loan, they are discriminatory. If they do, they are predatory.

  5. When developers build affordable housing on their own, it destroys the character of the neighborhood. Government must step in and do something.

    When developers don’t build affordable housing on their own, the market has failed. Government must step in and do something.

    The county where I grew up once had an ordinance requiring affordable housing in all new subdivisions of 50 or more houses. A friend asked me why all new subdivisions had exactly 49 houses each.

  6. “In exchange for allowing builders to construct houses, officials require them to set aside a percentage of the new houses that would be sold at below-market rates.”

    Which forces the costs of the ‘market rate’ housing higher, and since the BMR housing is a percentage of the MR, that means *everybody* pays more for housing!
    Minimum Wage insanity applied to housing!

    1. No way. Intent is magic, and economic laws are just loonytarian talking points.

    2. In exchange for allowing builders to construct houses

      This phrase has no place in a free society.

      It is ubiquitous in the US.

      You do the math.

  7. This cycle is inherent in the whole idea of California. People have long come to California to get away from more crowded and congested states on the East Coast and in the Midwest. For several decades now, though, California cities have become just as crowded as these other places, in no small part because of restrictions on land development intended to prevent overcrowding (i.e. crowded cities surrounded by miles and miles of protected wilderness).

    Berkeley is a typical, if extreme, case. The City of Berkeley refuses to acknowledge that it is in the middle of a densely urban area and aggressively limits growth by refusing to grant permits for significant residential construction. In order to mitigate the “devastating effects on the poor,” as Berkeley is wont to do, they have a rent control law that they refuse to let die come hell or high water.

    They DO NOT understand why this makes Berkeley unaffordable by inflating the price of anything that DOES become available beyond all recognition and then locking in that price through the “rent control trap” that keeps people from moving when they otherwise would.

    1. Also, the chief effect of protecting the wilderness in areas that do that is to cause development just past the protected areas. Thus, a policy that supposedly stops sprawl actually aggravates it.

      1. Precisely.

        1. Although I should confess that I took advantage of this particular brand of stupidity by buying a house in a neighborhood with protected parkland on three sides of it. Should keep its value nicely . . . is that morally comparable to Mormon sister-wives taking welfare as single mothers?

    2. “They DO NOT understand why this makes Berkeley unaffordable by inflating the price of anything that DOES become available beyond all recognition and then locking in that price through the “rent control trap” that keeps people from moving when they otherwise would.”

      As far as I can tell, the voting on this is strictly political envy.
      Far more renters pay far more in rent to subsidize (along with the owners) those few who plop their butts down and never move, along with the various legal services suppliers and bureaucrats.

      1. When I lived in B, they were referred to as “Dinosaurs”. Hippies who lived in the same rent controlled units since the 60’s. Some were paying as little as $100/month. Any time their cushy little scam was threatened, they’d go straight to court.

        1. And when the landlord can’t afford to fix the leaking roof, they scream about the evils of capitalism.

    3. That’s how you end up with wealthy slum lords who run sex trafficking rings.

      This guy owned MOST of the available rental properties in the Berkeley area when I lived there.

      1. Was that the guy who owned the Indian restaurant on Shattuck? I remember when that whole thing blew up – it was bizarre.

        1. The extended family owned 3 or 4 restaurants, some run with slave labor.

          I wouldn’t be surprised if it was arson. In fact, it probably was an insurance scam, and a way around the building codes.

          1. I don’t mean literally “blew up,” I mean “when the scandal broke.” I want to say the place was called Pisand. Great buffet. I feel like the guy’s brother took it over after they found out that half the labor were slaves illegally brought over from India and SE Asia. This was about 15 years ago.

    4. Good point, Square.

      And bonus points for using Berkeley as an example of urban “density”. Well played.

      1. Berkeley IS the event horizon of urban density . . .

  8. In exchange for allowing builders to construct houses, officials require them to set aside a percentage of the new houses that would be sold at below-market rates.

    That’s crazy! Officials should require them to *give away* a percentage of the new houses!

    1. Nonsense, officials should seize every fifth home and sell it themselves to keep housing prices up.

  9. And:

    “Under basic constitutional principles, government may not single out specific individuals or groups of property owners to bear the burden of paying for needs they didn’t create, and for general social programs that are the responsibility of the entire community,” said Anthony Francois,”

    I’m sure it won’t escape the court’s notice that this little gem would immediately outlaw rent control; can’t have that!

    1. You didn’t build that!

  10. The city requires the buyers of these reduced-price houses to sell them to other lower-income buyers in the future, or turn over price gains to the city.

    Thus shitcanning the incentive of maintaining and/or improving the house.

    No possible way the developers would just use lower-grade materials and less-skilled workers on these houses. None whatsoever.

  11. “However the court rules, policy makers ought to look more at markets and less at dictates.”

    Absolutely proscribed in The People’s Republik of CA, home of positively the dumbest electorate, known to man.

  12. By definition affordable housing is old, obsolescent and in neighborhoods low on the housing ladder.

    But the new definition of affordable housing in California is brand new, with the most recent electronic and energy efficient upgrades, and with pools, spas, gyms, and close to shopping centers and subsidized by every four neighboring homes which inflates the values of those homes that may not be recovered when the market takes a downturn.

    Concurrently, the inclusionary unit, financed with a subprime loan, is all too often allowed to resell for a windfall.

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