“Affordable Housing” Laws Backfire

“Enlightening Ideas for Public Policy”
Volume 10, Issue 23: June 9, 2008

Courts in California have defended “affordable housing” ordinances partly on the grounds that requiring homebuilders to sell a portion of their new houses at prices in easier reach of low- and moderate-income families. In reality, these well-meaning laws have resulted in high prices for the fewer homes that get built, argue economists Edward P. Stringham and Tom Means in an op-ed that appeared in last week’s San Francisco Business Times (below). (The op-ed draws from a policy report ‘Market Housing Mandates as Takings: Measuring their Impact’, they co-authored with Edward Lopez for the Independent Institute last November (also below).

Stringham and Means studied the effects of “affordable housing” mandates—also known as “inclusionary zoning” —as the number of California cities with these laws rose from 15 to 56. “The cities that adopted inclusionary zoning laws saw a 20 percent jump in housing prices and a 10 percent decrease in the number of new units built,” they write. The reason is basic economics. “When forced to sell at below-market rates due to this type of zoning, homebuilders must choose between decreasing the number of affordable units versus taking a loss,” they continue. “And, not surprisingly, they almost always choose decreasing the number of affordable units, which they accomplish by reducing the total number of planned units.”

The problem is especially acute where the median home price is much higher than median household income. “In San Francisco, where the median home price is now around $846,500 and the median household income is $86,100, only 7 percent of available houses are affordable for those whose income is in the median income range. In the Los Angeles-Long Beach-Glendale area, it’s even worse. The median home price in this area is $515,000; the median income is $61,700; and only 3.7 percent of homes are within a ‘doable’ price range for the average family.”

Affordable Housing Laws Make Housing Less Affordable
May 30, 2008
Edward P. Stringham, Tom Means
San Francisco Business Times

(An alternate version of this piece was published in the Los Angeles Business Journal on June 16, 2008.)

What if our affordable housing laws actually increased the cost of housing by 20 percent and decreased the number of available new homes by 10 percent? Wouldn’t that encourage us to take a serious look at what our housing policies are doing these days?

California’s courts don’t think so.

In 2001, when homebuilders challenged a local “inclusionary zoning” law (also known as an affordable housing law) requiring them to sell 10 percent of any homes, townhomes, condos, or apartments they build at an average of $300,000 less than the fair market price, the Court of Appeal sided with the government.

Writing for the majority in Home Builders Association of Northern California v. City of Napa, former Circuit Court Judge Scott Snowden said, “…it is beyond question that [the City of Napa’s] inclusionary zoning ordinance will ‘substantially advance’ the important governmental interest of providing affordable housing for low- and moderate-income families.” The ordinance, he concluded, “will necessarily increase the supply of affordable housing.”

The Court based its opinion partly on economic arguments. Now, in hindsight, we are able to test those arguments and see how they hold up against the evidence. We recently analyzed how inclusionary zoning laws requiring builders to set aside a given percentage of new construction for low- to moderate-income individuals have affected both new home prices and the quantity of new homes over time.

During the period we studied, the number of California cities with inclusionary zoning laws increased from 15 to 56. We compared the changes in housing prices and supply in these cities to those without a similar ordinance. The cities that adopted inclusionary zoning laws saw a 20 percent jump in housing prices and a 10 percent decrease in the number of new units built. This is the basic law of supply and demand at work. Affordable housing mandates have had an unintended consequence: they have discouraged homebuilding, and the diminished supply of housing has driven prices up.

When forced to sell at below-market rates due to this type of zoning, homebuilders must choose between decreasing the number of affordable units versus taking a loss. And, not surprisingly, they almost always choose decreasing the number of affordable units, which they accomplish by reducing the total number of planned units. In other words, since inclusionary zoning laws require developers to sell a percentage of all units they build at below-market rates in order to get permission to build market-rate units, the policy forces them to cut back on everything. With the number of new homes thus limited, buyers end up paying more for their homes.

Housing affordability is a major problem nationwide, but it is particularly acute in California. In San Francisco, where the median home price is now around $846,500 and the median household income is $86,100, only 7 percent of available houses are affordable for those whose income is in the median income range. In the Los Angeles-Long Beach-Glendale area, it’s even worse. The median home price in this area is $515,000; the median income is $61,700; and only 3.7 percent of homes are within a “doable” price range for the average family. In the San Diego area, only 10.1 percent of homes are within reach of the average family, and in San Jose, only 14.1 percent. The list goes on.

The last thing California families need is a law that makes housing even less affordable than it would be in the first place. Inclusionary zoning does just that.

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Edward Stringham is Associate Professor of Economics at San Jose State University and editor of the Independent Institute book Anarchy and the Law: The Political Economy of Choice.
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Tom Means is Research Fellow at the Independent Institute and Professor of Economics and Director of the Center for Economic Education at San Jose State University.
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Below-Market Housing Mandates as Takings: Measuring their ImpactNovember 9, 2007
by Edward J. Lopez, Edward P. Stringham, Tom Means

Housing affordability has become a major issue in recent years. To address the problem, many cities have adopted a policy known as below-market housing mandates or inclusionary zoning. As commonly practiced in California, below-market housing mandates require developers to sell 10–20 percent of new homes at prices affordable to low-income households.

Many developers, however, argue that the program is in violation of the takings clause of the U.S. Constitution because it forces developers to use some of their property to advance a public goal. Nevertheless, in Home Builders Association of Northern California v. City of Napa (2001), the court ruled against the regulatory takings argument, saying that belowmarket housing mandates are legal because (1) they offer compensating benefits to developers and (2) they necessarily increase the supply of affordable housing.

This study investigates these claims in the following way: Section 2 discusses the history of regulatory takings and discusses why below-market housing mandates may be considered a taking. Section 3 investigates how much below-market housing mandates cost developers. Section 4 investigates econometrically whether below-market housing mandates actually make housing more affordable.

Our research indicates that the decision by the California Courts of Appeal is on shaky ground. Below-market housing mandates require developers to forego substantial amounts of revenue and they provide little offsetting benefit. A mandate in Marin, California, for example, would require developers to forfeit roughly 40 percent of revenue from a project, and builders are offered almost nothing in return.

We can see how below-market housing mandates affect housing markets by using econometrics to analyze data of price and quantity for California cities in 1990 and 2000. Our regressions show that cities that impose a below-market housing mandate actually end up with 10 percent fewer homes and 20 percent higher prices.

For developers, inclusionary zoning has an effect similar to a regulatory taking. For society in general, affordable housing mandates decrease the supply of new housing and increase prices, which exacerbates the affordability problem.

Edward J. López is a professor of economics at San Jose State University.

Edward Stringham is Associate Professor of Economics at San Jose State University and editor of the Independent Institute book Anarchy and the Law: The Political Economy of Choice.

Tom Means is Research Fellow at the Independent Institute and Professor of Economics and Director of the Center for Economic Education at San Jose State University.

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