Reason Foundation - Authors > Benjamin Powell http://reason.org/authors http://reason.org/authors info@reason.org http://www.pjdoland.com/chai/?v=0.1 Affordable Housing in Monterrey County http://reason.org/news/show/affordable-housing-in-monterre <h3>Executive Summary</h3> <p>Monterey County is in the process of updating its General Plan. The old proposed General Plan Update (GPU) had a number of problems and was voted down by the Board of Supervisors in May 2004. Now that Monterey County has an opportunity to draft a new General Plan Update, it can learn from the mistakes in previous work.</p> <p>This report analyzes the old proposed General Plan Update and the Economic Impact Analysis (EIA) conducted by Applied Development Economics, Inc. We find that the economic analysis for the county is based on false premises and faulty economic logic. The future General Plan Update should seek to avoid the mistakes in the old proposed GPU and the EIA.</p> <p>The old proposed GPU included numerous regulations that would have severely affected the livelihood of Monterey citizens. Among the documents&rsquo; stated goals were the reduction of residential development and the promotion of affordable housing. Unfortunately, these goals are contradictory. By mandating large minimum lot sizes and requiring developers to provide a certain amount of money-losing &ldquo;affordable housing&rdquo; units, the county would only reduce the available supply of housing. This would lead to price <em>increases</em>, quite the opposite of more affordable housing.</p> <p>In addition, the GPU and the EIA made unrealistic assumptions about the cost of additional services and infrastructure required by new development, particularly in rural areas. Such rural areas currently do not receive full government services. Thus, including the cost of full government services in rural development impact projections is disingenuous. Those projects that require additional services in rural areas should instead be encouraged to ensure that developers provide the necessary infrastructure in their new developments or to form homeowners&rsquo; associations or other voluntary cooperative organizations to adequately address the homeowners&rsquo; needs.</p> <p>The preservation of agricultural land is also a major issue. While supporters of the old proposed GPU and the EIA claim that the policies they advocate will aid farmers, the truth is that restrictive land-use regulations will only reduce the value of the farmer&rsquo;s chief asset: his land. Scientific and technological advances have increased agricultural productivity. Farmers should have the flexibility to use their property as they see fit and the ability to make their own land-use decisions to improve their well-being. The old proposed GPU attempted to micromanage the economy of Monterey, and it would have led to dire consequences. In every case, the old GPU and EIA call for additional land-use regulations that would have only led to greater economic hardship and a diminished quality of life for Monterey County residents. The new General Plan Update should seek to avoid these mistakes.</p> 127556@http://reason.org Sun, 01 Aug 2004 00:00:00 EDTinfo@reason.org (Benjamin Powell) info@reason.org (Edward Stringham) adam.summers@reason.org (Adam Summers) Huge Hidden Tax on Homes http://reason.org/news/show/huge-hidden-tax-on-homes

Orange County Register

<p>The median sale price of a home in Orange County hit $543,000 in May, according to Data-Quick, a real-estate information service. Now imagine finding out you paid a hidden tax of $66,000 as part of the purchase price of your new home.</p> <p>Most buyers would regard this as unfair, yet that is exactly what is already happening in a number of communities in Orange County and Los Angeles. The hidden tax is called &quot;inclusionary zoning&quot; &mdash; and a number of cities such as Brea, Laguna Beach, San Clemente and San Juan Capistrano have already implemented it.</p> <p>Inclusionary zoning is a price control that requires homebuilders to sell a portion of new homes in a development at below-market prices. A typical ordinance caps the maximum home value for 10 to 20 percent of a development so that it is &quot;affordable&quot; to families with low to moderate incomes.</p> <p>It sounds harmless enough, but proponents of these programs mislead the public when they say there is no cost to these ordinances. Someone must pay for the subsidized units. That someone is you, when you buy a home.</p> <p>When a subsidy to each &quot;affordable unit&quot; is required for permission to build, the subsidy acts as a tax on the remaining market-rate homes. This tax can be quite large. In some cities such as San Juan Capistrano and Laguna Beach, our research show inclusionary zoning drives up housing prices by more than $100,000 for each market-rate home.</p> <p>Builders pass on this tax to land- owners and market-rate homebuyers. If they cannot pass it on, they simply stop building and move to other jurisdictions. Exactly how the tax is split between landowners and homebuyers varies depending on market conditions. Our new Reason Foundation report estimates that the inclusionary tax adds $33,000 to $66,000 to the price of a new home in the median Orange County and Los Angeles jurisdiction.</p> <p>Allowing new home production to keep up with demand is the key to keeping housing affordable for everyone. Unfortunately, inclusionary zoning does the opposite. When landowners and builders are forced to absorb part of the tax, it lowers the incentive to build new homes. In the eight Southern California cities with data available, we found that in the seven years after passing an inclusionary ordinance, new housing production decreased by 61 percent. That amounts to 17,296 fewer homes in those eight cities. Yet during that time inclusionary zoning in those eight cities led to only 770 &quot;affordable&quot; units.</p> <p>Homebuyers and taxpayers have to question whether a paltry 770 units are worth the cost when it means some 17,296 fewer homes. By discouraging production of 17,296 homes in those eight cities, an estimated $11 billion worth of housing was essentially destroyed.</p> <p>A housing production decrease of this magnitude forces buyers to bid up the price of both new homes and old. Housing becomes less affordable. Some might consider these costs worth it if the ordinances produced a significant number of &quot;affordable units.&quot; Unfortunately, they do not.</p> <p>The average jurisdiction with inclusionary zoning produces only 34 &quot;affordable&quot; units per year. Are the few homes produced really worth this enormous cost?</p> <p>A number of Southern California cities, including Los Angeles, are considering imposing affordable housing mandates. Voters and their representatives would do well to study the track record of the existing Southern California ordinances before they move forward. They will find that inclusionary zoning acts as a tax, raises the price of most homes, produces few units and actually makes most housing less affordable.</p> <p><em>Benjamin Powell, Ph.D. and Edward Stringham, Ph.D. are professors of economics at San Jose State University.</em></p> 122761@http://reason.org Wed, 30 Jun 2004 00:00:00 EDTinfo@reason.org (Benjamin Powell) info@reason.org (Edward Stringham) Do Affordable Housing Mandates Work? Evidence from Los Angeles County and Orange County http://reason.org/news/show/do-affordable-housing-mandates <p><strong>Executive Summary</strong></p> <p>California and many urban areas nationwide face a housing affordability crisis. New housing production has chronically failed to meet housing needs, causing housing prices to escalate. Faced with demands to &ldquo;do something&rdquo; about the housing affordability crisis, many local governments have turned to &ldquo;inclusionary zoning&rdquo; ordinances in which they mandate that developers sell a certain percentage of the homes they build at below-market prices to make them affordable for people with lower incomes.</p> <p>The number of cities with affordable housing mandates has grown rapidly, to about 10 percent of cities over 100,000 population as of the mid-90s, and many advocacy groups predict the trend will accelerate in the next five years. California was an early leader in the adoption of inclusionary zoning, and its use there has grown rapidly. Between 1990 and 2003, the number of California communities with inclusionary zoning more than tripled&mdash;from 29 to 107 communities&mdash;meaning about 20 percent of California communities now have inclusionary zoning.</p> <p>Inclusionary zoning attempts to deal with high housing costs by imposing price controls on a percentage of new homes. During the past 20 years, a number of publications have debated the merits of inclusionary zoning programs. Nevertheless, as a recent report observed, &ldquo;These debates, though fierce, remain largely theoretical due to the lack of empirical research.&rdquo;</p> <p>Our recent report, <em>Housing Supply and Affordability: Do Affordable Housing Mandates Work?</em>, filled the empirical research void. We measured the actual performance of these ordinances in the San Francisco Bay Area. This study follows up on our previous study by examining data from communities in Los Angeles County and Orange County to evaluate the effects of inclusionary zoning and examine whether it is an effective public policy response to high housing prices. In Los Angeles and Orange Counties, 13 cities have an affordable housing mandate. These communities vary in size and density with different income levels and demographics, so they provide a good sample to tell us how inclusionary zoning is working in Southern California.</p> <p>These are our findings:</p> <h3>Inclusionary Zoning Produces Few Units</h3> <p>Since its inception, inclusionary zoning has resulted in few affordable units. The 13 Los Angeles and Orange County cities with inclusionary zoning have produced only 6,379 affordable units, with 70 percent of those units being produced in Irvine. After passing an ordinance, the median city produces less than eight affordable units per year. Inclusionary zoning cannot meet the area&rsquo;s affordable housing needs.</p> <h3>Inclusionary Zoning Has High Costs</h3> <p>Inclusionary zoning imposes large burdens on the housing market. For example, if a home could be sold for $500,000 dollars but must be sold for $200,000, the revenue from the sale is $300,000 less. In half the Los Angeles County and Orange County jurisdictions this cost associated with selling each inclusionary unit exceeds $575,000. In current prices the cost of inclusionary zoning in the average jurisdiction is $298 million, bringing the total cost for all inclusionary units in Los Angeles and Orange County to date to $3.9 billion.</p> <h3>Inclusionary Zoning Makes Market-priced Homes More Expensive</h3> <p>Who bears the costs of inclusionary zoning? The effective tax of inclusionary zoning will be borne by some combination of market-rate homebuyers, landowners, and builders. How much of the burden is borne by market-rate buyers versus landowners and builders is determined by each group&rsquo;s relative responsiveness to price changes.</p> <p>We estimate that inclusionary zoning causes the price of new homes in the median city to increase by $33,000 to $66,000. In high market-rate cities such as San Juan Capistrano and Laguna Beach we estimate that inclusionary zoning adds more than $100,000 to the price of each new home.</p> <h3>Inclusionary Zoning Restricts the Supply of New Homes</h3> <p>Inclusionary zoning drives away builders, makes landowners supply less land for residential use, and leads to less housing for homebuyers&mdash;the very problem it was instituted to address.</p> <p>We find that new housing production drastically decreases the year after cities adopt inclusionary zoning. For all 13 cities average production of housing fell the year following the adoption of inclusionary zoning. In the eight cities with data for seven years prior and seven years following inclusionary zoning, 17,296 fewer homes were produced during the seven years after the adoption of inclusionary zoning. In those cities 770 &ldquo;affordable&rdquo; units were produced. One must question whether 770 units are worth the cost in terms of 17,296 fewer homes. By discouraging production of 17,296 homes in those eight cities, $11 billion worth of housing was essentially destroyed.</p> <h3>Inclusionary Zoning Costs Government Revenue</h3> <p>Price controls on new development lower assessed values, thereby costing state and local governments lost tax revenue each year. Because inclusionary zoning restricts resale values for a number of years, the loss in annual tax revenue can become substantial. The total present value of lost government revenue due to Los Angeles and Orange County inclusionary zoning ordinances is upwards of $752 million.</p> <h3>Price Controls Do Not Address the Cause of the Affordability Problem</h3> <p>Price controls fail to get to the root of the affordable housing problem. Indeed, by causing fewer homes to be built they actually make things worse. The real problem is government restrictions on supply.</p> <p>Supply has not kept up with demand due to these artificial restrictions. One recent study found that 90 percent of the difference between physical construction costs and the market price of new homes can be attributed to land use regulation.</p> <p>The solution is to allow more construction. When the supply of homes increases, existing homeowners often upgrade to the newly constructed homes. This frees up their prior homes for other families with lower income. Inclusionary zoning restricts this upgrade process by slowing or eliminating new construction. With fewer new homes available, middle- and upper-income families bid up the price of the existing stock of homes, thus making housing less affordable for everyone.</p> <h3>Conclusion</h3> <p>Inclusionary zoning has failed to produce a significant number of affordable homes due to the incentives created by the price controls. Even the few inclusionary zoning units produced have cost builders, homeowners, and governments greatly. By restricting the supply of new homes and driving up the price of both newly constructed market-rate homes and the existing stock of homes, inclusionary zoning makes housing less affordable.</p> <p>Inclusionary zoning ordinances will continue to make housing less affordable by restricting the supply of new homes. If more affordable housing is the goal, governments should pursue policies that encourage the production of new housing. Ending the price controls of inclusionary zoning would be a good start.</p> 127413@http://reason.org Tue, 01 Jun 2004 00:00:00 EDTinfo@reason.org (Benjamin Powell) info@reason.org (Edward Stringham) Housing Supply and Affordability http://reason.org/news/show/housing-supply-and-affordabili <h3>Executive Summary</h3> <p>California and many urban areas nationwide face a housing affordability crisis. New housing production has chronically failed to meet housing needs, causing housing prices to escalate. Faced with demands to &ldquo;do something&rdquo; about the housing affordability crisis, many local governments have turned to &ldquo;inclusionary zoning&rdquo; ordinances in which they mandate that developers sell a certain percentage of the homes they build at below-market prices to make them affordable for people with lower incomes.</p> <p>The number of cities with affordable housing mandates has grown rapidly, to about 10 percent of cities over 100,000 population as of the mid-90s, and many advocacy groups predict the trend will accelerate in the next five years. California was an early leader in the adoption of inclusionary zoning, and its use there has grown rapidly. Between 1990 and 2003, the number of California communities with inclusionary zoning more than tripled&mdash;from 29 to 107 communities&mdash;meaning about 20 percent of California communities now have inclusionary zoning.</p> <p>Inclusionary zoning attempts to deal with high housing costs by imposing price controls on a percentage of new homes. During the past 20 years, a number of publications have debated the merits of inclusionary zoning programs. Nevertheless, as a recent report observed, &ldquo;These debates, though fierce, remain largely theoretical due to the lack of empirical research.&rdquo;</p> <p>This study attempts to fill the research void. In this paper we use data from communities in the San Francisco Bay Area region to evaluate the effects of inclusionary zoning and examine whether it is an effective public policy response to high housing prices. We chose the Bay Area because inclusionary zoning is particularly prevalent there; today more than 50 jurisdictions in the region have inclusionary zoning. These communities have various sizes and densities with different income levels and demographics, so they provide a good sample to tell us how inclusionary zoning is probably working nationwide.</p> <p>These are our findings:</p> <h3>Inclusionary Zoning Produces Few Units</h3> <p>Since its inception, inclusionary zoning has resulted in few affordable units. The 50 Bay Area cities with inclusionary zoning have produced fewer than 7,000 affordable units. The average since 1973 is only 228 units per year. After passing an ordinance, the average city produces fewer than 15 affordable units per year.</p> <p>Inclusionary zoning cannot meet the area&rsquo;s affordable housing needs. At current rates, inclusionary zoning will only produce 4 percent of the Association of Bay Area Governments&rsquo; estimated affordable housing need. This means inclusionary zoning will require 100 years to meet the current five-year housing need.</p> <h3>Inclusionary Zoning Has High Costs</h3> <p>Inclusionary zoning imposes large burdens on the housing market. For example, if a home could be sold for $500,000 dollars but must be sold for $200,000, the revenue from the sale is $300,000 less. In half the Bay Area jurisdictions this cost associated with selling each inclusionary unit exceeds $346,000. In one fourth of the jurisdictions the cost is greater than $500,000 per unit, and the cost of inclusionary zoning in the average jurisdiction is $45 million, bringing the total cost for all inclusionary units in the Bay Area to date to $2.2 billion.</p> <h3>Inclusionary Zoning Makes Market-priced Homes More Expensive</h3> <p>Who bears the costs of inclusionary zoning? The effective tax of inclusionary zoning will be borne by some combination of market-rate homebuyers, landowners, and builders. How much of the burden is borne by market-rate buyers versus landowners and builders is determined by each group&rsquo;s relative responsiveness to price changes.</p> <p>We estimate that inclusionary zoning causes the price of new homes in the median1 city to increase by $22,000 to $44,000. In high market-rate cities such as Cupertino, Los Altos, Palo Alto, Portola Valley, and Tiburon we estimate that inclusionary zoning adds more than $100,000 to the price of each new home.</p> <h3>Inclusionary Zoning Restricts the Supply of New Homes</h3> <p>Inclusionary zoning drives away builders, makes landowners supply less land for residential use, and leads to less housing for homebuyers&mdash;the very problem it was instituted to address.</p> <p>In the 45 cities where data is available, we find that new housing production drastically decreases the year after cities adopt inclusionary zoning. The average city produced 214 units the year before inclusionary zoning but only 147 units the year after. Thus, new construction decreases by 31 percent the year following the adoption of inclusionary zoning.</p> <p>In the 33 cities with data for seven years prior and seven years following inclusionary zoning, 10,662 fewer homes were produced during the seven years after the adoption of inclusionary zoning. By artificially lowering the value of homes in those 33 cities, $6.5 billion worth of housing was essentially destroyed.</p> <p>Considering that over 30 years inclusionary zoning has only yielded 6,836 affordable units, one must question whether those units are worth the cost in terms of fewer and higher-priced homes.</p> <h3>Inclusionary Zoning Costs Government Revenue</h3> <p>Price controls on new development lower assessed values, thereby costing state and local governments lost tax revenue each year. Because inclusionary zoning restricts resale values for a number of years, the loss in annual tax revenue can become substantial. The total present value of lost government revenue due to Bay Area inclusionary zoning ordinances is upwards of $553 million.</p> <h3>Price Controls Do Not Address the Cause of the Affordability Problem</h3> <p>Price controls fail to get to the root of the affordable housing problem. Indeed by causing fewer homes to be built they actually make things worse. The real problem is government restrictions on supply. From 1990 through 2000, the Bay Area added nearly 550,000 jobs but only about 200,000 new homes. The California Department of Finance recommends 1.5 new jobs per new home&mdash;the Bay Area produced only 55 percent of the suggested amount of housing.</p> <p>Supply has not kept up with demand due to artificial restrictions. One recent study found that 90 percent of the difference between physical construction costs and the market price of new homes can be attributed to land use regulation.</p> <p>The solution is to allow more construction. When the supply of homes increases, existing homeowners often upgrade to the newly constructed homes. This frees up their prior homes for other families with lower income. Inclusionary zoning restricts this upgrade process by slowing or eliminating new construction. With fewer new homes available, middle- and upper-income families bid up the price of the existing stock of homes, thus making housing less affordable for everyone.</p> <h3>Conclusion</h3> <p>Inclusionary zoning has failed to produce a significant number of affordable homes due to the incentives created by the price controls. Even the few inclusionary zoning units produced have cost builders, homeowners, and governments greatly. By restricting the supply of new homes and driving up the price of both newly constructed market-rate homes and the existing stock of homes, inclusionary zoning makes housing less affordable.</p> <p>Inclusionary ordinances will continue to make housing less affordable by restricting the supply of new homes. If more affordable housing is the goal, governments should pursue policies that encourage the production of new housing. Ending the price controls of inclusionary zoning would be a good start.</p> 127558@http://reason.org Thu, 01 Apr 2004 00:00:00 ESTinfo@reason.org (Benjamin Powell) info@reason.org (Edward Stringham)