In my previous blog, I talked about what exactly is meant by the term “affordable” housing and how the term is used to create an artificial shortage in the housing market. In this blog, I will describe the policy that is used to create these “affordable” units and how they are distributed to qualified buyers.
Most municipalities pass a policy referred to as “inclusionary” zoning (IZ). As of this writing, there are over 149 cities and counties in California that have an inclusionary zoning housing policy. The notion is that most zoning guidelines, like density, setbacks, and open space are exclusionary, and make housing more expensive. Inclusionary zoning guidelines apply only to new development and require a developer to provide a certain number of below-market-rate (BMR) units either for sale or for rent. While each municipality passes its own policy, there are many common characteristics. Each policy will specify a certain percentage of required BMR units, the targeted income level required to qualify for living in the unit, a time period that the unit is priced as affordable, the quality of the unit, and many other requirements. The developer agrees to build the units as part of his proposal, but some cities may have the option of paying an in-lieu fee to the city.
When I served on the city council, we would generally accept the in-lieu fees, which would commit us to build BMR units. There were a few cases where the developer actually provided the BMR units on site. Most were rental units but there were a few for-sale units produced. In this blog, I will focus on the for-sale units.
In 2006, the city of Mountain View, where I served on the city council approved a 35-unit townhome project. Ten percent of the units would be set aside as BMR units. The targeted income level was 100-120% of the median household income level for the county. Priority was given to city public-safety workers, local teachers, residents, and city workers. The market price for these 1575 sq. ft. townhomes was set at $825,000, which provided 3 bedrooms and 3.5 bathrooms. Association dues were initially set at $110/month. The price for the units designated as BMR, was set at $326,000 and required an income equal to $106,000 for a 4-person household. Potential buyers would be required to make a 20% down payment.
When I present the details of buying a BMR unit to a group of economic students, the first question they ask is how long do I have to wait until I can flip the unit and collect the windfall gain. They are usually disappointed to hear that most IZ policies impose a price control (adjusted annually by the CPI) in reselling the units or they would have to live in the unit for 50 years before the price control could be removed.
So what are the issues in marketing these units? First, who decides who gets the option to purchase these units. There is a priority given to some residents, but in the end, it is a staff housing director that actually decides who gets the right to purchase a BMR unit. Second, while the BMR unit provides ownership, the owner does not share in the equity gains received by his neighbors that paid the market price. Third, the association dues are not subject to the price controls imposed on the unit.
There are other issues about whether the policy, which provided three units is the best way to build affordable housing. As I suggested in my previous blog, is it really necessary to provide high-quality newly built units versus providing older lower quality units? Couldn’t the city require in-lieu fees and use the money to provide income vouchers to allow more people to rent rather than own a home with limited equity gains.
In my next blog, I will address the issue of providing BMR rental units.
