Market Failure

by Carolyn Chase


Month after month, the media has been filled with reports of the rising fortunes of California real estate investors.

"Home prices soar ever higher"
"Housing prices out of control"
"California home buyers pushed existing-home sales to a record pace."

But the return of the housing market does not come without much legitimate hand-wringing about those being priced out of decent shelter. What can we do about those who cannot afford housing in such a "runaway market"?

The obligatory building industry line is that by reducing their developer impact fees we will get more affordable housing. Costs are undoubtedly high for anything new. But has anyone ever seen prices come down just as result of building fees being reduced?

Market prices for houses are rising by the thousands because new wealth from the economic boom is bidding what they have to for the existing supply. Housing prices aren't so high at this point because of the costs, they are so high because the wealthy tier can afford to finance them.

Furthermore, builders are protected by a state law requiring that all fees must have direct connection to the project. If the fees do not, or are excessive, builders move politically - and legally - to adjust them. They did so at the County under the leadership of Ron Roberts who brought in auditors in response to complaints from builders.

Builders fees should match the cost of the infrastructure required for the public systems we all need. By law, builders cannot be overcharged. But when they are too low, the taxpayers - and the environment - takes it in the chin. The city then ends up with insufficient or poorly designed infrastructure that offloads costs and impacts into the public realm, and especially into the environment. Just to name two such costs: polluted-runoff and traffic congestion are by-products of allowing growth to happen without sufficient infrastructure planning and funding.

What contributes to polluted runoff in San Diego? Aside from leaking sewer systems - and other personal habits that contribute to runoff-borne pollution into our streams and bays - projects are not yet really required to be designed to minimize and treat polluted runoff on-site. Cost-benefit analysis of the use, performance, and return on investment of such "pollution prevention" designs and systems show a significant reduction in public costs over time.

Why so much traffic? Builders are allowed to build without sufficient systems going in to deal with traffic - or community designs to reduce traffic.

Another area where building choices can raise long term public and household costs: energy. If incentives and requirements were matched that allowed builders to install the most efficient lighting and appliances, it would reduce both the monthly costs to power the home and the need to build expensive new plants or burn excessive amounts of polluting fuels.

Improvements to building standards may indeed increase costs to new buyers, but can significantly reduce costs and impacts to both the owner and the taxpayer in the long term.

One "win-win" example of this is the low-flow toilet standard. Builders are required to install water-saving toilets in both new units and in old ones at the time of sale. This successful program has saved millions for both individuals and ratepayers who don't have to finance additional infrastructure because we used incentives to support smart, prevention-oriented design.

We need to face the fact that poor and middle-income people cannot successfully compete in the market that for-profit builders have every right to pursue. There are a lot of reasons industry doesn't build housing designed to be "affordable." High costs are a factor in any project. But another is a fundamental market-based reality: you can't make as much money selling stuff to poorer people - especially not with a thousands of hi-tech single and dual-income families bidding against them. The minute you move to make a house "affordable," the profits decrease, if they are possible at all.

Unless you want to put a cap on high bids or introduce some form of overall market price controls - which I'm quite sure the industry is not suggesting - the issue is not so much the euphemistic term "affordable housing" - it's really the less politically-correct issue of how to build "below-market-rate" housing and what are the standards.

You can design nifty lower-priced homes. Siting them can be pure torture. Non-profit builders willing to dedicate themselves to building below-market-rate housing faced overwhelming odds, even during the last recession. Most existing residents do not want growth near them - and certainly not "poor growth."

Overcoming prejudices about who needs more affordable housing may become easier when people realize that it includes most teachers, police, fire-fighters; waste management, transportation, recreation, entertainment, food service and government (civilian and enlisted) workers, artists, students, retirees and all manner of service employees. We must discover the ways to provide housing for the middle and lower ends of the market. When the markets fail, people still need shelter.

But increasing the housing supply should not be approached by reducing infrastructure, environmental or quality-of-life standards. All the current indicators are showing that we need to increase those standards in the face of runaway growth.

Beware of political-speak. When industry lobbyists say 'reduce costs to make housing more affordable' the taxpayers should hear - 'reduce standards so we can make more money.' Our answer should be no thanks.

Unfortunately, past practices have left us with a huge deficit in both money and thinking going into dealing with these problems. But we can make progress by shifting our thinking and funding to a prevention-oriented design approach. Investments in prevention design will reap rewards for both the taxpayer and the environment.

Too often, at City Hall the agenda is dominated by what's best for builders. It's no surprise that their answer is just about anything that reduces their costs. What we need is designs and measures that reduce systems costs and allocates necessary costs fairly.

Until San Diego gets honest about what infrastructure is needed and how it will be paid for, the battles over growth will only worsen. Both our quality of life and the public tax burden are at stake.