Trickle Down Housing

by Carolyn Chase


ow often do you see an industry publicly complaining that their products are too high priced? Maybe that's why ya gotta wonder what's up when the Building Industry Association and the mortgage/debt industry and everyone else making money from real estate starts to push affordable housing. The foxes are in the henhouse. Again.

For the building industry and land development flacks to tout affordable housing is obscene. Their party line is: "growth control measures, project approval delays and any other legislative or regulatory effort designed to constrain growth help cause a lack of affordable housing." You can't exactly argue about that. But let's not talk about all the other costs involved: land speculation, labor, materials, overhead, insurance. We all have costs of doing business.

Santa Barbara's example is one the building industry wants us to forget about -- they have strict growth controls, and housing is expensive there. Lucky us - we have almost no growth controls and housing is still expensive here.

At least in Santa Barbara ,their growth has been contained and current residents don't have to worry about being stuck with the bill or environmental consequences for attempting to put ten pounds in a five pound sack.

What really drives the high prices of California housing? California is considered by many to be a highly desirable place to live.

Where else is on the top ten list for expensive housing? Honolulu, San Francisco, Aspen - you get the idea. It's the lifestyle and people's abilities to pay for it.

Of course, developers and politicians prefer to blame those seeking to protect the environment and quality of life. They are all just costs driving up the price of housing. If only those pesky folks would stop hassling them. Then we'd have affordable housing is the constant implication. Without them, the costs will go down and houses will be more affordable. Seems simple, right? Too simple.

In real estate, when costs go down, prices do not necessarily follow. And without protections, our quality of life would surely plummet. Even with some protections, were still headed downhill because of mismanagement of growth.

More than most industries, real estate prices are set by demand and flow to the rhythm of the fluctuating time-value of money. It's the demand by people able to pay more that drives others out of the market - combined with others who do not wish to sell at any price.

In California, you also have the Prop 13 influence. Surely the fact that families in the land game - and that, by the way, includes in a small way my family - have locked in under-cost taxes on houses bought before the Great California Real Estate Run-up is a factor. With Prop 13, you have to be insane or transferred out of the area with no ability to keep the property; to sell any property which would trigger a reappraisal. There is no way that the taxes on an older Prop 13 property will ever cover the costs of services provided by the City. On most properties, it doesn't even cover the cost to pick up the trash weekly, much less police, fire, libraries or anything else.

The basic price of real estate throughout the SoCal coastal zone is also skewed by the large number of wealthy who buy second, or even third homes or condos, further using up the supply.

All of these factors - in concert with the credit markets - keep demand and prices rising, at least until the next down cycle. I learned one of many lessons about real estate when my husband and I purchased our first home together. We were looking just after the last cycle peaked. One day the house we wanted was one price, the next day, they lowered it $40,000. This is how it became "affordable" for us.

At some point, sellers have to meet what the market is able to pay. Right now there are more buyers chasing sellers....and lower-income folks can't compete. Another question is: should people even attempt to compete?

Another fun lesson came when I attended a meeting at a fine home in La Jolla. I complimented the man living there whom I had presumed to be the owner. He replied that no, he wasn't in the real estate market at the moment - the way the markets were, it made more sense for him to rent than to own. The amount of capital it takes to lock up pieces of developed California land often do not make sense for folks without a romantic attachment to the "American Dream" of land ownership as the ultimate security.

Everyone needs a place to live, and a way to sustain their household. Not everyone needs to own the land or the house they live in - nor is it necessarily a good financial plan to have a high percentage locked into an industry with such high transaction costs.

Prices rise to meet demand. When more and more wealthier people are willing to compete for housing, the prices go up. When older established people don't want to sell - at just about any price - the inventory doesn't turn over.

What solutions are the builders touting? The building industry pursues "trickle down" or basic supply side approaches to housing. Do whatever it takes to increase supply. Build more! Reduce standards! Reduce environmental protections!

In theory, when they build new housing, people move and then the other housing is potentially left as more affordable. But what happens in practice is that the increased supply is absorbed by new growth which can always outbid others - and the cycle continues, never really providing more affordable housing.

It seems to me that we do have a basic right to plan development in such a way so as to preserve the environment and a certain quality of life, and that doing so is at heart a far more conservative value than the reckless, unplanned development many in the building industry and Chamber of Commerce advocate.

It really is a shame that this city/region has such disrespect for real affordable housing planning and related issues. Markets are not designed to provide products to service all spectrums of demand. That is something that is in the public and the common good and is increasingly being abandoned to the priorities of economic-interest, growth-dominated politics.