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Saturday, April 26, 2008

Commentary: A critical examination of our affordable housing program in Davis

The issue of affordable housing is clearly one of those issues that will likely arise in each and every debate for city council. That's not surprising and frankly it is one of those top four issues that is on everyone's mind. And frankly it is an issue that transcends the divide between those who are slow growthers and those who are a little bit faster growthers.

There is an on-going and interesting debate on this blog about the extent to which the building of more homes will reduce housing prices. In the community there seems a clear ambivalence on the issue. On the one hand, about everyone is concerned with rising housing prices. On the other hand, about everyone is concerned with preserving the character of Davis. The thought is you build up, build out, or jack up the prices. Personally I don't think it is quite that simple and I'm questionable on the issue that we can grow sufficiently to reduce the cost of housing in real terms in the short-run. In the long-run, we could probably do it by reducing the character and appeal of Davis, but that seems a pretty high price to pay (no pun intended).

I actually am not that interested in rehashing this argument in this space today, although, feel free to debate it to your hearts content in the comments section.

There is actually another issue I want to talk about that I have been thinking about for a long time and it came up in the debates.

It comes from comments that Stephen Souza and Don Saylor made in the debates this week, captured nicely by the quote from Councilmember Souza:
“We implemented the fairest and toughest affordable housing ordinance in the nation.”
We certainly have a broad affordable housing ordinance, but I have had real concerns about the ordinance for quite some time.

The first problem with it, is that for the low income people the cost of housing is $177,000. Now in order to explain the problem we have to backtrack to the early portion of this decade. What would happen is that people would purchase these houses, and in some case fraudulently--wealthier people would get individuals who qualified to basically be squatters for a two year period that they were required to own and occupy the home, and then they could sell it. When they sold it was sold at market rate, for huge profits. Those who were around know this was a huge fiasco at the time and there were some city staffers in on it. Needless to say however, after two years, what was supposed to be an affordable home becomes just another market rate home.

The city fixed this problem by limiting the amount of equity that you could make on a home to a value based on the rate of inflation. So if you buy a house for $177,000, then in ten years, you sell it for $177,000 plus inflation. That achieves the goal of keeping the homes that were supposed to be affordable housing, affordable, but it also creates new problems.

One of the purposes of affordable housing is not merely to provide someone with a place to live that they can afford, but it is also to help them build up equity and be able to raise the level of their condition. The Davis affordable housing by limiting equity, pretty much traps individuals at these incomes into affordable housing because it does not allow them to build up equity.

There are other models of housing out there that might be better for the individual who is not able to afford market rate homes to be able to build up their equity so that they can better their conditions--while at the same time being able to keep what is an affordable home, affordable (and avoid some of the past scandals). That's really I think what this city needs to look toward.

The problem of workforce housing also comes into play. When most people think about affordable housing, that is really what they are thinking about--housing that people over moderate and middle incomes can afford. The city of Davis' ordinance provides people of this range about 20 to 25% of the housing. That means up to $464,000 or so.

On the surface again, that sounds very good. Except you start to realize quickly that over half of the housing is going to cost more than $464,000. And in fact, it may cost much more. Not that $464,000 is cheap. I remember when a former colleague of mine got a job in Lawrence, Kansas at the university there and purchased his home for $92,000. An assistant professor at the University of Kansas at the time made about $3000 less per year than an assistant professor at UC Davis.

As Sue Greenwald pointed out at the forum on Thursday night, the break even point for a developer to make money on a home is about $500,000 per unit. If half your homes are held below that mark, that means the other half have to basically be McMansions in order for the property owner to make a profit.

So you basically have an affordable action program which sounds very good, but you end up with about 25% of the units for low income people, 20 to 25% of the units for middle income people, and then half of the units costing more than $600,000. Those who believe that we can bring about affordability in this way, might want to re-think it.

And that leads to another point that Stephen Souza made both Wednesday and Thursday.
“The problem is if you don’t build anything about 25 units you don’t get that full 45%, you get a smaller percentage based on the number of units that you build."
In other words, we have to build larger developments in order to get the full impact of the affordable housing ordinance. We have to do it in terms of getting the full 45% of the units being in the lower and middle range. But we also have to do it in terms of overall numbers. In a project the size of Covell Village, you are theoretically talking about producing between 850 and 900 affordable units. At the same time you are producing another 900 to 1000 units that are costing more than $600,000. That means you have to build a lot just to increase the number of affordable units.

As one can see, the benefits of such of program are not nearly as clear cut as they appear on the surface. There are other ways to produce affordability, but it is clear that we cannot rely on this ordinance to do it. We need to start, I think by looking toward building more compact developments with smaller units--townhouses, duplexes, and condos. I also think we need to seriously look to address the student housing problem, because so many core homes are rental units now rather than owner-occupied, which takes those units effectively outside of the market.
The number that was thrown around on Thursday was 8,000, the number of students who reside outside of Davis. Another number that was mentioned was 1%, the apartment vacancy rate in Davis. A number that should have been mentioned would be 24%--the number of students who live on the UC Davis campus itself, lowest in the system according to the table I saw a few weeks ago. Of all the jurisdictions involved, the university is in the best position to provide housing to students at the very least. If they can do that, it frees up housing in the core of Davis to single-family, owner occupied homes.

Finally, I think we need to revisit the affordable housing ordinance. It has some good properties to it, it is aggressive, but it also does not solve the overall problem of providing affordable homes to young families with children.

---Doug Paul Davis reporting