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TOM WHEELER:

Welcome to the Econews Report. I'm your host this week, Tom Wheeler, executive director of EPIC. And I'm joined by my friend and co-worker, Matt Simmons, also of EPIC. All right, so today we're going to be talking about housing. Again, I'm on my housing beat. And as we've said before, housing is an environmental issue. And we have a very special guest with us who is a great expert in the area of how housing supply impacts price, which is a big topic of conversation in Humboldt County recently with the Gateway Area Plan, with the McKinleyville Town Center, and with the proposed affordable housing development in Eureka.

So Vicki Been is the Judge Edward Weinfeld Professor of Law at NYU School of Law. She is also an affiliated professor of public policy at the NYU Wagner Graduate School of Public Service and the faculty director of NYU's Furman Center for Real Estate and Urban Policy. Vicki, welcome to the Econews Report.

VICKI BEEN:

Thanks so much. Thanks for having me.

WHEELER:

All right. So. For some reason, especially in progressive circles, it seems that our understanding or our belief of supply and demand as as descriptive of how markets work goes out the window when we're talking about housing. So there is this skepticism that supply can influence. The the cost of housing, this typical supply demand ratio, right? You've done really important research. You've published a paper supply skepticism, which we'll have available on the Lost Coast Outpost and in the show notes on the podcast. So I'm really glad to have you on. Matt, in addition to his role at EPIC, is also a planning commissioner for the city of Arcata. Matt hears a lot of this skepticism when taking public comment from folks. Matt, do you want to give an example of supply skepticism that you hear? And then we could talk about we could talk about this phenomenon a little bit and get into why this paper was written and why it's important.

MATT SIMMONS:

Yeah, so I'd say the most common refrain that I hear is that new housing will be luxury housing that will be set at a rent that is unaffordable to the vast majority of people currently living in our community and that therefore that new housing does not address any of the current housing affordability problem in our community. This is just luxury housing for rich out-of-towners. It's not going to help at all. Why are we building this?

WHEELER:

Not for people from Humboldt, or Frumboldt, as we call it in Humboldt. So this is obviously not a unique problem to Humboldt County, though, because, Vicki, you are in New York City and you are writing on this subject. What inspired you to write supply skepticism and to make this an area of your research?

BEEN:

A couple of things. I mean, one is that the courts have often treated land use issues as that the developers would have outsized influence on what happened in a community, right? But a lot of work has been done over the last several decades that show the power of homeowners, right? And homeowners traditionally have opposed to new development. In part, they opposed new development because they worried that more supply would lower the cost of their homes, and so they wouldn't be able to cash out when they wanted to. But starting really in sort of the mid or early 2000s, we started to see renters start to complain that they didn't want new housing because they were afraid that it would increase their costs. And so I found that puzzling, why we had one group who was afraid that it would lower their home values and one group that was afraid that it would increase their rents, really.

And so I started to try to unpack that and why we were seeing, especially in cities that traditionally have been pretty pro-growth. I mean, New York City is an example of a quite pro-growth jurisdiction, and yet we were seeing time after time land use decisions being made against more housing. So I was fascinated by those tensions. And also, I come from a town of about 400 in southwestern Colorado, so I have some vision of what Humboldt County is all about. And I was also struck by how much the skepticism about housing was in big cities, in smaller cities, in small towns, and really was trying to understand that, right?

WHEELER:

So let's get into some of the arguments that we routinely hear about, about housing and how markets and housing work. And then we can turn to the data because there's been a lot of research that's been done in the last couple of decades about supply demand impacts on, on housing. So, Matt, I said before the show to you that I think that there is kind of this spectrum in arguments against housing production that goes from new housing's not going to change the price that these things are independent of supply and demand to the more pernicious, actually increasing supply by building new housing, which might be quote unquote luxury housing, it's going to increase the price of housing elsewhere. So let's start at maybe the worst case scenario that if we build some sort of luxury housing, the other landlords of an area will look at the price that is being set there and say, all right, well, the new, the new normal is going to be, let's say $2,000 for a studio apartment where it had been $1,500. What do we know? What does the research bear out on how new housing in particular, perhaps how new supposedly luxury housing impacts housing across the spectrum, right? Because we have, we have existing housing stock. How does it impact the general housing market?

BEEN:

Mm-hmm. So there are two ways in which it can really affect the general housing market, right? One is, what does it do to the prices nearby? The scenario that you paint of landlords who already own homes nearby will say, hey, they're renting for $2,000 a month. I can raise my rent to $2,000 a month. And what we see there is that the research is pretty overwhelming that that does not happen, right? That when new development goes into an area, the immediate neighborhood, the immediately surrounding area, you do not see increases in the existing building surrounding it, right?

In fact, some studies show that you see a decline in the rents, especially when what's around it is already pretty high-end housing, that for that housing, the price comes down significantly, right? And here, when I say the price comes down, it's like the price comes down relative to where it would have gone had that housing not been built. So that may mean you may see it increase, but you're seeing it increase at much less than you would have seen it increase had the new housing not been built, right? So the research shows one study, for example, shows that at the high end, that prices come down, rents come down by like 3% to 6% when new so-called luxury housing goes in in the neighborhood, right? So that's one thing.

The second thing is that when new housing goes in, it is going to tend to be at the top of the market because that's where developers can make the most profit. So it is going to tend to be at the top of the market unless there are government subsidies that are making it more affordable, right? So if it's at the top of the market, one of the things that happens is the person who moves in to that luxury housing was going to live somewhere regardless, right? And that somewhere would often have been, well, I'll buy a cute older house in the neighborhood and I'll renovate it. And maybe it was a two-family house or a three-family house, so I'll make it into a bigger one-family house. I'll make it more to my high-end tastes. And by doing so, the people who are renting it now will have to essentially leave, right?

That is interrupted if new housing becomes available that the high-end person finds more desirable, right? They can move into that new unit rather than buying or renting and renovating an older unit that someone else is now living in. The other thing that happens is when that person moves into the new housing, they leave an apartment empty. Somebody moves into that and the chain goes on down however long it lasts, right?

And one of the things that the new research is showing is within basically three moves, the people who are moving in to the apartments left vacant by somebody moving up the housing ladder are people who are from below median income neighborhoods. So, the poorer neighborhoods, people are moving into the homes that are made available, right? So, it's just not the case that building luxury does not help other segments of the market. It does by this moving chain and by also affecting the rents of the competitors, right? The surrounding properties in the neighborhood.

WHEELER:

So in Arcata, something that I think about is if we were to build new housing, if we were to build a number of one and two bedroom apartments, there are a number of existing houses that are functionally broken up and turned into little mini apartments because students get together and they rent one large house. And so we also have this effect when these folks are moving from that house into these new apartments, that house becomes available again too. And it can become available for somebody who wants to buy it, or it could become available for other renters. We increase the total amount of housing stock. And so one criticism that we often hear is that, well, we don't present ownership opportunities through these new apartments, but we can create ownership opportunities by freeing up existing housing stock that is historically single family homes that have been de facto become apartments. So we have really interesting and complex market dynamics here. And maybe you can talk about that, the difficulty in actually studying how changes in land use policy impact price, because there are so many variables that are occurring at the same time. So what does a study of price changes of supply and how it impacts housing prices, how do these studies work? What does the data kind of look like?

BEEN:

That's a great question. So, look, often you will see somebody say, new housing went in, rents increased, or housing prices for sale, home prices fell, or they rose, or whatever, and you see a correlation, but you have no idea whether that means that the new housing caused whatever you're seeing, or if it's totally unrelated, or only partly responsible, that kind of thing. So, in order to really peel apart what is causing, when new housing is built, what does it cause to happen, you really have to look for ways of isolating what was already going on in the community, because developers will build where they think the demand is, right? And so, if there is already demand, prices are going to be going up anyway, right? And so, you need to isolate that out.

So, what researchers have to do is they have to look for essentially something that's random, right? That you can focus on that random event and say, okay, housing was built here randomly, or because of some random event, what happened to the surrounding area? We've isolated out, it wasn't about prior demand, it wasn't about other things going on in the community, something random caused that housing to be built in this place at that time, for whatever reason, right? And then what you do is you compare areas where that random event happened versus other areas that were on the same trend as the area that got the new housing, and you see, well, how did the trends change in those two different neighborhoods?

So, the best, I think the clearest example is a great study in San Francisco. In San Francisco, very hard to build, there's rent regulation, there's all kinds of zoning restrictions, it's extremely difficult to build. But what one researcher did was to realize that there were buildings being destroyed by fires. Fires are pretty random, right? I mean, if it's arson, that's not random, but most fires, luckily, are not arson, so it's pretty random. So, what she did was to say, okay, random event, a fire destroys a building, all of the sudden, it's much easier to build there than it otherwise was, because now you don't have a building that you've got to tear down, and you're already zoned for a building because it was already there, etc. So, she looked at when a building gets built because of a fire, what happens to the surrounding prices, and she found that prices declined.

WHEELER:

The eco news we're talking about the area of how housing supply impacts price with Vicki being faculty director of NYU's Furman Center for Real Estate and Urban Policy.

BEEN:

So that's a good example of randomness. Other researchers use, for example, weather delays, right? If you look in one part of the state, a weather delay could hold up construction of homes for three months, right? Whereas in a comparable area of the state, there was no weather delay, right? So you look at things like that. Or you look at just, again, random changes in when a building that is started construction, how long it takes, right? Building should take relatively the same amount of time, but some run into foundation problems and some run into labor problems and some have supply chain problems. Those are random events. And so by looking at differences in how long it takes a building to go from permit to actual occupancy, you can introduce some of that randomness. Does that make sense?

WHEELER:

That does make sense. One thing that I feel like has started to come up and is a topic of debate locally, and I'd really appreciate your thoughts on this, is inclusionary zoning, which is a requirement that we have a certain amount of housing be dedicated for affordable housing. So deed-restricted affordable housing. So let's say if you wanted to build a new building, you'd have to have 5% of the units be deed-restricted for low-income folks to be able to rent those. And this is an intervention that some folks are proposing, perhaps in good faith, perhaps not, to try to address issues or perceived issues that we're just building luxury housing or we're building to the top end of the market. But it can backfire, or there's a risk that it backfires, right? Because we're changing the market forces that drive housing. What research has been done or what is the state of research on inclusionary zoning and how it impacts developers and total housing production and therefore housing costs?

BEEN:

So it's a great topic. It's a great set of really interesting issues. And I have to disclose, I served as housing commissioner for the city of New York for three years, and then as deputy mayor for housing for another two and a half years. And one of the things that we did was include a mandatory inclusionary housing requirement for everything that got built in neighborhoods that were being rezoned, right? So I have a research interest in this because I had done years of research prior to becoming housing commissioner, and then as a government official, I drove a lot of this policy. And what we found in the research and what has continued to be found is, look, it's all about setting the amount correctly, and that's difficult to do. You need to set the amount at an amount that is essentially reducing some of the profits that the developer is making, but not reducing them to the point where the developer will say, I'd rather put my money in the stock market, right, or wherever else.

And that's hard to do because, for example, when we set the inclusionary mandate in New York City in 2015, interest rates were one and two percent. Now they're six and seven percent, right? And so the calculation has dramatically changed. So it's a policy that can do good in the sense of it brings economic diversity to neighborhoods. When something gets built, there will always be some amount of affordable housing that comes along with it. But it only works if you can set the price, which is really what we're talking about, set the price correctly. And where you don't set the price correctly, you will end up getting nothing, right? And so throughout the debate about inclusionary housing in New York City, I had to say to advocates over and over again, look, 50 percent of nothing is nothing, right? 20 percent of 100 is 20, and 20 is more than nothing. So let's be reasonable here. But you have advocates like to push. That's what their job is, right? They like to push.

And so you often end up in a situation where people acting in good faith are setting the price too high or setting the price too inflexibly so that it can't adjust to changes in the market. So the most recent research is in Seattle, where they imposed mandatory inclusionary, set the price too high, but only imposed it for like an oval part or sort of a strip of downtown Seattle, right? Right outside that strip, you're seeing development. Inside the strip, you're not seeing anything. And that's what can happen if you set the price incorrectly or if you don't provide some flexibility measures that allow it to adjust to things like higher interest rates.

WHEELER:

Well that is such a great answer. Matt?

SIMMONS:

I guess I just wanted to tie this back to what we were talking about earlier. I think if you're a supply skeptic and you believe that any new housing supply could raise the rents or won't affect the rents, you might be more willing to make that bet at a different place than if you believe that new housing supply actually could reduce rents, right? Because you gave the example, and I've actually made this exact point in a planning commission meeting, so I'm glad to hear that experts are making it as well, of 20% of 100 is 20, but 50% of zero is zero. But if you believe that all that new housing is actually increasing the rents, then that calculus starts to look different.

And so then some of the research you've done looking at that supply skepticism actually ties directly back into this question of where we should be setting the inclusionary zoning rate, because you gotta factor in, okay, yeah, some of this will be higher-end housing, maybe because it's nice housing, also maybe just because it's new. We haven't really talked about defining luxury housing yet, but I give the example of new models of cars, right? Like a 2024 Corolla sells for more than a 1980 Corolla. It's not necessarily just because of the new gizmos and gadgets they put in the car, it's also just because it's new, right? And 40 years from now, it'll be the cheap 2024 Corolla compared to the 2064 Corolla. Wow, okay. So anyway, I just wanted to make that point more.

WHEELER:

Oh, thank you. I appreciate that point.

BEEN:

Yeah, actually two things to that. One is that you're you're exactly right. And one of the things that I find frustrating about this argument is that some of the same people who will say we shouldn't have any new luxury housing are exactly the people who are asking the city when I was in city government to preserve housing that is now affordable, but was luxury when it was built. 20 years ago, New York. New York had a program in through the 50s through really the 80s called Mitchell-Lama. And everybody says, why can't we have Mitchell-Lama housing again? Mitchell-Lama housing is now actually fairly low income. And in many places, it's quite low income. But when it started out, it was upper middle class income or at the very least middle class income. And now it has become affordable housing. It has become low income housing. So you have to also be thinking about the future and your kids and your grandkids.

So that's one thing. A second thing is it is the case that the whole inclusionary housing issue has become misused in many cases. I mean, traditionally, some inclusionary housing requirements were quite exclusionary, right? They were imposed exactly to keep apartments out of suburban areas. You set the price too high, they won't come, they won't get built. And so we studied the municipalities around Boston, and we found that almost every jurisdiction that had an inclusionary housing requirement was getting no apartments. Right. That was the intent. And you're hearing more and more people say, well, I'm for affordable housing, so 70% of it should be affordable or 100% of it should be affordable at the developer's expense. And of course, that's not going to happen. Right. So it is being misused.

WHEELER:

Vicki, if I could ask you to take off your academic hat where you're studying the relationship of supply and demand, and put on an advocate hat. Let's say that we want to reduce the cost of housing, that we recognize that more housing is good. How should we do this? How do cities actually get production? Because that's another part of this puzzle, is that we need to have interventions. We have a system that's not working. We need to change the system. What are the changes that need to happen in an average American city to see production occur?

BEEN:

Okay. So, two things really drive whether development happens. One is the time it takes to get in the ground and then finish, right? And the second is the uncertainty, the risk. And so, the focus has to be on reducing the time and reducing the uncertainty. And that means not having lots of different veto points where somebody can come in and say, no, I don't want this in my neighborhood, right? You need to listen to the neighborhood. You need to respond to what the neighborhood's concerns are. But you need to limit the number of veto points that can happen, right? So, when you have environmental impact review and racial equity review and this kind of review and that kind of review, there's a lot of uncertainty and a lot of time that's built into that. So, you need to try to pare all that back, do those kinds of reviews, study the environmental impact of housing writ large, as opposed to project by project, so that you take out the uncertainty and you make it possible for developers to know, if I invest in getting my permit and getting this project started and buying the land, I'm going to be able to finish it in a reasonable amount of time, right?

And so, that means making more things as of right and less discretionary. It means, even when you have discretionary reviews, limiting the kinds of discretion that can be exercised, right? So, California has, as you know, said it has to be objective, right? It can't be, well, I don't like the way that looks, or I think that's a historic building because somebody, sometimes, somewhere thought about it as a place where they could go to do whatever, right? So, you really have to limit those kinds of discretionary decision points that get made and then just try to make as much as possible available for development within constraints, right? Within known constraints. It's the uncertainty and the time it takes to work out that uncertainty that kills projects. So, whatever you can do to do those kinds of things, more as of right, allow more density in lower density neighborhoods so that somebody can build three units instead of one unit, right? But know that they can do that. That's what is so important.

WHEELER:

I love that. And what's encouraging is that's what it sounds like our local jurisdictions are trying to do, right? That is what is behind the gateway area plan in Arcata, which is going to have a lot more by right development of taller buildings, of denser housing. That is what the city of Eureka has already done in its general plan housing element, which is, again, also allowed more by right development in areas appropriately zoned for higher density development. I think the county could go a little bit further, but that's what is in discussion for the McKinleyville Town Center. So we're heading in the right direction, and that's the good news. And so decision makers, policy people, nerds out there who want to see more housing built, take heart. We're heading in the right direction, and let's see the task through to completion. And that's really, let's see the task through to completion, because it's now year three of the gateway area plan. It was supposed to be a year. So all right. Well, oh, shoot. Unfortunately, we are out of time. Vicki, thank you so much for joining the Econews Report. It was really a pleasure to have you on.

BEEN:

So much fun. Thanks so much and good luck with everything.

WHEELER:

Thank you. And join us again on this channel next week for more environmental news from the North Coast, California.