In a recent article, I wrote about homelessness and mentioned that the building boom of new (mostly luxury) apartments hasn’t positively affected One Night Count numbers yet. Apparently, this is contentious. Urbanists are supposed to only celebrate the primal economic forces of supply and demand; critiquing the market is grounds for excommunication.

I’m not ready to concede the point however because it seems doubtful that the free market can address the needs of low-income Seattleites without being prodded to do so by the government. That’s what HALA seeks to do. Development-friendly rezones are paired with a commercial linkages fee and mandatory inclusionary zoning in order to ensure the next wave of development includes affordable housing. Time will tell if HALA is fully implemented and if the policies are sufficient to reduce homelessness and ensure that Seattle grows as a city for people of all incomes, not just the wealthy.

The lack of affordable housing is a root cause of homelessness. To assume the market alone can solve homelessness — and the twin problem of the housing shortage in the low rent market  — through supply has never been demonstrated in the real world. It’s a nice theory — a good topic for an Ayn Rand book. If it were that simple.

Rent Burden

A heavily rent-burdened working class means every year more people lose their housing and slip into homelessness, rapidly replacing the lucky few that claw themselves out of it. Based on 2013 Census data, 20% of Seattle renters are severely rent-burdened, meaning more than 50% of their income is spent on rent and utilities. The volatile combination of stagnating wages and soaring housing costs has led to an explosion in homelessness in Seattle and in cities across the country.

It should be noted that the percentage of rent-burdened tenants in Seattle has been trending down from a high of 26% in 2005. Gene Balk offered this explanation in a Seattle Times piece:

 

With that sharp decline, Seattle now has the smallest percentage of severely rent-burdened households among major U.S. cities. That may sound counterintuitive, considering the skyrocketing rents here. But it’s more than likely that those high rents are actually the explanation: As the city becomes increasingly expensive, the most vulnerable renters are being priced out. They’re leaving — hence, the declining numbers.

Gene Balk might not see any problem with low-income tenants, many of them minorities, relocating to the suburbs: “[I]f you’re forking over half your income in rent, leaving could be your best option. There are places a lot cheaper to live outside the city.” However, it’s not clear that the tenants themselves feel that way. One drawback of suburban housing is that it often comes with a longer commute. If a tenant is able to go without a car in the city but needs to buy one to get around the suburbs, then the savings in housing costs are going to be canceled out by increased transportation costs. That’s why Balk’s solution of ‘let them move to the suburbs’ may not work well for some renters. Plus, it might lead to Seattle becoming an even whiter city than it’s already is. Seattle has an image of itself as a progressive pluralistic utopia. It’s increasingly turning into a wealthy white enclave.

Filtering: Not Much Help For Low-Income Renters

Odin Apartments is recent addition to the Ballard rental market, which leads the city with a 17% vacancy rate.
Odin Apartments is a recent addition to the Ballard rental market, which leads the city with a 17% vacancy rate. If we were to expect to see downward price pressure anywhere, it’d be in high vacancy Ballard. However, prices are still high. Studios start at $1,542 at Odin.

Supply-side economists rely on filtering to explain how new construction — which focuses on luxury units — helps create more affordable units in the low end. Building high-end units keeps high-income people from bidding up the prices of mid-range units. In the longer term, new units age; their relative value decreases, and they could filter into mid-range market, easing the housing pressure in that price range. The question is: do mid-range units filter into affordable low-end housing? If so, do enough filter down to take place of the low-end housing lost to be redevelopment for high-end housing? The data — rapidly rising rents and homelessness rates — suggests filtering isn’t sufficient to take care of the housing crisis, at least at our current rate of supply growth.

If Seattle existed in a vacuum, filtering would work better. The demand would be more stable, and aging units would have the time to filter down to low-income renters. However, the reality is that Seattle’s population is growing rapidly at all income levels; tens of thousands are migrating from other cities seeking jobs in the booming economy. Demand for Seattle housing is so high that supply has a hard time keeping up.

Even in a booming economy with sky-high demand, developers are extremely careful to avoid oversupply. We saw Puget Sound Business Journal sound the alarm bells at the end of 2015 when the luxury market fundamentals lagged ever so slightly. Generally, supply rarely outstrips demand too significantly except when demand plummets unexpectedly, such as during an economic recession. Even when recession hits, developers adjust quickly and bail on the projects they have in the pipeline since they fear they will not garner the rents they want. The Civic Square tower might be standing today if the 2008 recession had not hit, drying up financing and stalling the project.

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Fear of oversupply and lack of financing was the first the thing to stall the Civic Square project. Now political scandal has further delayed it. (GGLO and Foster + Partners)

Zoning Isn’t The Only Thing Constraining The Housing Market

Seattle is a supply-constrained market. Some libertarians have suggested zoning restrictions are the only thing constraining the supply, but that’s not necessarily true. Easing zoning restrictions is certainly part of the solution, but it’s a necessary but not sufficient condition for affordable housing.

Sound_Transit_map-3-01
By 2023, North Link will reach Shoreline, Mountlake Terrace and Lynnwood. South Link will reach beyond SeaTac to Des Moines, Kent, and Federal Way. East Link will reach Mercer Island, Bellevue, and Redmond. (Zach Shaner)

Seattle is but 84 square miles. Even with liberalized zoning, land and physics eventually will become nearly as constraining as zoning is now. We have the ability to build super tall, but to do so is extremely expensive. Supertall skyscrapers are suited for luxury units, but ill-suited for affordable units since low rents cannot cover the high costs of engineering a supertall building. Large projects also need to prove they are a safe investment to the banks and investors financing them, and serving poor tenants rarely fits the bill. In the condo market, strict laws demanding a very high quality product and making it very easy to sue cause it to be challenging to serving the low- and middle-income markets where the profit margins can be tighter.

Land needs could also be met by the Seattle suburbs. Unfortunately, the transit network is weaker in the suburbs. To be well suited for dense mixed-use development, the suburbs need high capacity transit. Sound Transit is building it to select suburban neighborhoods thanks to North Link, South Link, and East Link, but it seems doubtful these three light rail lines will open up enough suburban real estate to dense mixed-income development to turn the tide.

To compound matters, the current political reality — which isn’t great in Seattle — is even worse in many suburbs where the loudest voices are dead set against multi-family development. Mercer Island, for example, nearly passed a moratorium on all residential development in December, avoiding that fate by one vote. There are some shining exceptions to this trend, but the embrace of dense transit-oriented development will have to be wide-scale enough to appreciably ease the housing pressure in the wider market for urban housing in the Seattle metropolitan area.

How To Keep The Invisible Hand From Choking Us

We need to build more housing supply. Pointing out the limitations of the market is not to argue against more supply. Even if filtering isn’t happening sufficiently, we still need to keep up a healthy growth rate or high-income people will move into lower markets and displacement will get even worse. In addition to making zoning and land use changes that encourage housing growth, the government must tilt the scales toward affordable housing with interventions like mandatory inclusionary zoning and the commercial linkage fee.

Some market urbanists opposed the commercial linkage fee for being “anti-development;” however, the fee is modest in the scheme of multi-million dollar commercial development and well worth the added zoning capacity to which it is linked. Market interventions like the linkage fee are key to guaranteeing HALA boosts of affordable housing. More market-rate supply alone might not be a huge help to people below the area median income, especially in the short term. Filtering takes time to work; low-income folks don’t have the luxury of time.

Emphasizing interventions could be crucial in convincing skeptics that liberalized zoning won’t lead to the tear down of more old affordable units than are replaced with HALA programs. Saying the solution has to be not just supply, but supply and market interventions may get me kicked out of some urbanist circles, but it’s a better policy.

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52 COMMENTS

  1. Gene Balk is a friend; a smart, humane guy. If you paid closer attention to his column – maybe the large chip on your shoulder is blocking the view? – you’d pick up that he’s reporting what’s happening, not advocating for it.

    Also, what Zach said.

    There are sufficient preachy, clueless “activists” in Seattle. Please choose another path, one way or another.

  2. This article takes a long time to say that housing supply is in fact a solution and in the meantime it provides a lot of arguments for those looking to restrict supply to say “see, we can’t let the city continue to grow wildly!”.

    I’m not saying there’s not room for ‘urbanists’ to disagree, I’m just saying that it would be good to start off by saying that lack of supply does matter and does very much impact displacement, instead of burying it deep in the article.

    • Trust me people lining up against the rezones already found all of these arguments and then some. I think we as urbanists have to prepare ourselves to win those arguments and that involves making a nuanced case that addresses those points rather than trying to win on abstract economic theory alone.

  3. Who are these libertarians you’re referring to? That’s just the first of like 90 straw men in this short piece. Absolutely no one thinks that deregulating land use will solve all homelessness. This piece reads incredibly dishonest and doesn’t want to deal with the ACTUAL arguments urbanists are putting forward.

    • I really want urbanists to work together. The idea that you’re only a true urbanist is you’re a hardcore supplysider is a detriment to that in my opinion and that what this piece was about. I suspect we agree on the vast majority of HALA.

      • I’m sure we do! But you can’t write a hit piece without engaging in actual arguments actual people are making without expecting pushback. You should feel bad writing a piece arguing against a strawman.
        Exactly 0 people in Seattle are “hardcore supplysider[s]”. That’s another strawman. ENGAGE WITH ACTUAL ARUGMENTS.

        • You’re welcome to hide behind a straw man accusation all you want, but plenty of people were making the case commercial linkage fee is going to significantly limit supply and be counterproductive. That is one real area of disagreement. Some people think market rate housing is better than MIZ at reducing displacement. I’m skeptical that would be true in Seattle, and I like the concept of selling the upzones with MIZ because it undercuts a anti-upzone talking point and at 5% likely wouldn’t be the difference maker in projects not penciling out.

  4. “The data — rapidly rising rents and homelessness rates — suggests filtering isn’t sufficient to take care of the housing crisis” Surely you see that adding jobs at twice the rate as we add housing can not drop rents, right? Unless we come close to catching up with job growth rents will rise. That “data” doesn’t imply anything about filtering – it just shows that we have a housing shortage. That housing shortage is self-imposed.

    “Seattle is but 84 square miles. Even with liberalized zoning, land and physics eventually will become nearly as constraining as zoning is now.” Don’t be chicken little about Seattle being too dense for “land and physics”. It’s obviously not true. 65% of our land area is taken up by single family homes compared to 13% zoned multifamily (and that includes low-rise and mid-rise).

    “Land needs could also be met by the Seattle suburbs.” Please don’t add to the sprawl machine. Not only is this a nightmare for the environment, you’re wasting people’s lives commuting. The expense and time impact of a long commute is a burden on the poor, and if you reduce the time impact you’ll see the poor displaced even further as less-poor move in near transit stations.

    (makes strong attempt to find common ground)

    One thing I agree with is that market rate housing will never solve homelessness, and is not the complete* solution for the less employable. We absolutely need government programs and subsidies to build housing for these populations. HALA is doubling the housing levy, and I fully support that and I support strong programs to help those that need help.

    But even there we disagree on the means. You would tax development to pay for it, which leaves us with fewer roofs over people’s heads. If you want to make sure everyone can afford an apple shortage it’s a bit crazy to tax apple growers to fund new apple farms. Tax everyone – not only is the pool of money much larger, you aren’t reducing the incentive to grow apples. If you’re really trying to tax land value, then tax land value. Not development.

    Every new unit built puts a roof over someone’s head. Every unit you suppress leads to displacement.

    * I will note that when you’re building subsidized housing you’re still competing for land on the open market. Know a way of dropping land prices and thereby allowing more subsidized housing to be built with your limited funds? Upzone to allow more zoned capacity.

    • If we had a Kia shortage we might actually want to tax Mercedes. Not all markets are commodity markets. Housing is not a basket of apples. There are other fruits too.

      • No. If your Mercedes tax drops the number of cars produced overall, the cost of Kias will rise. If you think rich drivers will just start walking if they can’t buy a Mercedes you’re kidding yourself. They’ll downgrade to a Kia before they’ll walk.

        Housing acts the same way. Drop the picture in your head of the CEO with a downtown luxury condo. The people affected are those that would barely afford a new condo. Make them more expensive and they don’t give up and leave the city, they buy a nice used place. And on down. The total number of units we have is the only number that matters. Add more, and those that would have not afforded a home at the bottom can suddenly make rent. Add less and they have to find some other way to get by.

        • But if your point is that we shouldn’t be encouraging the sprawl machine and externalizing our poverty to the suburbs, a huge boom in luxury market might give Seattle a lot of Mercedes, but the Kias will be in the suburbs. We are already seeing it happen. South King County has way more low income households and minority households than Seattle.

          Some people are cool with Seattle becoming a lot wealthier and letting South King handle the poverty and the diversity. I think Seattle should try to grow in a mixed income way. MIZ and the linkage fee guarantee that will happen even if so many jobs are added that the housing growth never surpasses the job growth.

          I’m a huge fan of density but acting like the modest commercial linkage fee and 5% MIZ is going to halt development is crazy.

          • When the city’s analysis of linkage fees and MIZ starts at maximizing tax returns and not maximizing the number of units produced, then it’s doomed to fail from the get go.

          • If you read the linkage fee analysis, you’ll see the variable they try to maximize is the amount produced by the linkage fee. If you start with that, you’re going to get the wrong answer. And indeed, they did.

          • I don’t think they started with that assumption. There were assumptioms about normal developer profit margins that came from surveys of developers, which drove the allowable in-lieu fee.

            And I definitely would have remembered if they were trying to maximize taxes which doesn’t even make sense in our budget-based property tax system.

          • ” a huge boom in luxury market might give Seattle a lot of Mercedes, but the Kias will be in the suburbs” Not building these Mercades in Seattle won’t make the rich move to the suburbs – they’ll just displace the Kia drivers.

            ” the modest commercial linkage fee and 5% MIZ is going to halt development is crazy” I don’t think anyone’s arguing that. Raising the price to make something decreases how much is produced in a given market, but doesn’t necessarily stop it completely. The question you have to ask is how many units total will we end up with in each scenario? Taxing to build units probably leaves us with a few less units – most of the same money would be spent building units, but you lose some of the value to the inefficiency of transfer (and the fact that government subsidized projects are costing as much as “luxury” units with lower quality results). I don’t think this is the end of the world – we’ll only be left with a little worse housing problem than we have now. But it’s a big political show where everyone thinks they’re solving the problem while it’s actually getting worse. Soon we’ll find a decade has passed and we’re in a worse position than we are today.

        • If all housing is interchangeable then, yes, you are right. But it’s not. They aren’t called submarkets for nothing.

          Do you think Class A office tenants rent Class B office? I’m not saying that filtering doesn’t happen or that it is not a really important source of affordable housing, just that it is not frictionless as hardcore supply siders seem to think.

          And I’d like to have a more honest debate without having to tackle extreme and unfounded assumptions that any real estate professional would laugh at.

          • In a supply-constrained market Class B offices will upgrade their space to make it Class A. I’ve worked on exactly that project many times.

          • Those are expensive and often impossible upgrades. And good luck getting a tenant like Russel or Amazon in there. It’s frictionful, which is my point about filtering. There is some ratio that tells us how much affordable housing new lux housing saves. It is less than 1 and more than 0. That ratio, if we found it, could drive a lot of good policy.

          • “There is some ratio that tells us how much affordable housing new lux housing saves. It is less than 1 and more than 0.”

            It’s very close to 1 when we’re in a supply constrained market. You’ve switched to office space, but let’s go back to residential. Pretend you’re in the market for a “luxury” apartment, and prices are high enough that you can’t afford any. But you have a job in Seattle. Would you rather move to Portland and leave your job rather than rent an existing apartment? Of course not. Nobody does that. And if they did, the job they left would hire someone new, who would be looking for an apartment.

            What happens in reality is that living units are almost infinitely fungible. I’ve seen very poor people living in what used to be luxury hotel rooms when the bottom fell out of a market. I’ve seen people pay a million dollars for something that was ordered out of a Sears catalog. I’ve seen the rich live in warehouses and old fire stations, and the poor live in old mansions.

            Build units of any kind in Seattle, and more people will afford to live here.

        • What about a Mercedes tax that is used to fund Kia production? Additionally, what if the automaker has discontinued Kias because they no longer “pencil out?” That doesn’t reduce the overall number of cars, right?

          • If the Mercedes tax funds Kia production, but Kias cost as much to produce as Mercedes (as is true with subsidized housing), you’ll end up with fewer cars. There is loss in this transaction.

          • And if the Kia cost less? Or costs the same but provides a social value, not reflected in the cost, that is superior to the social value of the Mercedes?

            And then consider (and I apologize because the analogy falls apart here) if you think the Mercedes tax comes out of land profits because of the unique way land captures value. So that even though you are taxing Mercedes you are really taxing land windfalls that have no effect on Mercedes production.

  5. What a load of crap.

    Yes, there are physical and financial limits to how much supply you can get by massively liberalizing zoning. But those limits are so high compared to now that it’s like saying exercising your body now isn’t worth it because the heat death of the universe is inevitable.

    • No I said it was still worth it. Liberalize the zoning. Just don’t expect the market to solve homelessness and low-income housing without intervention.

      • If 9 of your first 10 answers on this aren’t “massively increase supply”, you’re crazy.

        And massively increasing supply will help low-income housing. It won’t do anything about the most desperate of homeless people directly, but it will help even them indirectly by making the acquisition of housing for them by others much cheaper.

        • Michael Bloomberg had this exact policy for 12 years in New York. It did nothing for affordability. If you care about affordable housing neither the neo-liberal approach of Bloomberg nor the local control in the Bay Area will have 9 of your 10 first answers.

          • That link says 1.7% net FAR change in first 5(?) years in office. Concentrated in Manhattan and adjacent areas, it appears.

          • Not sure about net zoning capacity change (I’ve looked before; not sure if anyone has calculated it; the planning dept does not). But Bloomberg was known for getting big developments through and was known as a very pro-dev mayor. The downzomes were in typically established neighborhoods with less potential for rapid growth (not the industrial and poor neighborhoods that were upzoned).

            In any case, population went up 280,000 and housing units about 220,000 over his mayorship. It was a major development boom under a pro-development mayor.

          • What drops rents is additional zoned capacity. Only building units as rents rise will never catch up to demand (though it sure beats not building those units!). As rents rise you see more and more projects penciling out under the current restrictions. Only by easing these restrictions (upzoning, higher FAR, subsidizing, etc.) do you see these projects penciling at cheaper rents.

          • Broham, if you don’t build new housing units, then of course population increase will be muted. That’s because the law doesn’t allow for room to be made for those who desire to live in the city. Compare NYC employment growth instead of population and you’ll see how much development is needed to meet actual demand.

          • How many people do you think live in those new housing units?

            Also note Zach’s comment above about additional demand for housing from people who simply couldn’t move into the city and were outbid by those who did.

          • At 1.83 plus additional unfulfilled demand from folks commuting in, I can easily see how 220,000 new units with 280,000 new residents would not lower prices or even keep them steady.

          • Bloomberg did not. Not even close. You’re like our local NIMBYs who point to 5 new housing units being created, prices shooting up, and thinking they’ve disproved supply and demand. Left unsaid was the fact that 100 new people moved to the area seeking housing at the same time, and 95 units were stopped by suburban zoning.

          • That Bloomberg was a pro-development mayor is not controversial. I don’t know why you would take such an extreme opposite position.

          • Bloomberg was able to get 5 new units built, in the analogy I use above, which is better than somebody getting 0 units built, for sure, but if 100 people arrive with a need for housing units, it’s not going to lower prices or even keep them steady.

          • But that analogy doesn’t reflect the reality. 280,000 net population change, 220,000 new housing units. I’d like to add demos to those numbers but what we know from Seattle’s boom and our own permit data is that demos are relatively small compared to new construction.

          • Between ’04 and ’08 employment in NYC went up by 700,000. I don’t know the exact numbers over your timespan, but the numbers are large compared to the number of new housing units. If the number of new housing units doesn’t match the number of new jobs, you get increasing rents and displacement out of the city.

          • Cities always concentrate jobs. We should expect jobs to be much greater than housing in metro centers. It’s the nature of the bid rent curve. Jobs are important to look at but we shouldn’t expect housing in city centers to match jobs in city centers. Housing simply can’t compete no matter how liberalized our land use is.

          • Not with that attitude it can’t. 🙂 We can pick that discussion back up once we have more than 13% of our land area taken up by multifamily zoning.

            As long as we have more households that want to live in Seattle than we have homes, we have displacement. Adding jobs without adding as many homes increases that displacement.

    • With vacancy at 3.5-4%, how much more market housing do you think developers would build with doubling zoning capacity overnight?

      • A ton! You’d see property values drop dramatically overnight. That would correspond to much cheaper price to build housing, which would drop the rent needed to payback said development. Suddenly a lot of properties would be able to pencil out.

        But what’s your point. That 3.5% is a high vacancy? It’s not.

        • It is low but not very low. The vacancy rate is a good indicator of how supply-constrained we are. Natural vacancy rate is about 5% in Seattle. Closing the gap from 3.5% to 5.0% gives us 2250 units — not insignificant! — but not nearly the transformation supply siders seem to think it will be. And that’s only if the low vacancy rate is due to regulatory restrictions. If you ask property managers or developers they will tell you it was unanticipated Amazon hiring.

          • The market doesn’t work like that. Adding 2250 units doesn’t get you 5% vacancy – those units get filled! What you’re seeing with the 3.5% number includes: new units not yet on the market, units in transition (one tenant moved out, next tenant not yet in), and landlords that are prospecting for higher rents. You’ll never get to zero because of these three factors, but adding units doesn’t linearly add vacancy. Depending on demand and the magnitude of these three factors it’s possible adding 2250 units will leave you with the same vacancy rate. Assuming demand remains unchanged while you’re adding these units, rents would go down under this scenario.

            As long as there are more people that want to live in Seattle than there are homes, you’d expect a low vacancy rate no matter the amount of housing supplied. Except in the short term, it benefits landlords to rent out their units 100% of the time.

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