How Housing Markets Aren’t Like Musical Chairs

Women play musical chairs in Bangladesh. (Moheen Reeyad, Wikipedia Commons)

That The Urbanist disagrees with Sightline Institute about Seattle’s Mandatory Housing Affordability (MHA) program is hardly news. I’ll try not to beat a dead horse. The latest piece from Sightline’s Dan Bertolet presents his “static pro forma” numbers in the low-rise zones. Bertolet’s long-running argument that the program would work better as a “naked upzone” with no MHA requirement is a bold claim that deserves closer examination and we can look at the upzone without MHA numbers he provided to illustrate the point.

Pro Formas Are A Limited Snapshot

Pro formas–the budgeting spreadsheets developers use to demonstrate the financial viability of their projects to banks and investors–are a finicky thing to get right, even for somebody who does them full-time. And even when they’re right, they represent a snapshot in time rather than a guarantee of what will happen in the future. Sometimes, rents go up even in the time it takes from breaking ground to renting out a completed project. That means the pro forma indicating a certain profit level may reap higher profits, and the reverse is also possible. A convincing pro forma is crucial for a project to secure financing, but they don’t necessarily chart a project’s real future, especially if market conditions change unexpectedly.

Notice the upzone without MHA line. (Sightline Institute)

Bertolet’s “pro forma” might not even be far off. But that he chose to start his analysis from a baseline of 15% return on investment (ROI) is arbitrary. Projects are going to come in at a spectrum of returns, and in the current boom, many projects are likely reaping higher returns than 15%. And while Sightline paints slightly diminished returns on investment for developers as a doomsday scenario, it’s not clear that it is. Notably, Sightline doesn’t include leverage (borrowing) in their “pro forma” examples instead using 100% cash on cash returns. As such Sightline’s pro formas aren’t very realistic because most developers do use borrowing to amplify their investment and decrease their personal risk. What’s more, Bertolet calculates the ROI number from year one; one year in is rather early for an investment to mature.

Hypothetical pro formas by people on the sidelines–while interesting–do not really rise to the level of empirical housing research. And, by the way, developers rarely release their real pro formas because they reveal a good deal about their assumptions and business practices. As for empirical research, The Urbanist’s Owen Pickford has laid out relevant studies and interviewed experts, and he concluded the research that has been done on inclusionary zoning conflicts with the narrative that it’s a fragile program; nearly all the academic research found no impact on supply, or minimal impacts from inclusionary zoning across many different designs, markets and municipalities.

Musical Chairs Analogy

The framework underlying the supply mindset is that any unit deferred or eliminated increases the cost of housing and prices somebody out. Bertolet uses the musical chairs analogy to illustrate this point: “Regulations that hold back the production of market-rate housing ultimately hurt the city’s lowest income individuals and families most through the housing market’s cruel version of musical chairs that results in fierce competition for what’s available in the city and leaves no homes for those with the least to pay for them.”

Clearly building enough housing to accommodate a growing population is a worthy and needed goal. But the musical chairs analogy falls short in a few ways:

  • This “game” can always add more “players.”
  • The new “players” tend to be wealthier and able to out-compete older players.
  • The new market-rate chairs tend to be more expensive than comparable old chairs.
  • Many of the lowest income renters already rely on reserved seats (i.e., rent-restricted units).
  • Housing consists of a series of distinct markets rather than a single unified “game.”

Therefore, helping the lowest income individuals should involve creating more rent-restricted units, not just market-rate chairs. Building rent-restricted units in booming neighborhoods (like MHA does) ensures at least a baseline level of economic mixing of classes. More sophisticated critiques of MHA have focused on how it leaves a gap between those who qualify for rent-restricted units and those who can afford market-rate units. This is a problem, but an easier one to address than the alternative of creating no new housing supply below 80% of the area median income. It takes less subsidy to help someone at a moderate income level than a low income level.

Land Ho!

Sightline’s preferred solution of just doing the upzones without MHA could very well result in a big spike in land prices. Their pro forma illustrates the point. The 15,000 square foot lot zoned LR3 gains a million dollars in value and about a quarter million dollars in absolute return in the upzone without MHA scenario. Notably, that’s assuming land costs are the same across all scenarios; on the contrary, land values are likely to respond to the zoning changes. Land sellers would note the increased value and ask for higher prices. By avoiding the affordability requirement, developers would likely end up paying more to landowners. MHA moderates the tendency for upzones to send windfalls to landowners.

Bertolet has argued higher land prices are good because it would encourage more landowners to sell to developers who then create more housing supply. This may work on a certain scale (insofar as landowners are rational actors). However, using the market to build our way to affordability runs into some problems. First, saturating the luxury market is easy enough but few developers focus on the lower-end market, and filtering takes time. Second, enough capital has to exist to build out the increased housing potential. Third, if the building binge starts working and prices flatline or even dip, developers would still have to continue building even as banks tighten credit and their pro formas start looking less enticing.

Bertolet quantified the reduction of ROI caused by MHA, but didn't consider land value changes. (Sightline Institute)
Bertolet quantified the reduction of ROI caused by MHA, but didn’t consider land value changes. (Sightline Institute)

In conclusion, Bertolet might have a minor point that the City could have been a bit more generous in the low-rise zones. But this is hardly the intractable problem he makes it out to be. For one, the City is creating additional low-rise zones with its rezone process. Some urban villages will see single-family residential zones converted to LR1 or LR2 low-rise zones, meaning Bertolet’s analysis doesn’t apply to them since single-family residential zones weren’t buildable before as multi-family apartments, anyway. In the existing low-rise areas that are getting a less dramatic 10% to 15% floor area ratio (FAR) boost, it’s possible land values will absorb some of the developer costs. Or a developer may decide a project with a slightly smaller return on investment is still worth building.

Thinking of housing as a single unified game of musical chairs leads us to overlook some factors. The fact that this game can add a lot of players means adding chairs doesn’t necessarily mean less competitive players (poorer people) won’t miss out on a chair and get eliminated from the game. That’s what we already are seeing: even as we build record numbers of apartments, increasingly poorer Seattleites are getting displaced to the suburbs, farther away from services, jobs, and the communities they’ve built. There is a possibility filtering works well and rapidly so that an influx of new market-rate units serve the least among us indirectly, but more likely we need the influx to include affordable units immediately to begin reversing the displacement trend. Inclusionary zoning serves that goal while shifting the paradigm about much needed upzones from developer giveaway to affordability tool.

Featured image is by Moheen Reeyard and used via Wikimedia Commons.

Misleading Sightline Articles Undermine Inclusionary Zoning Effort

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Doug Trumm is The Urbanist's Executive Director. An Urbanist writer since 2015, he dreams of pedestrianizing streets, blanketing the city in bus lanes, and unleashing a mass timber building spree to end the affordable housing shortage and avert our coming climate catastrophe. He graduated from the Evans School of Public Policy and Governance at the University of Washington. He lives in East Fremont and loves to explore the city on his bike.

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I do not agree with MIZ as a way to force-feed a solution.

Seattle is a growing city.. there is limited supply of ANY housing. and much more demand and growth. what are you going to do? Best solution is to adapt to it.

I worked in the bay area before for a year, it did not make sense for me financially, so i gtfo and moved back to my hometown of Seattle.

There is no one solution that can solve the problem. Washington state isn’t Texas. There is only so much land near our city centers.

In this particular situation, for better or worse, ownership of property is a solution to control rising housing costs and be able to have better control over one’s destiny.

Shane Phillips

Yeah, the arguments against the musical chairs analogy were super weak. Mostly straw men, or at the very least were nuances that most proponents of the analogy would freely acknowledge. None of them changed the basic fact that more people with less housing hurts lower-income folks the worst, and that higher-income folks always find a seat if they want one.


Meh. Rent control doesn’t work. It’s impossible to create enough “affordable” units to meet demand.

Rezones without MHA would obviously be better. It’s just a political compromise.


We know for a fact that the market can create enough housing to meet demand, because it has been doing that for the past 150 years in Seattle.

Rents have only been high for a few years due to increased employment. In that time, construction has skyrocketed to meet demand.

“Affordable” units on the other hand are being created by taxing the creation of new market rate units… so necessarily you can only produce a tiny fraction of “affordable” units relative to the number of market rate units. MHA will only ever help a relatively small number of people compared to the vast majority living in market rate units.

MHA is fine as a political compromise as long as the requirement isn’t too high, but 90% of the new units will be market rate.


‘Enough housing to meet demand’ isn’t the only measurement of a well functioning housing market. In fact, if we don’t build housing for people without money we have also met demand since they don’t create demand in the simplified 101ism view of the housing market.

It’s absurd to look at the last 3 or 4 years in this city and make the argument that the housing situation is fine. Yes, you are mostly right, that the market eventually creates enough housing in the most general sense (although it never does for people with the lowest incomes) and it appears to being doing just that in region. However, that technical observation says nothing about any of the conditions that make a housing system just or moral.

It’s also simply wrong to suggest that the housing situation in the Seattle area was fine over the last 150 years. Housing has always been segregated and income segregation is one of the most common forms of segregation. That’s why programs like these are called inclusionary zoning. Density helps inclusion but it’s not enough by itself as is obvious in nearly any large, dense metro area. And inclusion is just one example of the markets failure. In fact, the history of the housing market, including Seattle’s, is littered with horrendous failures.


I have been here for a lot more than 3 or 4 years… that’s why I have a longer term view. Prices are up now, but they have been down before, and before that they were up…. and before that they were down.

On average though, Seattle has always been about half the price of San Francisco despite being similar in many ways.

People “without money” have never been able to live in trendy Seattle neighborhoods. The cheapest housing in Seattle metro is in Snohomish and Pierce counties… most lower income people have ALWAYS commuted into the city. Including my own family when I was a kid.

A model where lower income people live in luxury apartments in trendy neighborhoods subsidized by taxes on the middle class is unrealistic. It just will create a situation where some people win a lottery and get a rent controlled apartment, but most of the middle class is forced out similar to San Francisco.

A model where we have lots of market rate apartments and condos that are affordable to the middle class, and lower income people either rent older run down apartments, or smaller apartments, or commute in from Snohomish and Pierce county… or get roommates… is the way Seattle has always worked. It is a realistic goal to return Seattle to that level of affordability.


First, Inclusionary Zoning isn’t a model where low income folks live in subsidized housing paid for with taxes. And no, it’s not unrealistic. It’s been done in over 500 municipalities. There are also other solutions, like an income tax.

Second, as my previous post stated, median rents aren’t the only problem. What you are describing is demographic sorting. That is a huge problem. The Seattle you speak of nostalgically wasn’t a great for many people. Income inequality has exacerbated problems that always existed. Seattle’s housing market has never been just, despite your attempts to paint it otherwise. It might’ve worked for your family and it might’ve worked for the white middle class but it was not just and it still isn’t.


You are misinformed.

It is subsidized housing paid for by taxes. Market rate construction is taxed, and it pays for subsidized housing. Just because you call it “inclusionary” or “affordable” doesn’t change what it is.

These same units are ALSO built with a housing levy, which is just a straight up property tax. I was MORE in favor of the housing levy since it taxes property and not construction, though even that isn’t ideal since it is still a tax on housing.

500 municipalities? I know the SF bay area has it, and they still have a terrible affordability crisis. They even have much higher contribution requirements than Seattle.

Give me a break with this “white middle class” stuff. MHA doesn’t create housing for minorities. It creates housing for people at specific income brackets, most of whom will be white. In fact, people have been complaining because many minority groups DON’T fit into these brackets.


By any reasonable definition of the word “taxes,” IZ units aren’t paid for with taxes. That law and the dictionary differentiates between taxes and fees.

Arguing over semantics is obnoxious. You know the point I’m making.


No, I genuinely have no idea what your point is.


So you don’t see “regulations that hold back the production of market-rate housing” as a particularly major issue? Given skyrocketing construction, etc., I think it should be clear that this is an opportunistic claim from the developer advocates.

Meanwhile, we offer subsidized “affordable” housing to a few lottery winners, a small fraction of those who need it, as a sop to show we care, but neither is this a path to resolving the problem.

Caught on the horns of the dilemma. When will the pretenses wear thin enough, that we have to face up to the need to manage growth itself?


Regulations DO hold back production of market rate housing. For instance, we no longer have affordable market rate housing because the city council increased the minimum size and amenities that apartments require.

Developers are not the bad guys. Developers don’t set the rent, they just build the buildings. Prices are up because we have a housing shortage plain and simple.

San Francisco is also an example of regulations holding back the production of housing. Despite enormous demand, there is almost no construction in san francisco.

“managing growth” is just a euphemism for keeping new people out of Seattle. As a Seattle native, I find it particularly galling that everyone who moved here 10 or 15 years acts like they own the place, and tries to keep the next generation of immigrants out.