On a recent trip a friend of mine suggested that, "Affordable housing is whatever I am willing to pay for it."

I have to admit I laughed when he said it.  Call me cold.  But the idea that government can or should successfully dictate housing costs in any particular market goes against my ideology.  However, as a planning commissioner I am in the middle of the affordable housing debate all the time.  And since the other leaders in my city don’t hold my philosophy, I am usually trying to improve the plans and programs rather than block them.

So whenever someone who I respect comes up with a cogent commentary on affordable housing I read it with interest.  Diane Harkey is a Dana Point city councilwoman and financial whiz and one of the few elected officials I know that has a command of how our economy really works.  Here are her thoughts on the subject:

The Affordable Housing Dilemma…or the problem with living in paradise…

We love to read about how much our homes have appreciated – how smart we were to buy when we did! But what about our kids, and what about our workforce?  How will they ever afford to buy a home? Moreover, how do cities meet state affordable housing goals when our equity, the source of our wealth and financial security impedes future generations? The answer is clear, not without our help and some creative solutions.

While not usually heeded, the first rule in government is “do no harm.” So, when I hear, “Let’s increase fees on developers because they make huge profits,” I get a little nervous. Some fundamental economic rules make this simple solution a bit complex. What drives up the price of any freely traded product?  High demand and limited supply.  We all know undeveloped land along the coast and in OC is scarce.  What keeps prices in check? Competition. 

Homebuilding is an industry joined by nearly everyone with a hammer and a pick-up truck in good times. When the market begins to soften, many close up shop. Like any industry, unless a profit is realized, there’s no way or reason to keep the doors open.  Businesses (and investors) must make a profit to pay themselves and employ people, who in turn buy goods, that entice more entrepreneurs to fund business ventures, that hire more people…. and so on and so forth.

With the market noticeably slowing, and Moody’s and other investment firms predicting that Southern California will see prices dropping by 10% next year, builder profits are (or soon will be) shrinking and if we are in a traditional down-cycle, many will eventually exit the market.  However, the overall price of land and/or housing in OC will still remain out of reach to entry level buyers, and it won’t be because builders are making money. 

Many cities consider allowing density bonuses (building more units, usually smaller, taller and wider with less parking on a piece of land) and/or deciding to charge a substantial ($25,000 to $300,000+ per unit) in-lieu fee to builders to subsidize housing elsewhere. Let’s analyze these “solutions”. Any good business owner should know the price he can charge for his product. He then subtracts the cost of producing the unit, and what’s left over is profit, to pay himself for his work. 

If there is little or no profit, he’ll need to find another job. Hence, we can see how with fees the cost of producing the home is greater, which increases the cost of producing housing and/or can actually decrease the amount of housing produced.  Not our goal. Increasing density would seem to work but, we don’t want our views blocked or more traffic.

Living in paradise is tough!

So, how do we fix it? Not easily.  Some cities have redevelopment monies that they can use to buy-down the price of land to make an affordable project feasible for a private developer.  Others donate a piece of land, and work with a non-profit to build below-market rate units. Still others work with employers to find solutions that help meet the workforce needs. As for our kids—unless we share our nest egg to keep them near-by, they’ll probably have to build up equity the old fashioned way, like we did. They may even discover a new paradise!

This entry was posted on Tuesday, October 17th, 2006 at 12:00 am and is filed under Blog Posts.