High Cost of Government Housing

In our recent study on the Low-Income Housing Tax Credit (LIHTC), Vanessa Brown Calder and I discussed how subsidized housing projects usually cost more than market-based ones. There is more bureaucracy, more delays, and more micromanagement of building requirements. As in education or health care, government intervention in housing undermines cost control.

This article discusses San Diego’s efforts to supply subsidized housing, and it focuses on the cost problem. The article discusses projects financed by a combo of the LIHTC and other programs, which is apparently called a “funding lasagna.” But a “subsidy lasagna” might be more accurate.

By any measure, the city government’s efforts to help low-income families are far behind the demand for subsidies, and losing ground.

High cost has been a major factor. In recent years the public has paid luxury price tags for a handful of subsidized construction projects, draining money to build more apartments.

“They are building Cadillacs,” said Alan Nevin, director of economic and market research at Xpera Group, a building-industry consulting group.

This outcome flows from a system that evolved over years to build projects whenever public money pops up, and isn’t necessarily focused on reducing costs or producing the maximum number of apartments.

…

The most extreme example of high-end cost is found in Barrio Logan, according to figures provided by the San Diego Housing Commission.

Operating under a city contract, developers spent $46.2 million from federal, state and local sources to build 92 apartments at the Estrella del Mercado on National Avenue, which was completed in 2012. That works out to $502,000 per apartment.

…

Setting aside the Mercado project, price tags of $400,000 per subsidized unit in new complexes are the rule lately, particularly downtown. This places public housing in the same league as luxury apartments downtown, and 35 percent higher than midrange private projects in other urban neighborhoods.

Higher costs in the public sector have multiple causes. Land prices play a role, because officials want to place subsidized projects in high-cost areas. This allows low-wage workers to live near jobs.

And developer fees are much higher. Unlike private apartment builders, who count on years of rising rent to recover their investments, developers of subsidized housing require the bulk of their profits up front, because they face 55 years or more of below-market rents.

These developers must submit bids to a state agency, but those who prevail typically are chosen based on added features rather than low cost.

A third factor is government requirements. Officials typically insist on solar energy features, meeting rooms and long-lasting exteriors that aren’t always included in private developments.

In 2011, the housing commission hired Keyser Marston Associates, an industry consultant, to compare three recent subsidized projects to the costs of nearly identical developments in the private sector. The study focused on construction and development — excluding land costs.

At the Mercado, Keyser projected costs totaling $388,300 per subsidized apartment, or 31 percent more than the $297,000 price tag for an equivalent complex built for the market.

A key difference was the assumed developer fee of $2.3 million, compared with $733,000 for the market-rate project. This difference alone added nearly $24,000 to the cost of each apartment.

Also pushing up costs were financing fees, retail space and an exterior designed to last 55 years without major maintenance.

All three of the projects studied by Keyser showed similar cost inflation, but the amount varied widely.

A project on Florida Street was projected to cost 15 percent more than the market-rate equivalent, while another in Otay Mesa was 51 percent more expensive.

Incidentally, high budgeted amounts don’t insulate public projects from real-world cost creep. At the Mercado, for example, cleaning up contaminated soil helped send the project’s final price tag 7.6 percent above the housing commission’s approved budget, officials say.

In accepting higher costs, officials are trying to avoid the sort of cheap, high-density public housing projects that instantly blighted Chicago and New York in the 1970s.

“Units are being built nicer and nicer so there isn’t so much community opposition,” said Resnik, the housing federation director. “The downside of doing that is the units are too expensive. You’re in a little bit of a no-win situation.”

Advocates of government-funded construction say the projects are competitively bid and carefully monitored, with little evidence of corruption or excessive cost escalation, given their unique requirements.

“I don’t think anybody gets rich on this, but they certainly make a living,” said Chris Estes, chief executive of the National Housing Conference. “The margins are pretty lean in terms of how these properties operate. A lot of the deals that require deeper subsidy, that serve people with special needs, tend to be done by nonprofits over longer periods of time.”

To be sure, public housing costs are not always sky-high.

Particularly when they buy and renovate older complexes, San Diego officials have delivered lower costs and higher numbers.

For example, in 2010 the housing commission spent less than $204,000 for each of 171 apartments at Mariner’s Village in the Skyline-Paradise Hills neighborhood.

And it spent just $127,000 in 2012 for each of 70 senior apartments in City Heights.

City officials could help substantially more struggling families if they forgot about new construction, says Nevin, the housing economist.

“If the city is spending money, what they should be doing is buying older, market-rate units and renovating them,” he said. “You can get those for $200,000 per unit.”

The numbers bear out Nevin’s approach.

According to a commission report, the city helped developers build 501 apartments from 2007 through 2013. That’s a rate of less than 84 units a year, well below the 33-year average of 446 a year that has left thousands of qualified families on waiting lists.

On the other hand, the commission added 875 units since 2007 by buying buildings that were already built, or roughly 75 percent more units in the same six-year period.

Still, both activities require money, and that’s been in relatively short supply lately.

By far, the biggest pot of money in San Diego is filled by federal funding for vouchers, which subsidize rent payments to private landlords. And it has grown at a healthy clip, up 19 percent since 2008 to $150 million in 2013, or more than twice the rate of inflation.

“It’s probably our most effective, efficient program that serves the most people, and serves them very well,” said Richard Gentry, the housing commission’s chief executive. “Because it works so well, that’s probably why it’s one of our least well-known.”

As for other funding, in fiscal 2013 the San Diego Housing Commission received $45 million from local sources such as fees on new construction of homes and office buildings; $34 million from the federal government (in addition to $150 million for vouchers); and $2.1 million from the state, according to a May report.

Of that roughly $81 million, about $21 million went to shelter the homeless. That left $60 million available for new projects, other programs, and operating the commission, which has 260 employees.

To stretch construction dollars, the commission typically fills gaps for developers who layer federal tax credits onto a complex array of other financing to create a “funding lasagna,” as Gentry puts it.

Key to such projects are tax incentives for developers under the federal Low Income Housing Tax Credit program.

Although Congress has supported use of tax credits for 28 years, the 2008 global financial crisis put the industry into a deep freeze that’s just now thawing.

Meanwhile, direct funding to build new subsidized units has been subject to political volatility.

State housing bonds are spent. And Gov. Jerry Brown grabbed redevelopment cash to balance the state budget, a move that diverted $86 million from local governments in San Diego County this year.

Meanwhile, demand for housing assistance has grown inexorably.

If you adjust for inflation, the median income in San Diego County dropped 7 percent from 2000 to 2012, while rents increased 23 percent, according to an analysis of federal figures by the National Low Income Housing Coalition, an advocacy group.

Under the standard federal definition, housing is unaffordable if a family’s total tab for rent or mortgage, plus utilities, gobbles up more than 30 percent of their gross income (before taxes and other deductions).

For a San Diego family earning the 2012 median income of $64,000, this works out to $1,600 a month.

By necessity, officials focus on the poorest households; those earning less than half the median income.

But narrowing the scope still leaves a shortfall of 63,615 low-cost apartments right now in San Diego, according to an analysis of federal data by the California Housing Partnership Corp., an advocacy group.

Getting out of a hole this big requires policymakers to first stop digging.

Yet they hold widely divergent views on precisely how to retire their housing unaffordability shovels.

Developers and conservative politicians would focus on boosting overall supply by making private-sector housing cheaper to build. They want to allow more units on each piece of land, require fewer parking spaces, and cut building fees, which total $100,000 or more per unit in some neighborhoods.

Progressive politicians and advocates for the poor want to see more hammers swinging, too.

They lean toward increasing supply with higher public subsidies, funded by taxes and higher fees on commercial and residential construction.

This fundamental tension between left and right, which has generally produced stalemate over the years, recently yielded some political movement.

In October, Democrats who control the San Diego City Council quintupled a fee on private-sector commercial development to raise money for subsidized housing. In response, Republicans and the Chamber of Commerce geared up a ballot initiative to reverse the vote, arguing that such fees raise costs and cut supply for everybody.

The council withdrew, and early this month negotiators struck a bargain with something for both sides. Fees earmarked for subsidized projects would increase from $2.2 million to $3.7 million for at least three years; longer if the city lowers development hurdles. This could boost construction of subsidized units by 15 apartments a year.

In a council hearing last week, commission officials said the commercial “linkage” fee had helped developers build 3,889 apartments since 1993, by filling financing gaps.

Perhaps more substantially, the bargain would let private-sector builders put more units with less parking on projects along transit routes. In addition, the city would see if it owns property that could be used for low-income projects.

If the deal gets past the city council, San Diego’s leaders will have delivered the first big opportunity in years to create large numbers of affordable homes.

However, such progress would merely nibble at the shortfall if private development doesn’t ramp up considerably.

Since 1981, the city’s housing commission has helped developers build 14,723 subsidized apartments. Using federal vouchers, it helps nearly 15,000 additional families a year.

These 30,000 or so recipients represent about 6 percent of the 473,842 housing units considered occupied in the 2012 Census estimates.

Advocates on both sides of the political spectrum agree that reducing the housing burden frees up cash for saving, investing and spending in the wider economy.

Consider Vinzant, the disabled veteran in a subsidized complex in Fairbanks Ranch.

Her rent is $604 a month, a figure that provides a cushion for emergencies and other expenses. She recently paid $1,000 to a dentist for a root canal and root extensions.

“And I was able to do that, because I have a little bit extra in my budget,” Vinzant said. “I’m able to make a car payment. It’s made for a better quality of life.”

Yet such success underscores the special status of the relatively few people who receive public support.

And paying for it raises questions of fairness, says Howard Husock, vice president for policy research at the Manhattan Institute, a conservative think tank based in New York.

“City government can take the position that it should be able to restrict supply (through zoning), and then ask taxpayers at large in the nation to subsidize the production of high-cost apartments,” he said. “… You are asking taxpayers in Mississippi to write down the cost of those $400,000 units in San Diego. Is that fair?”

Given the inherent limitations of public financing, Husock says cities that genuinely want affordable housing have little choice but to lift zoning limitations on the size and number of units on each parcel.

San Diego has been here before, he points out: Years ago, San Diego pioneered “single-room occupancy” apartments, which provided small, low-cost rooms without individual kitchens or bathrooms.

Today developers in other cities are experimenting with micro-apartments aimed at young people in urban centers, but a trend is far from taking hold with the public or planning officials.

In Atlanta, officials place a time limit on housing assistance to recipients without disabilities. The idea is that requiring them to get jobs and move on allows more people to receive help over time.

San Diego has no such requirement, but it does fund a jobs program to wean recipients from housing subsidies.

Meanwhile, the region’s private sector is doing little better than public officials in creating low-cost units.

Across the county, sales of new houses and condominiums averaged 660 a month in the year that ended in May, according to the DataQuick real estate service. That production is less than 40 percent of the 10-year average, and well below the level of 1,400 a month or so reached in the mid-2000s.

Apartment construction is bouncing back from a decade-long drought, with 3,000 or so built countywide over the last few years and 20,000 more in the pipeline.

But nearly all of these new houses and apartments are aimed at higher-income consumers, with houses costing a median $600,000 and average rents of about $2,000 a month.

To significantly add supply, builders would have to hit production peaks unseen since the 1980s, when vast tracts of North County land were being carved into subdivisions.

Such a boom could lower overall costs indirectly, if enough wealthier families moved into pricey new construction to create a glut of older units. Just as the present housing market took decades to evolve, a transition on this scale could take many years.

Demand from people who don’t even live in sunny San Diego, but would like to, has been a powerful driver of housing costs, according to economists Joseph Gyourko, Christopher Mayer and Todd Sinai, who studied why prices grow faster in some cities than others.

From 1950 to 2000, San Diego County’s house prices increased faster than general inflation by 2.61 percent a year — beating Boston, Los Angeles and New York as the fourth-fastest in the nation, according to their 2013 paper called “Superstar Cities.”

The result: Superstar cities like San Diego and San Francisco are becoming enclaves for the wealthy, outpacing efforts to create low-cost units by either the public or private sector.

“For a long time, we’ve been comfortable with the idea that not everyone can live in the town they want to,” Sinai said. “Not everyone can live in La Jolla. It’s not an inalienable right. Not everyone can drive a Ferrari, so some of us buy less expensive cars or we don’t buy new cars.”

But those attitudes are changing, as low-wage workers are forced into ruinous commutes or pockets of low-quality urban housing.

“We’re now getting to the point in the United States where entire cities are becoming priced out of the range of large chunks of the population, and we’re trying to figure out what to make of that,” Sinai said.

Yet industry and government face the same powerful obstacle — ordinary San Diegans.

Increasing unit “density” shifts a cost onto the people who already live there, whether it’s more traffic, more noise and longer lines at Starbucks.

The burden of congestion falls onto renters as well as homeowners, who tend to vote in high numbers.

The San Diego Union-Tribune article is here.

Our study is here.