Commentary: Can We Solve Our Housing Crisis through Market Rate Housing?

My View: We are not going to build our way into affordability.

Twenty years ago when I rented my first apartment in Davis, I moved in with a buddy of mine from graduate school and we shared a two-bedroom apartment for $625 a month.  By the time my future wife and I would get a three-bedroom apartment, it was more expensive but still a very reasonable $925 a month.

That was in 2000.  By the time we moved out of there, the rent had jumped to $1750 a month.  And the average three-bedroom apartment is now $2300 a month, and that’s probably on the low end.  Students have an advantage in that they can double up in a room and split the rent multiple ways.  Families can’t do that.  That means that a market rate apartment for most families is probably out of their reach in Davis.

If you think about it, if a two-bedroom rents for somewhere between $1600 and $1800 a month (and that’s a small family with people sharing rooms), even if you are making around $50,000 a year, you’re looking at more than half your take home pay going to rent alone.

The recommendation from financial advisers is that rent should not be more than 25 percent of your gross monthly salary.  Some will allow you to go up to 50 percent.

“Households that spend more than 30% of their income on housing costs are said to be cost burdened. Those that spend 50% or more of their pay on housing costs are classified as severely cost-burdened households,” a report from Harvard Joint Center for Housing Studies noted.

Spending more means that you cannot save to buy a home or for retirement.  It also means you have to save through reduction in other expenses.

The basic problems in the Davis housing market are easy to spot and difficult to fix.  The first problem is that the demand for rental housing has been almost completely absorbed by student renters.  Students, by our calculations based on the 2010 Census, make up around 85 percent of all renters, and given that the data came from the 2010 Census, that is probably a low percentage now.

In addition, Davis remains a community in high demand – with a good standard of living, a university nearby, good schools, low crime, etc.  Finally, Davis has further shortened the supply through growth control measures that have greatly capped supply, thereby artificially inflating the cost of living.

However, given the high demand for housing and the magnitude of the shortage, it does not seem likely that we can simply build our way into affordability.

While the university is committing to build 6200 beds and the city has project proposals that would add perhaps as many as 4500 additional beds, with a vacancy rate currently at 0.2 percent, it is not clear that the proposed projects would increase vacancy to a more manageable 5 percent – which at a recent Planning Commission meeting was the stated goal of the city.

Given that we likely cannot build our way to affordability – how can we produce some housing for families in Davis that is affordable?

One idea is the notion of affordability by design.  At least two projects proposed – the one along Chiles Road and Plaza 2555 – are proposing micro-units and smaller households that would be more affordable because they are smaller in size.  Of course a 300-square foot studio apartment is not generally going to work for families, but the concept could be translated to produce small two- or
even three-bedroom apartments that would be affordable simply because of their lack of size.

The problem that you face is that Davis isn’t a closed market.  And so yes, maybe you could get a pretty affordable 300- or 600-square-foot home that you could afford to rent in Davis, but for the same amount of money you could go to another nearby community and commute to Davis and have a much larger home.

At a recent workshop, the Davis City Council decided to focus its attention on affordable rental housing rather than for-sale housing.

There are lots of challenges.  For the most part, the city recognizes that it is not going to have large dedicated sites (apparently the West Davis senior project notwithstanding).

“Those days, for now, are done,” said Mayor Robb Davis. “We’re not getting any large developments that lead to that kind of availability to create the affordable set aside inside.  The Cannery might have been the last one.”

What the council favors instead are projects that integrate affordable housing within the project.

However, not everyone agrees with that view.  Luke Watkins of Neighborhood Partners in an October article told the Enterprise that he views the move away from land-dedication sites means that “the city is heading in the wrong direction.”

In a lengthy email to council, which he copied to the Vanguard and others, Mr. Watkins said that one of the challenges is how a city serves households of people who are clearly struggling simply to survive.

From his perspective, the answer is not to “reduce the City’s affordable housing requirement” and it’s also not to “exempt certain project unit types” or to “allow accessory dwelling units to count as affordable units.”

He added, “And it’s not to require that the affordable units be integrated into market-rate student apartment complexes.”

He writes, “There seems to be some concern that market-rate apartments need more concessions from the City to make them economically feasible. While the City should definitely take some immediate cost-neutral specific steps to incentivize production of smaller unit types (like adjusting its density calculation and fees to reflect the size and bedroom count of each unit), it is not the inclusionary affordable housing requirement halting the production of market-rate apartments.”

From his perspective, “It is simply the lack of available zoned multifamily sites. The inclusionary requirement is of course a cost… but if the City’s inclusionary requirement can be met by having the developer donate land, or pay a reasonable in lieu fee, then it is a cost that can be absorbed into the sales price of the land.”

Luke Watkins also argues, “Exempting certain types of projects from the inclusionary requirement may seem like an innovative way to encourage downtown housing, or condominiums that will be more affordable than single family homes. However it undermines the City’s most critical affordable housing goals, and results in fewer resources to support the creation of special needs housing. There is a good reason to exempt smaller projects from the land dedication requirement, because a land dedication site needs to be big enough for at least 40 units, in order to reach the minimum necessary economy of scale.”

Mr. Watkins was critical of the Cannery agreement that allowed accessory dwelling units to meet the affordable housing requirement “without any rent limitation or income screening for the tenants.”  He said, “Even if there is income screening to ensure that the units go to households that need the affordable housing, what is the chance that very many of the units will be rented to a special needs household, who would have to pay a rent that is likely more than their entire monthly income?”

His biggest concern concedes that it is desirable to integrate the required affordable housing units into the market-rate housing projects.

But, he says, “our inclusionary housing policy does not require market-rate developers to provide units that are affordable to extremely low-income disabled households. So the 10% very low-income and 25% lower-income affordable housing requirements (which is actually only total 26% of the market-rate units, because a density bonus is allowed) will never be affordable to the disabled households.”

The challenge of course is not just lack of available land.  It is also funding.  The lack of RDA (Redevelopment Agency) funding has meant that a revenue stream which used to exist to fund these projects is now gone.  The state may be looking to reinstate some of that through some of the new legislation.

But in the meantime, the city council is caught in between.  Do they require new housing projects to build on-site, which appears to be their preference, or should they coddle in-lieu fees and grant funding to try to find larger dedicated sites?

Finally, as I observed a few weeks ago, the affordable housing that we do have actually works.  For example, the affordable housing I live in with my family has seven units, and all seven are occupied by families with children.  That’s a success.

The challenge will be finding a way to provide more housing that families can live in and I would argue for the most part that is not going to happen simply by providing more market rate apartments, most of which will be quickly snatched up by students.

—David M. Greenwald reporting



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About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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11 thoughts on “Commentary: Can We Solve Our Housing Crisis through Market Rate Housing?”

  1. Matt Williams

    To put David’s rent increase example into context, the advice that an Investment Counsellor like Fidelity Investments or The Vanguard Group or Edward Jones or Charles Schwab would give to any investor is that an investment should double in value every 10 years.  Applying that investment rule of thumb to David’s $625, after 10 years if it is performing at the market average, it would grow to $1,250, and after 20 years it would grow to $2,500, which is remarkably close to the $2,300 that David cites in his third paragraph.

     

    1. Howard P

      A bit simplistic, as I understand it… an income property appreciates in addition to income received… there are also tax deductions… so, ROI is a bit more complex than revenues realized.  But your numbers are a good starting point baseline.

      1. Matt Williams

        Context is often simplistic by definition.

        With that said, income properties often do indeed appreciate in value.  However, they also come with expense(s), so the total picture is a combination of revenues less expenses less taxes plus capital appreciation.

        Regarding tax deductions, the reality of any such deductions is that virtually the only way that someone can have a deduction is if they also have an expense … and typically the deduction is a small percentage (somewhere between 20% to 35%) of the expense.  So, in reality, tax deductions are “one step forward and three to four steps backward” from a fiscal perspective.

        1. Howard P

          C’mon… ‘depreciation’, particularly by some IRS allowed methods, isn’t “real” (assuming an owner does preventative/other maintenance)… it’s a tax ‘shelter’ approach… it does somewhat get ‘re-paid’ at sale, when IRS looks at “cash basis” (including depreciation previously taken as a write-off), but until then, it’s a “gimme”… and for MF properties, if you transfer interests over years, it is not considered a “sale” for IRS and/or property tax purposes (same applies to other commercial property MF is indeed, commercial/residential)… a ‘loophole’… ironically, the House and Senate have no apparent intent to ‘simplify’ that!

    2. David Greenwald

      But my guess is that an investment is going to increase faster than the rate of inflation (otherwise your real rate of return is zero) and yet when you are talking about rent, the increase of the rent would not be measured in that way but rather as a percentage of your income.

      1. Howard P

        Inflation, for years, has hovered between 0-2%.  Call it 1%. [except in certain ‘sectors’]

        Matt’s numbers assume a ROI much, much higher, everything considered.

         

         

         

         

         

         

      2. Matt Williams

        David, one of the farthest things from a real estate investor’s mind (landlords are real estate investors by definition) is the rate of inflation.  Inflation was a concern for an investor back when Jimmy Carter was POTUS and the annual inflation rate peaked at 13.58%, but inflation is at best a minor concern for real estate investors now … if any concern at all. The cold hard reality is that their concern is Return On Investment (ROI).

  2. Richard McCann

    I think we need to assess the impact on the market of adding 4,000 MF units to the rental market in this town.  That’s close to a 5% increase in the housing supply here. The relationship between supply and demand isn’t linear and likely has inflection points at which rents could change dramatically. Without this type of assessment, we are all speculating about what might happen and in turn, what are the best solutions.

    1. Howard P

      5% would get us to what has long been considered a “balanced” vacancy rate where landlords and tenants were ‘best off’.  [actually , 4-5 %]

      Not quite a number as reliable as the value given for the acceleration due to gravity, but probably a pretty good number.

      As to the 4-5% number, how that is allocated by units actually built on-campus or off is a separate matter.  If on campus had a 0 to 0.5 vacancy factor, and the City had a 4-5% vacancy rate, that would work too.  UCD isn’t “market”.  Their ‘drivers’ are different…

      1. Mark West

        Richard mentioned a 5% increase in the housing supply, not a 5% increase in the vacancy rate that Howard is discussing. The two are related, but that relationship is not linear.

         

         

        1. Howard P

          Difference (and point) noted… and agreed… but at 0.2% vacancy presently, if everything was static (which it is not),  it would take ~5% more units to get to 4-5% vacancy.  Barring an exodus of current Davis residents…

          As to folk leaving town (exodus), I thought of the Mikado (G&S, one of my favorite light operas):

          https://www.youtube.com/watch?v=1NLV24qTnlg

          I’ve got a “little list”, and am pretty sure I’m on many of your folk’s lists…

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