Commentary: Does Market Rate Housing Help with Affordability?

Photo by Marcus Lenk on Unsplash

By David M. Greenwald
Executive Editor

Davis, CA – In the midst of an interesting debate on housing, one commenter this week put forth the proposition that the city should in effect turn its affordable housing policy on its head and push for 85 percent affordable housing projects if not fully 100 percent.

While we certainly have a number of examples locally of land dedication sites, building large scale affordable housing would be extremely difficult and time-consuming.  While the state has passed some affordable housing measures, unless it goes back to the days of RDA (Redevelopment Agency), which to date has not gotten a lot of traction in the legislature, it would be difficult to see a funding mechanism for large scale affordable housing.

Moreover, even under RDA, the city’s affordable housing policy was 65 percent market rate to 35 percent affordable.

Implicit in this discussion is the notion that market-rate housing is not a useful production of housing.  Having subsidized affordable housing is helpful to create a more diverse pool of housing, but it really would not fix some of the problems with the  housing market.

For one thing, many housing advocates talk about the need to address the “missing middle,” the kinds of market rate housing that can serve middle income people—duplexes, fourplexes, and the like which serve as a middle between the traditional detached single-family homes and the denser apartment buildings that serve as the core of affordable housing projects and housing for lower income families and working class people.

I came across a study out of the Lewis Center at UCLA by Shane Phillips, et al., which was published in February 2021 and found that, contrary to some claims, “market-rate housing makes nearby housing more affordable across the income distribution of rental units.”

There is an interesting and growing debate among housing advocates over “the neighborhood-level impacts of market-rate housing development.”

On one side of this debate is the notion that “unsubsidized homes—whose price often places them beyond the reach of lower- and middle-income households—make nearby housing more affordable by increasing availability and relieving pressure on the existing housing stock.”

This is known as the “supply effect.”

On the other side are those who argue that this “new housing only attracts more wealthy households, brings new amenities to the neighborhood (including the housing itself), and sends a signal to existing landlords that they should raise their rents.”

Many argue that this effect actually makes housing less affordable.

Researchers have long believed that “building new market-rate housing helps stabilize housing prices at the metro area level” and the authors here note, “The question of neighborhood-level impacts of market-rate development has been hotly debated but under-studied.”

Here the researchers examine six working papers on the impact of new market-rate development on neighborhood rents and they find that five of them find that market-rate housing makes nearby housing more affordable across the income distribution, while the sixth finds mixed results.

The authors conclude: “These findings point to local benefits from market-rate development, but they should not be interpreted as an endorsement of market-rate development regardless of the project or neighborhood context.”

Instead they argue: “Housing production should still be prioritized in higher-resource communities where the risk of displacement and other potential harms is lower, and complementary policies such as tenant protections and direct public investments remain essential.”

Nonetheless, “the neighborhood-level benefits of market-rate development are promising and indicate an important role for both market and non-market solutions to the housing crisis.”

This finding reinforces my inclination that market rate housing  and increasing the overall supply of housing acts as a release valve to relieve pressure on the existing housing stock to provide for the entire range of housing needs.

That said, I am not opposed to communities such as Davis prioritizing both subsidized affordable housing and also the missing middle to provide starter homes for middle income families who can then buy into the market and use that to upscale to larger homes.

While I largely agree with those who argue that Davis probably can’t build sufficient housing to alleviate its demand problem, at the same time, the stagnant market is not helping those attempting to buy into the market and certainly not helping to bring in more families with children—and that’s to the overall detriment of the community.

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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16 Comments

  1. Keith Y Echols

    The problem with real estate “research” is that what do they say about real estate”  “location, location, location”.  Or in other words local markets all have their own issues.  So new housing construction in Texas or Arizona doesn’t face the same development and land constraints that CA has.  A place like San Francisco has reached it’s saturation of development…it has nowhere to go but down…it’s not like it’s going to continue to attract even higher end buyers to a degree that will effect real estate prices….but in Sacramento?…..that’s a different story.

    Available land, labor and construction are all constraint factors that have to be considered.  All these factors constrain the supply.  But here’s the thing if you constrain the supply and then manipulate which local markets get new housing (those that are growing) then, yes you’re going to exasperate the housing affordability market.  Supply may go up but then you’re building new homes for people that can afford the top of the market and then some.  So in terms of affordability it’s one step forward and two steps back.  So yes you can build, increase supply and in theory housing prices will stabilize or go down.  But that’s only true in a vacuum that doesn’t take into consideration all other factors.  Why would a home builder build homes if the market isn’t growing and prices aren’t going to rise once they build homes and try to attract even more higher end people to the local market?  And of course a rising tide lifts all boats.  And you know what home builders do when prices aren’t going up?  THEY DON’T BUILD.

    I urge you to actually talk to major CA developers and builders about the issue and how they and why they build (I’ll give you the easiest answer….for money).  These real estate research papers are silly.

      1. Keith Y Echols

        I talk to a lot of people,

        Really?  Who are you talking to that is relevant?  I talk to developers and planners in other cities.   Who are you talking to that is relevant?

        , but irrespective of that, anecdotal evidence is helpful but no replacement from empirical data analysis.

        I’m all for empirical objective evidence.  But objective empirical evidence needs context…I’m providing it.  This report you’ve glommed on to is a joke.  It also reeks of confirmation bias.

        “Researchers have long known that building new market-rate housing helps stabilize housing prices at the metro area level.”

        “To be clear, this debate is not about whether new housing can reduce housing prices overall. At this point, that idea isn’t really in doubt.

         

         

        1. Richard_McCann

          Keith O

          Empirical research almost always trumps anecdotes, no matter how experienced the observer. If a study has “confirmation bias” it is always possible to find a study with an opposing conclusion. That is my professional experience of nearly four decades. But this study went through half a dozen other studies and found confirming conclusions in 5 out of 6. If one wants to contradict those findings, then you need to find another empirical study. Confirmation bias is MUCH more likely to be rampant among those collecting anecdotes. (I see this very often among my clients when I have to gently steer them away from their misconceptions.) Yes there might be exceptions to these findings like in SF with true space constraints, but this finding is applicable broadly across California including Davis. The context that you’re providing doesn’t really contradict the findings–you need to present actual evidence from DATA not personal conversations that we have no idea were in what context.

          Market based housing reduces general housing prices by attracting higher income households out of older housing, which then becomes more affordable housing for lower income households. Much too often the dynamics and interactions between the new and used capital goods markets are ignored by those commenting on an initiative. One of the reasons that the electric vehicle market didn’t engage in the 1990s was that the EV proponents overlooked the fact the early model EVs were competing with the used commuter car market where prices were much lower than the new car prices that the proponents were comparing against. Now EVs have many of the same features as new conventional ones so they compete head to head.

        2. Keith Y Echols

          There’s a reason why academics don’t run the world.  Data without real world context is useless.  Please explain SPECIFICALLY how this “data” is applicable to Davis using real world context.

          Market based housing reduces general housing prices by attracting higher income households out of older housing, which then becomes more affordable housing for lower income households.

          So again context.  Real estate is a local game.  Yes higher priced homes attract buyers that leave older housing available.  So what.

          1.  You missed my comment about rising tides lift all ships.  Meaning if new homes sell at a premium…ALL HOMES will likely sell for more.

          2.  WHERE do you think the people moving to those brand new expensive homes are coming from?  They’re not abandoning old homes in Davis to move to new ones (at least not the majority of them).  No.  These are people moving from ELSEWHERE and leaving their old homes in a DIFFERENT MARKET.  So how does that make housing more affordable in Davis?

          So context is important.

          1. David Greenwald

            There is also a reason why we rely on empirical studies to inform most of our policy decisions

        3. Ron Oertel

          If the goal is to lower the valuation (and tax collections) for existing properties (as a result of new development), Davis already has an example of whether or not that works in the form of The Cannery.  (And apparently, it didn’t work.)

          But I believe that what Keith E. is noting is that broad studies don’t necessarily lend themselves to local variables.

          One local variable, for example – is the entire Spring Lake development.  (Even some pre-existing Davis residents have moved there.)  Is Spring Lake an example of “local supply” that must be accounted for in regard to a “localized” empirical study?

          At what point do housing prices, taxes, and other hassles become significant enough where the entire country is essentially providing an alternative to “local supply”? (For example, the exodus of businesses, jobs, and people from San Francisco.) That’s actually how the free market works.

          And, where were these “empirical studies” when Davis was considering adding 2,500 jobs (but only 460 housing units) at DISC, given that you claim that the city relies upon such studies?

          Now that I think about it, it seems that pursuit of sprawl (in a place like Phoenix) doesn’t necessarily lower housing prices.  Broader forces (such as interest rates and economic conditions) result in “boom-and-bust” cycles there.  One minute there’s “not enough houses”, and the very next minute there’s an “oversupply” – without even changing the amount of existing housing or that under construction. (As Keith noted, builders suddenly stop building, when economic conditions change.)

        4. Richard_McCann

          Keith E

          In my decades of consulting across more than a half dozen industries including housing, my experience is that the “common sense” understanding of my clients about larger market impacts of policies are generally incorrect. They know how a policy might affect their own decisions but they don’t follow the dynamics of the broader market. So I put little stock in “cheap talk” by industry insiders unless they have analysis to back them up.

          Notably these “academics” you disdain are often also direct consultants to the housing industry, especially if they come from a business school rather than an economics department. This is especially true in real estate. (I’m having a current underlying dispute on electricity policy with a group of academics, none of which actually get their hands dirty in utility consulting, so I’m well aware of when the lack of “context” arises.)

          You’re not providing “context”–you’re trying to refute a metastudy of multiple studies with your anecdotal conversations. Context would acknowledge that the study results are largely valid but impact in Davis may be different (but not totally opposite) due to local conditions.

          I didn’t miss your comment about all house prices rising-I fundamentally disagree with it. You’ve said several times before without any empirical evidence to back it up, in contrast to the study reported here. All home prices only rise with more new homes only if those new homes change the neighborhood in a way that attracts more higher income households beyond the purchases of new homes. Those higher income households then outbid locals and increase the price. That’s what gentrification is about. But it’s not a fundamentally inherent attribute of building new market-rate houses.

          As for where new home buyers are coming from, of course many are coming from out of town. But right now those same out of town people are buying existing homes–the new houses divert some of that demand, relieving the sales pressure on existing ones. This is the key part of the dynamics in this market, and an example of the complexity that industry managers often overlook in my experience.

      2. Keith Y Echols

        Richard,

        First, some background…I used to be (a couple decades ago) the one to find those academic real estate reports and use incorporate them in marketing and financial presentations.  I also contributed to some of those reports (raise your hand if you’ve participated in one of those reports as an industry expert).  I used to be the one to argue about the use of purely objective data applied to the real estate market and perspective projects.  It’s only after having more senior real estate partners of mine show me how much local knowledge and relationships are the primary deciding factors for real estate projects.  It makes a huge difference when it’s your own money at risk.

        Notably these “academics” you disdain are often also direct consultants to the housing industry, especially if they come from a business school rather than an economics department. This is especially true in real estate.

        As I said, I’m well experienced with the application of academic real estate and economic reports.   I don’t have a problem with them.  Academic reports have their place.  But let me put it to you this way: If you had an important cargo container ship that had a long journey through a treacherous region would you rely solely on a map? (a map that consulted with many researchers and ships captains).  Or would you trust an actual captain that has captained ships through that region…even if he disagreed with some of the data on the map?  No one says to throw the map out completely.  But direct relevant experience trumps academic conclusions every time.

        You’re not providing “context”–you’re trying to refute a metastudy of multiple studies with your anecdotal conversations. Context would acknowledge that the study results are largely valid but impact in Davis may be different (but not totally opposite) due to local conditions.

        That’s essentially what I said. I don’t dispute the findings of the reports within their narrow parameters.  But as I said real estate is a very specific local game/venture.  It’s the APPLICATION of the report that I question as well as the broader conclusions the report gives.  The data is the data within it’s narrow scope.

        All home prices only rise with more new homes only if those new homes change the neighborhood in a way that attracts more higher income households beyond the purchases of new homes. Those higher income households then outbid locals and increase the price. That’s what gentrification is about. But it’s not a fundamentally inherent attribute of building new market-rate houses.

        You’re splitting hairs and playing a cute game.   GENTRIFICATION IS WHAT DRIVES NEW HOME CREATION.  Builders go into growing markets.  It’s the first thing you research when entering a market (this is the primary thing I used to do). Economic growth and POPULATION GROWTH.  Builders build New Homes to create a premium market.  So if a builder is building somewhere than they are exasperating the gentrification effects by creating higher end homes.  So it is a fundamental attribute of building new market rate homes.  Builders build in growing markets.  Builders build to get a premium on the existing market  Show me a builder that says; yeah…I’ll go and build homes in a shrinking market.  If they are, they’ve got land they can’t get rid of and can’t sit on (and even then, they’re more likely to write it off as a loss).

        But right now those same out of town people are buying existing homes–the new houses divert some of that demand, relieving the sales pressure on existing ones. This is the key part of the dynamics in this market, and an example of the complexity that industry managers often overlook in my experience.

        I love how classic economists are stuck on supply and demand as the end all be all of economic factors.  No one is saying supply and demand doesn’t apply.  It’s just not the strongest economic factor in play.  No, as I said builders go into growing markets.  A builder’s goal is to get a premium on the the homes they build.  So if the upper end of the market is getting $50/sqft more because of new home construction; then existing homes (ask a realtor…they’re always looking for reasons to increase the homes they have for sale) are going to push for $30 more/sqft or $20 more/sqft as you go down the product price range on the existing homes market.  New home construction aggravates gentrification and makes it worse.  Why?  Because that’s the goal of the builder.  As a new home builder, you always build to add a premium on the market (because new home building doesn’t have the greatest of margins….generally 5%-7%).

  2. David Thompson

    Dear David,

    I am grateful to you for covering affordable housing as you do. Your writings and the comments received help educate citizens of Davis about the topic.

    However, perhaps it is time to dispute the mistaken belief that the end of RDA is a barrier to financing the development of affordable housing. I think it wrongfully impacts and impedes our discussions about the development of local affordable housing.

    The end of RDA did change the resources needed for afforadable housing but other sources quickly filled the gap and no time was lost.

    Said another way. There is not a site set aside for affordable housing in Davis that has not been built.

    As to size of project being an impediment, if you look at Sacramento you can see affordable housing projects in the hundreds of units  all being fully funded with the existing and new sources of funding for affordable housing.

    Any site in Davis set aside for affordable housing will be built on no matter the end of RDA. The end of RDA should no longer be part of the discussion about barriers to affordable housing in Davis.

    Let’s keep the discussions going and thank you for your part.

    David J. Thompson

     

     

     

    1. Richard_McCann

      What the end of RDA did is removed the fiscal incentive from enhanced local property tax revenues. That’s why cities are now more reluctant to build new housing–the revenues now go the state. This can be easily fixed with by the state by giving a much larger increment of tax revenue to locals when housing is built. The RDA was ended due to the abuse of redevelopment designations, eminent domain and corruption. None of the objectionable features are central to what can be accomplished with a revised version.

  3. Ron Oertel

    How quickly that some “forget” that the most-recent Measure J vote resulted in less need for housing than would have otherwise occurred (e.g., if the council or the Vanguard “had its way”).

    Then again, some didn’t seem to understand that basic concept in the first place (e.g., 2,500 jobs, but only 460 housing units).

    (If you want to know why this entire topic is “hopeless” to engage in on here, look no further than that.)

    Apparently, some people only want to look at “supply”, as if “demand” is fixed. These same people also fail to accurately describe “supply” (e.g., primarily Woodland).

    They view Davis as a “silo”, but only when it’s convenient for their arguments.

    1. David Greenwald

      Had DISc 2020 passed there would have been around 150 affordable units that would have been included and counted in the current RHNA. Now those units will have to be built elsewhere.

      1. Ron Oertel

        They don’t actually have to be “built”.  Per what’s occurring across the entire state, it’s unlikely that most of the RHNA Affordable housing units will actually be built. The only thing that needs to occur is a potential “spot” for them – something that most cities are having more difficulty with than Davis does.

        But the point (in reference to your article regarding market-rate housing) is that adding 2,500 jobs (but only 460 housing units, 150 of which would have been “Affordable”) would have increased demand for housing.

        Does that really need to be explained?

        Which “side” is actually advocating for housing shortages (and more greenhouse gasses)?

  4. Todd Edelman

    If we build housing as intentional, semi-contained systems it may be useful to have some market rate housing as part of the mix. This is simply because the people that want this housing exist! And it’s good for everyone in this intentional, semi-contained etc. housing to live close to and with people of all “stripes”.

    In Prague and Berlin I recall a lot of housing – I believe mostly fin de siècle apartment buildings up to 7-stories and with a particularly large footprint in the current capital of Germany – that had large apartments with high ceilings, best views, internal toilets and bathrooms, etc in the front, facing the street…. and more modest apartments behind with interior or backyard views, etc and not necessarily well-appointed. In some buildings the attics were rented to artists, with plentiful windows facing north, etc… so lots of space as a trade off for schlepping up 5 or 6 flights of stairs. Sometimes there’d also be small workshops in the courtyards.

    A more progressive model is of course intentional community housing with large shared kitchens and other spaces, but another example of this is any existing apartment building – and e.g. the new one recently approved on Olive Dr (which has constant illegal leaf piles in the bikelane in front, but that’s another discussion, sort of) which has people with subsidizes next to people without subsidies living next to each other, without either knowing that the other is not as well-off (yes, I realize that the base price in this place is high and it only has 15% below market.)

    In both models, neighbors are sort of encouraged to mingle…. and ideally children play together even if they don’t go to the same schools. I am not saying that either is a model of for my preferred mode of radical socialism with anarchist frosting BUT they can be gemütlich (cozy).

    On the other hand we have Sterling 5th apartments next to the main post office, which has a large market-rate student housing building next to a 100% subsidized, low-income housing all on the same lot, the latter built as part of the deal.  But they are separated by the internal driveway, and the subsidized housing has poorer facilities: No bike parking rooms, no pool… as well as less space, etc. Also 5th Sterling has a huge parking garage which could have been housing, and the whole place ended up being shorter than originally designed because the people in single-level housing at the mobile home park objected.

    When I asked the Mutual Housing director about the pool in 5th Sterling which the kids at the “poor” housing wouldn’t have access to, she said the poor kids could get free passes to e.g. the Manor Pool many, many blocks away. Probably the kids there would learn to swim better – or learn to swim at all – if they had access to a pool within a minute’s walking distance. So perhaps some will drown later because of that — this is perhaps a good metaphor for how screwed up is our general housing model.

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