So I know this is a little departure from my regular shit…hopefully it’s cool.

I try to keep up with the full spectrum of policy policy debates and not limit myself to environmental issues…I don’t always do a great job of keeping a wide view. In this case there is an issue that’s been on my radar for a while: affordable housing. More specifically, the Santa Cruz City Council and Santa Cruz County Regional Planning Boards have been debating a pretty specific mechanism for addressing the ‘lack of affordable housing’ in our community: easing the permitting process for developing Accessory Dwelling Units (ADUs).

As quick proof that I’m not just fabricating an issue in order to have something to bitch about on the internet:

Ok, back to the story. ADUs in Santa Cruz are basically garages and tool sheds that people convert (sometimes legally and sometimes not) to living quarters to rent out.

In this case our City Council has already approved what I consider to be a pretty big financial giveaway to homeowners and real estate developers in the form of friendly tax incentives and lax permitting requirements for developing ADUs.

As has become my trademark, I’m going to give you the punchline first and let you decide if you want to sift through the ‘how I got there part.’

  • I think homeowners, prospective home buyers, real estate developers and the people that lobby for these groups really like ADUs because they can use them to make (more) money.
  • I think the aforementioned people – like most profit maximizers – want the regulatory burdens of developing ADUs softened substantially.
  • In order to get this regulatory burden softened (which they call ‘easing the permitting process’) they have tried to frame ADUs as a solution to the problem of ‘access to affordable housing’ that many community face.
  • I think this group has been intentionally vague and possibly intentionally fraudulent about how exactly ADU development addresses the affordable housing problem.
  • Since the taxes and fees involved in the ADU permitting process (that the ADU lobby finds so onerous) contribute to public finance, I think this is a pretty classic case of a small group of already wealthy people trying to individualize the profits and socialize the costs of ADU development.
  • Stated a slightly different way: if we ‘ease the ADU permitting process’ then the community at large has to shoulder a bigger tax burden in order to maintain the same level of public services…while the ADU developer reaps profits from the ‘eased process.’

Here are some basic observations that make me suspicious

  • City Councils and Regional Planning Boards tend to have far greater representation from Developers, Land Owners, Business Owners, and Real Estate Agents than they do from actual potential consumers of affording housing (low income families).
  • ADUs in my community are almost exclusively studio-style units between 400-800 sqft.

First, here are three groups of people that come up a lot when discussing the issue of affordable housing. Each of these groups does face legitimate housing insecurity in a lot of high-priced areas like Santa Cruz and the Bay Area, CA writ-large.

1. Young, Employed, Mobile Workers

I believe the current debate about ‘affordable housing’ is taking place on imprecise terms. I think many people are being intentionally vague about who it is exactly they are talking about when they reference community members impacted by rising rents and increasing property values (people getting ‘priced out’ of their communities). This article in my local paper focuses on a the housing woes of a young, educated, single, teacher.

Yes, I think it’s important for my community to attract young, energetic teachers that will contribute to the community. No, I don’t think young, single, mobile individuals with moderate housing insecurity is a group we should be making into the face of our ‘affordable housing crisis’. My position here is shaped primarily by the fact that I see this as a transitional group. The guy in this media article is young, single, and not poor. He may not love the options he has available to him…but he actually has a lot of options: he can live in some dude’s (unpermitted) converted garage, he can rent the attic from a retiree with more house then they need, he could probably get by ok (for a couple of months at least) renting a spot at the KOA campground and going on an REI shopping spree. My main issue here is that I don’t see this dude’s current state as one of permanence. He’s going to wait and save and eventually buy a house.

Should we address housing insecurity among young, energetic individuals making positive contributions to our community through chronically underpaid professions (teaching, nursing, firefighting, etc.)? My answer would be yes. Would a larger supply of ADUs on the rental market help this group out? Probably. So what’s my problem here?

My problem is that public money is being used to subsidize an already well-off population (homeowners and developers) and the social benefit the rest of us are supposed to get is a solution to our ‘affordable housing’ problem. I would love it if young teachers faced less housing insecurity in my community but I’m not willing to blindly accept that this give-away is an ‘affordable housing’ solution when it doesn’t address what I see as the real issues of affordable housing: i) low income families and ii) the elderly poor.

2. Low Income Families
The group that I think really needs to be front-and-center in the affordable housing debate is hard-working families surviving below (in many cases, well below) the median county income. I think it’s pretty clear that ADU supply does next to nothing for this group since ADUs are generally studio style units 400-700 sqft.

A family of 4 living on $78k/year in Santa Cruz will be severely strained by $2.20/sqft (~$2500/month) cost of a 1200 sqrft 2 bed-1 bath rental. And whatever their current status is, I find it unlikely that status is improved much by cramming them into some rich dude’s garage on the Lower Westside.

3. The Elderly Poor
There is a group that I feel is both critical to the affordable housing debate AND well served by ADUs: non-rich retirees (statistically, this is a pretty small, but not trivial, group in Santa Cruz). Elderly residents on low fixed incomes face substantial housing insecurity in Santa Cruz County.

My follow-up to those who would say, “See you just answered your own question. ADUs are awesome because they help out old, poor people so we should give ADU developers lots of shit for free”, is “ok are ADUs the best way to help old, poor people?”

How many people are we talking about here? If it’s a lot, will ADUs satisfy this group’s demand for affordable housing? If it’s not a lot, can’t we explore options involving one of the 20 mobile home parks that chronically run at 50% capactiy in Santa Cruz?

Ok, on to some specific claims that come up when I read about affordable housing and ADU construction:

Claim 1: ADUs put downward pressure on rental rates by adding to the rental stock

There is excess demand in the rental market currently…that much is crystal clear from the perpetually increasing rent/sqft in Santa Cruz, County. Since there is excess demand, I find it unlikely (if not impossible) that these ADUs will come on the market below the market rate. Why would they? There is excess demand so they might as well try to extract max willingness to pay from those many renters lining up for the limited available units. The only way ADUs put downward pressure on the market rental rate is if enough of them come on the market to address the excess demand.

Let’s make it overly simple: the current market rent in Santa Cruz is around $2.20/sqft. Suppose there are currently no units for rent and 10 individuals willing to rent at this price. If 10 ADUs come on the market as rentals tomorrow all 10 rent for $2.20/sqft and the rental rate is unchanged. It is only the case that ADUs put downward pressure on the overall rental rate if ADUs come on the rental market in quantities greater than the current excess demand in the rental market. Nobody in my community is talking whether this (total ADU potential relative to excess rental demand) is an empirical likelihood. That is, I believe they want to just be hand-wavy and say, “ADUs add to the stock of rentals and therefore put downward pressure on rental rates” and they don’t want you to think too hard about the conditions under which that statement might be true.

I contrast the situation in #1 to something like our current restrictions on developers that any multi-unit housing development including more than 10 units most provide some percentage of those units under Measure J specs (income restricted units in Santa Cruz can only be sold to people with incomes below a certain level, they are capped in terms of what the sale price can be). So while Measure J units actually enter the market as affordable housing, ADUs enter at the market rate and only become ‘affordable housing’ to the extent that they tip the Supply-Demand relationship towards oversupply.

Corrollary 1

When we talk about ‘solutions to the affordable housing problem’ are we talking about stopping the rate of increase in rental rates? or bringing existing rates down?

I’ll concede that ADUs, even if they can’t close the demand-supply gap and bring current rates down, could slow the growth of the rental rate…I’m not sure that’s what ‘affordable housing’ advocates are talking about since, if $2.20/sqft is straining low income families currently then I doubt anyone will be celebrating if the median rent is $2.50/sqft next year instead of $3/sqft…but if what we are talking about is slowed growth of rental rates, I concede ADU construction might be quite effective.

Claim 2: ADUs add to the ‘stock of affordable housing’.

People like to view the lack of affordable housing in Santa Cruz as a supply issue…that is, we simply don’t have enough low-cost units to satisfy demand.

As I’ve stated above, ADUs don’t enter the market as ‘affordable housing’ unless regulated as such. That means that what these people must mean when they say, “ADUs add to the stock of affordable housing” is, “there are too many 1400 sqrt rentals which, at the market rate of $2.20/sqft, equate to a monthly rent of over $3,000/month which is financially out of reach for many Santa Cruz County residents. So what we need are more 400 sqft units priced at $2.20/sqft or ~$800/month.”

So is ‘affordable housing’ an issue of size mismatch? Well, one problem that ADUs could, theoretically solve, would be the problem of lots of young, single people (who only need 400 sqft of space) renting 2 bed-2 bath units leaving no appropriately sized units for low income families to rent.

If the rental market were segmented such that removing all single individuals from rental units greater than 500-600 sqft and moving them ADUs would immediately result in an oversupply of larger rental unit, then one could imagine that ADUs would drive the price of larger rental units down. This could be good for low income families. Two questions I have:

1. How likely is it that this is an actual problem that exists in real life? I’m going to claim that, with median rent hovering around $2.20/sqft, there probably aren’t a ton of people currently renting 1,0000 sqft units that would rather be in a 400 sqft converted garage. Are there some? Sure? Are there enough to create a mass downsizing event that might cause deflation in the rental rate for large units? I doubt it.

2. How likely is it that, when we supply the rental market with an abundance of 400 sqft ADU rental that single people renting 1000 sqft units are going to move? Might some of them say, “I want more than 400 sqft of space and I’m willing to pay for it?” Is it possible that this is the primary reason for all these hypothetical single people renting larger unit currently?

I’m not convinced they do…but even if they do we are still left with the question of whether ADUs will add affordable housing stock.

As discussed above, if enough ADUs are supplied to the market that excess market demand transitions to excess supply (a pretty unlikely scenario in my book), then ADUs MIGHT put downward pressure of overall rental rates…

And if every individual living in (let just say) 600 sqft of space downsizes into an ADU…and if there are currently lots of individuals living in large rental units of 800 sqft and up (another really, really, really unlikely situation)…then ADUs could put downward pressure of rental rates for large units…

But what about the rental rates for smaller units?

Do ADUs help old, poor people if we don’t put any restrictions on the conditions of the rental? I’ll gently remind readers, we are currently in a state of extreme excess demand in the rental market. If we remove all individuals from their 1,000 sqft rental and get them to bid on ADUs, doesn’t this put the elderly poor we should be concerned about in a bidding war young, employed, relatively high earning app developers? How do you think grandma on her $2,200/month fixed income makes out in that auction?

Claim 3: Sure, we need an all-of-the-above strategy but ADUs are something we can do NOW that will have a measurable positive impact


I’ve already disputed the ‘measurable positive impact’ part. Now for the ‘it’s something we can do now’ argument.

‘Easing the ADU permitting process’ represents a change to local housing policy. It is fundamentally no different from Measure J or other ballot measure-type actions that address affordable housing. To say that the ballot measure process is too lengthy and contentious and therefore “we should focus on ADUs because it’s something we can take action on in the short-term”, is basically saying “it’s too difficult to change local housing policy so here is a solution that changes local housing policy.”

Clearly, the “it’s something we can do now” argument is predicated on an assumption that ‘easing the ADU permitting process’ should escape the type of scrutiny that would be leveled on a higher profit change to local housing policy. I see no compelling reason why this should be the case. Giving handjobs to homeowners and developers is an important change to municipal government and it should be evaluated and debated as such.

Final commentary on the elusive ‘Win-Win’ of housing policy

This is a little awkward for me because as an environmental economist working almost exclusively with market failures, I’m used to slapping around old-school economic though that doesn’t appropriately respect the role of market failures…but in this case, the old-school economists’ skepticism is, in my opinion, warranted. That is, the main thing that unsettles me about the ADU debate in the context of affordable housing is that it is basically a bunch of homeowners that want concessions from the city (lax permitting, fewer inspections, lower costs) and they want to frame this as a win-win (the homeowner gets the financial burden of development eased and gets to profit off the new development…and the community gets ‘affordable housing’). The issue is getting a lot of traction in communities everywhere because people LOVE ‘win-win’ solutions to social problems. Economists tend to be skeptical of proposed ‘win-win’ scenarios because it usually means whatever solution is a win-win is a solution to a problem that never existed. That is, if there is room for a win-win then whatever constraint was originally on the system wasn’t binding in the first place.

In this case I can see pretty clearly how the homeowner-developer wins. I feel like if the city/community needs to think pretty hard about how they get their half of the ‘win.’ For instance, I think that if the Santa Cruz City Council were serious about ADUs as a possible solution to the affordable housing issue…and they were serious enough to consider offering concessions to developers to incentive ADU development…then they would propose some restrictions to ensure their goals are addressed. Here are a couple examples:

  • Ok developers, you can have your reprieve from onerous inspections and fees associated with ADU development…but you have to agree to put this unit on the rental market at 75% of the current market rental rate.
  • Ok developers, you can have your reprieve from onerous inspections and fees associated with ADU development…but you have to agree to rent to someone making below the median county income and you can’t charge more than X% of their gross monthly income.

And a final thought to leave you with: I’ve actually heard County Supervisors in my community mention the high cost of housing and how ADUs can also offer a solution to help get people into home-ownership (presumably by giving them a way to convert their house into an income stream). Have these fools learned nothing from the last 10 years! Do we really need ANOTHER incentive for people to buy more house than they can afford?

We (the American taxpayers), since around 2009, have been getting pretty consistently stabbed in the dick by the consequences of rampant housing market speculation that came home to roost pretty much as soon as the world woke up and realized American banks and mortgage brokers had been creating a real life version of the Vin Diesel classic, “Boiler Room”, from 2000 – 2007. In light of that dick-stabbing, I’m not in any real hurry to further incentive people to ‘buy big’ by offering them a way to hedge their home purchase by speculating in the rental market.

The bottom line:

  • ADUs offer homeowners a way to profit off their house and offer prospective home-buyers a way to hedge their real-estate market speculation.
  • ‘Easing the permitting process’ means doing away with a systems of taxes and fees that contribute to public finance.
  • So I know who gets the benefits (developers and wealthy home owners) and it’s clear who pays the costs (the rest of us). The question is what do the rest of us get for the money?
  • We’re told (by the ADU-lobby) that we get ‘a solution to our affordable housing’ problem and maybe we do. But the failure of people to articulate the mechanisms by which ADU developments contributes to the ‘stock of affordable’ housing is pretty unclear to me.