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:
- This is a perfect example of they type of media peice I’m reacting to in this post: http://www.citylab.com/design/2016/05/how-one-colorado-city-instantly-created-affordable-housing/483027/. It’s very light on detail regarding i) what exactly was Durango’s ‘affordable housing problem’? and ii) how did ADU construction help?
- This piece references the specific case of Santa Cruz (where I live) ,http://www.smartgrowthamerica.org/2014/12/12/using-accessory-dwelling-units-to-bolster-affordable-housing/, although I think they’ve misrepresented some of the specifics of how our municipal government is approaching ADU policy.
- For whatever it’s worth, this joint, https://accessorydwellings.org/2014/08/07/do-adus-provide-affordable-housing/, appears to actually agree with several of the points I’m about to make.
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.
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.
Aaron, hope all is well. Good note. I little run-on for me, but I have the attention of a nat.
The big issue to me in this case is the fact people with money are forced (by there added value money managers) by central bankers to find any investment that looks better then over valued (debatable) bonds and equities. This demand for real estate as a relatively lower risk potential higher return investment option, creates a false demand for “spec housing“ which drives prices up, so primary home dwellers have to compete.
I think I understand your concern on the simplifying and lowering of fees that just gets passed to the rich, but with the fee or without won`t they just pass the cost on ultimately to the renter anyhow?
I think the real dick stabbing is happening at the Central Banker level. They create these asset bubbles to help the rich and perpetually screw the poor and middle class. The rich, the one 1% or whoever, are reacting economically to the environment the central banks are creating.
Historically central banks helped to calm markets that were in turmoil, I guess. Now they have a God complex which is going to screw us all at some point.
If you create regulations to stop these greedy bastards from reacting economically to the central bankers, then we have to add the lawyer, lobbyist fees to the house renter as well.
And that`s it, my attention span is gone. Hope my ignorant, incoherent, poorly worded ramblings supply some form of amusement for your followers.
I enjoyed your take on on the post and found it quite the opposite of ignorant and incoherent. My first reaction to, “with the fee or without the fee won’t they just pass the cost on ultimately to renter anyhow?” is basically this:
I have no problem with a homeowner deciding to turn his garage into a 1 bathroom, 1 bedroom, 300 sq ft studio and rent it out. There’s some red tape he’s got to go through to make sure that development conforms to city land-use policy, zoning restrictions, etc. If he’s willing to absorb those administrative costs plus the development costs because he knows that what the rental market will bear for that unit will allow him to recover those costs in rents, I think that’s great. What I’m reacting to is the idea that we should, without much debate or scrutiny, waive all the administrative fees (and, in some cases supply subsidies) just because we want people to start putting their garages up for rent.
To me it’s a question of public money versus private money…and it looks to me like public money is going to subsidize ADU development under the guise of ‘creating affordable housing.’ Even that situation I don’t object to writ-large. However, I do fear that if public money is aimed at ADU creation under the expectation of creating ‘affordable housing’ it is likely to divert public money away from projects that I think would actually be far more effective at creating affordable housing.
The rest of your comment regarding whether the larger arms of fiscal/monetary policy are to blame for our current massive inequality of home ownership seems reasonable…but I’d have to give that more thought than I’m capable of on the Friday afternoon before the July 4th holiday…sorry.
Very enjoyable and thoughtful post. Thanks so much for it, and for linking to a post I wrote.
While I’m not skeptical on ALL the same points of the typical pro-ADU argument as you, I totally agree that thoughtful citizens should be skeptical of anything touted as a “solution” for affordable housing.
The #1 reason for that is that “affordable housing” is an more of an emotional concept than a scientific one. Yes, there is a proportion-of-income guideline used in some federal programs, but that’s not what people on the street or in the papers are talking about. To them “affordable housing” is kind of like saying “fair taxation.” The implied definition of affordable housing used in public discourse bounces around all over the place. This characteristic makes it easy for any hypothetical policy measure to “succeed”. Or “fail” if you like — it’s a moving target.
Another reason that people should be skeptical of any argument made about ADUs is that most arguments about them are based entirely on hypothetical hopes and fears…. they will house granny, they will ruin parking, etc. There hasn’t been much data to ground these arguments in reality.
One of the reasons I co-founded accessorydwellings.org was to provide a place for actual evidence to be presented. After four years, I think we have some… much is summed up here: https://accessorydwellings.org/2014/09/17/summing-up-adu-research-are-accessory-dwelling-units-as-great-or-as-horrible-as-people-say/
Based on all the evidence, here’s the one mistake I think you’re making: assuming that ADUs are developed and managed like other pieces of real estate. This is not true most of the time, and has some very interesting consequences.
In reality, ADUs are usually created by regular homeowners, not professional real estate developers or investors. In my experience there is no “ADU industry” or “ADU lobby” except perhaps for certain contractors who have realized that ADUs are profitable, or for advocates who really believe in the possible benefits of the form. The “movement” isn’t professionalized enough to have lobbyists, AFAIK.
Yes, the motivations to create ADUs usually involve making money (an income stream) , although this is often combined with family needs (either for money or a place for a relative to stay). It is not the very wealthy that make these things — we know that because the biggest single barrier to creating an ADU (in my city, anyway) is getting together money for construction. ADUs cannot be made by the poor (who either don’t own a property, or can’t get the money together to build an ADU). But they’re not really for the rich anyway, who don’t need all that bother for what to them is a small extra bit of income.
But here’s the really intersting thing : ADUs are not managed like professional real estate investments. Profit is not the permanent goal. ADU owners (who usually live on the property with the ADU) make real use of the flexibility inherent in having 2 dwellings on one property. Sometimes the ADU will be full market rent, other times not.
I have found that about 20% of the time, in Portland, and in the East Bay area, ADUs are inhabited for prices far below market rent. And yes, it is mostly to family and friends. But that has occurred (in those areas) without any specific government support for ADUs as affordable housing. (By the way, the whole argument about subsidies and taxes etc, for ADUs, sounds great but is hard to judge, because what kind of significant real estate development DOESN’T get some sort of subsidy in one way or another? If ADUs are to be critiqued on this basis, we badly need comparison groups.)
I’m not an economist, but here’s what I see ADUs do for household finances. Basically ADUs tend to stabilize a homeowner’s relationship with their property. Currently ADUs don’t do a lot for resale value so they are for people staying put. With the ADU, the homeowner now has more than mortgage debt — they now have an income-producing asset. For those already well off, yes, it makes them wealthier. But for those lower down, it frees them a bit from the savagery of wage slavery. If someone loses a job, rent from the ADU can tide them over.
I think ADUs create a special class of very small-time landlords: ones with exactly one rentable asset. Generally, I see that as a positive form of wealth, and very different from big-time landlording. Not all these owners are angels, not all are devils, but the important thing to remember is that almost none act like they’re running a REIT — and that is what makes ADUs special. 🙂
thanks for the comment. you’ve clearly put more thought into this issue than I have…there is a lot for me to think about embedded in your response. I remain a little worried that in high rent areas like the East Bay and Santa Cruz (where I live) ADUs will get pushed as a way to help people ‘afford’ homeownership. I think you’ve convinced me to second guess my intuition that ADUs have a ‘lobby’ and benefit the wealthy at the expense of moderate income families…I’ll hold on to my concern that people that should maybe save for a few more years to make sure they are really solvent will be tempted to get into homeownership too early because they think they can parley that purchase into an income stream by renting a granny unit.