Beyond Affordable Housing: A TPR Middle Class Roundtable

Zeidman, as a former senior official in the City's Housing Department and now with Fannie Mae, are you aware of any municipal policies in place to constructively deal with the housing needs of the middle class of metropolitan Los Angeles? 

Barbara Zeidman: There isn't a coherent public policy regarding housing. There is a piecemeal public policy that isn't housing driven—it's driven by our preoccupation with economic development, whole and healthy neighborhoods, and holding onto a tax base. It's focused on attracting a middle class back into our cities to bring psychological as well as financial investment. The hope is this will encourage people to care in the long term about their immediate neighborhood. 

The one item we now do have to encourage investment in housing is mortgage credit certificates for first time homebuyers—clearly a middle-class tool. 

There are many other things we could do. But the market does a great deal without the impetus of public policy to try to hold onto these same people. 

Kramer: Is middle class housing a more significant policy issue in New York, where you now live and build housing, than it is in Los Angeles?

David Kramer: In New York, housing for the middle class continues to be a significant concern—what public policy objectives need to be pursued to develop housing for everybody from teachers to civil servants to middle class professionals? 

Throughout New York City, the middle class is being priced out of the market because of land costs and construction costs. Programs are in place for affordable housing, and the market and economics certainly pencil out for higher income housing, the question is how to make any project for middle class housing pencil. 

Stark, as an employee of the Lee Group, developing new housing opportunities for moderate income families in Los Angeles, is there a public policy vacuum re middle class housing in the metropolitan area?

Jay Stark: The Lee Group's work in urban infill housing is in some ways meeting the need for "middle" class housing. We're finding that redevelopment agencies and community development departments are really recognizing the need to bring families, young professionals, and others back into their cities and urban areas. They are looking for developers to come in and build that housing. 

The housing we're doing in Southern California is in the $140,000s to the $190,000s. While that might seem high for other areas, it's quite affordable for a moderate-income family here in Southern California. It creates the opportunity not to have to drive an hour-and-a-half to Moreno Valley or Santa Clarita, and to help closer-in cities bring back that tax base along with other benefits. 

How can we create the same affordable opportunities in multi-family housing that have been afforded single family housing? In terms of efficient use of land, how can we incentivize through public policy affordable housing opportunities that utilize land efficiently so that large tracts of land, something no longer available in Los Angeles, are not required to meet increased housing demand?

Barbara Zeidman: Several ways. First, look for more efficient land uses, PUDs (planned unit developments), zero lot lines—even ownership townhomes in efficiently planned settings. It's the land cost that really drives prices out of the affordable range, even more than the development cost does. 

The second thing is for a built-out city like Los Angeles to reuse its existing resources—to take small homes and make them somewhat larger on the existing lots, to repair them, restore them, recycle them so they might have perhaps another 50 years of useful life. 

That is much less expensive for us. Using the available resources is always cheaper than building new. And it's always good when you can avoid some of our more expensive regulatory and land-use issues—getting a sewer hook­up for instance—that drive the cost up even more and make new construction of affordable housing more difficult. 

David, why don't you give us the New York perspective on that question?

David Kramer: Single family and multifamily are two different worlds. Outside of Manhattan, I'm not seeing a lot of new construction of multi-family housing—specifically rentals and affordable condominiums—in either L.A. or New York City. 

It's amazing that in New York City—even in Brooklyn, the second most populous borough with 2 million people—there is very little new construction of multi-family housing. It's because the construction costs are higher in New York than in Los Angeles. And the rents you need to cover the expenses are prohibitive.

As a result, the City of New York has begun to talk about middle income bond programs that would provide either tax-exempt or taxable bonds to create projects that would rent for under the low $20s per square foot. That's difficult to do without subsidies.

In Los Angeles, one of the challenges is that you can still find available rental units for the low $20s or high teens per square foot. If that's the case and the vacancy rate is more than a few percentage points, you won't necessarily see new construction. 

Barbara Zeidman: We are more interested in trying to change the home ownership picture. This is a city that lost 10 percentage points in home ownership between 1980 and 1990—a huge amount of housing turnover. We are looking at similar ideas but applying them in the home ownership arena. 

The City of Los Angeles is doing a taxable bond to provide down payment assistance opportunities for police officers and schoolteachers, because that's the employment level we' re trying hard to hold onto.

But if you want to do mixed income housing (which is the best urban model we know) it is harder, especially from a financing point of view. We’re trying to develop a specific toolbox that works for the middle class and aspiring middle class—the schoolteachers, the pharmacy clerks, the police officers, the people who really make cities work because they work.

Most municipalities are scared to death of the words “taxable bond.” They don’t know how to do it. But we at Fannie Mae know how to do it, and we’re doing it here in L.A. We almost need to take that multifamily toolbox, turn it upside down, and figure out which tools can be adapted to hold onto and work for a middle-class environment. 

Jay, what development tools are at the Lee Group’s disposal when pursuing an affordable housing agenda in this marketplace?

Jay Stark: First of all, even though we’ve come out of a severe real estate recession, we still haven’t seen a lot of new housing built in Southern California. Also, strict construction defect litigation laws have stifled affordable multi-family home ownership in California almost to the point that none is being built.

The Lee Group is pursuing a single family detached home strategy, with densities up to 18 units to the acre. This sort of product has been very well received by home buyers but is often more time consuming to bring to market vis-à-vis working with local government entities. We are working with a city right now which has no mechanism to deal with a high-density detached product, and it’s going to add a year to the process.

I agree with Barbara’s comment about PUDs and similar ordinances—cities haven’t quite caught up to the market yet and can’t understand what a high-density single-family community really is, or how to plan for it. So, we spend a lot of time educating planning departments, planning commissions, and city councils on why our high-density product not only sells well but brings value to their communities. 

When we visit our developments with local officials, as soon as they see how it lives and breathes—how high-density residential home ownership really works—a lot of those barriers go away. But it’s a learning process.

Mr. Kramer, you’re the freest to politically comment on L.A.’s policies because you now reside in New York City. You said in your opening comments that housing affordability for the middle class is a major political issue in New York. Clearly, it is not the dominant issue in Los Angeles. Could you comment on why you think that is?

David Kramer: At least as far as rentals go, perhaps the problem isn’t as severe in Los Angeles as it is in New York. You can still find a 600 S.F. apartment in Los Angeles within a reasonable amount of time for $800 or $1200—you could probably event do much better. So, it might simply be that you don’t have the same sticker shock in Los Angeles that New York is experiencing.

Now, if there continues to be no new construction of multifamily, that could be a problem. As the economy improves and population begins to grow again, you could have an increase in demand with either a plateau or even a reduction in supply.

Another issue is that vacancy rates in Los Angeles aren’t negligible as they are in New York. Someone recently defined the vacancy rate in New York as the time it takes the landlord to clean up the apartment between tenants.

Barbara, do you want to comment? What ideas for grappling with this problem do other jurisdictions have to offer Los Angeles?

Barbara Zeidman: The first lesson is that none of us can afford a single agenda. If you’re for housing and housing only, you won’t have enough partners to make it happen. You need the housing folks-who need density to bring the cost down—married up with the transportation folks—who see housing near transit as critical to the quality of life in a city. 

Then you need those people married up to the folks who are trying to hold onto or find educated workers to do high tech jobs. That's a big problem in L.A. You need all three if you want that worker. And that worker has other options. That worker we're trying to recruit and hold onto—let's say to do film animation—can go up to San Jose, pay even worse housing prices, but at least have access to some housing. Therefore, we must have something more to offer. 

The idea of a single, housing-focused agenda is an idea whose time has passed. 

That's a powerful statement coming from somebody who worked in a housing department that was created on the thesis that it had to be a focused agenda. Are you now saying that perhaps it's time to re­think the value of having a city housing department; that maybe consolidation with the other agencies/entities in the city might be a good idea? 

Barbara Zeidman: It is a critical time to rethink that relationship. Our housing policies must work with our transportation policies, our economic development with our needs to market ourselves as a community. If any of those pieces fall off the radar screen, we will continue to build non-functioning, non-contributory housing. The leverage that you can get from the public dollar gets sliced in half every time you drop one of those agenda items. Pretty soon you have nothing left. 

Jay, you're working in multiple jurisdictions in Southern California, what do the better jurisdictions offer to encourage middle class housing? 

Jay Stark: First, the process in Los Angeles  has really gotten better. If you visit the new Construction Services Center, it's night and day. 

The differences now are mostly in planning and zoning issues. For instance, the City of Los Angeles doesn't have a PUD ordinance that would allow some of the developments we're doing to get approved in a relatively common-sense fashion. 

The best example is our Village Green project, which we're doing with Fannie Mae as our partner. We had to go through—and still are going through—a convoluted planning and approval process. You can't build a single family detached home on a 3,200 sq. ft. lot with private streets because there is no planning vehicle to get it approved in the City of L.A. So, we have to do all sorts of crazy things with unit maps or getting one part of it approved before the rest. 

On the other hand, a lot of cities have recognized a trend in design for higher density single family homes. And they have vehicles to review these projects to make sure you get a good product and design and something worthwhile. In the City of Los Angeles there isn't that vehicle yet. But there is perhaps a new will to look at some ways to get it done. 

If the question were home ownership rather than rental, the question for Los Angeles is, are condominiums being developed as they were years ago and if not why?

Jay Stark: California is the only state with a ten-year liability window for construction defect litigation. And in year nine, attorneys come and start asking the condo association what's wrong with their building. The attached multi-family home ownership market has essentially disappeared here—and this is the traditional vehicle for the first rung of home ownership. 

However, the home building community and others in Sacramento are lobbying very hard right now to get that changed. And it looks like there might be some changes on the horizon. Last year there was some legislation that allows developer to talk to homeowners’ associations before they got sued. That was the first step of progress.

Turning to urban design, it has often been neglected as an issue in housing development. Money spent on design is often thought of as a luxury. What in your opinion is the importance of design? 

Barbara Zeidman: That's another place where we have a chance to intervene in a positive way. For instance, when you're marketing a midrange affordable product, it must look like a place you’d want to live. It also must be designed to promote public safety. Those things are appropriate. 

What worries me is every time we try to talk about design standards with an entity—the CRA or whomever—they don't know the difference between half-a-loaf and a loaf-and-a-half. They over-regulate, over-design, over-everything. It stifles development and tells the developer to take a hike.

The public policy debate needs to be what is reasonable and what promotes a larger public agenda versus what simply adds cost and aesthetic value.

Lastly, do we write the requiem for urban middle class housing in America, or is there hope out there? Is there a product and a policy to support such housing?

Barbara Zeidman: The mortgage industry has designed an incredible host of products that entice the middle-income buyer. You can get in now with what we're calling a Flexible 97 Loan, which is 1% down payment and then you borrow the rest on your credit card—that is a middle-income product.

We have all kinds of mortgage products that sweeten the pot. We just need the public policy that supports them. But they're not quite in sync yet.

If you' re writing off the middle class, you're writing off the city. And I'm not willing to write off the city. You cannot simply have an institutional framework for schools, hospitals and cultural centers—which we all must drive 100 miles to use—and a wasteland of only the very poor who can't afford to live anyplace else. 

We must repair and keep what we have. I see enough people in the public sector saying there is hope and there is a good business reason for doing that. And that’s what going to keep other players at the table.

But the government can only do so much. I’m interested in making sure that the people who have a business interest do so stay partnered up rather than leaving and turning out the lights on their way out.

David Kramer: The largest public subsidy for the middle-class housing is, of course, the mortgage interest tax deduction. Beyond that, housing policy is typically crisis driven. In New York the attention to middle class housing is crisis driven and probably should have started three to five years ago—not now.

Whether it becomes a problem in Los Angeles will really be a function of supply and demand. The question is how much housing either will be revitalized or built new, and how that affects demand. 

We’ve already discussed the fact that there doesn’t seem to be a crisis in middle class rental housing in L.A. But home ownership is still to be determined.

Jay Stark: The whole key to revitalizing American urban areas is education. Builders, developers, investors, and others, they all look to where there are good urban schools. For example, we’re building in a small city in South Central Los Angeles that has a great school district, but the school district next door is in State receivership. 

People are coming from that other city to buy our homes because they see a new $80 million high school and community values for new youth programs, etc. They’re buying our homes not just because they come with quite an upgrade in lifestyle even though it’s only five minutes away.

So, where you see education and civic reform, you’ll see new housing and other opportunities follow.