Bill Witte on Housing Affordability: A Supply and Demand Problem

Bill, a recent study by Trulia found, after examining the range of affordability for a typical middle class home against median household income, that home ownership was increasingly out of reach of the middle class along the coasts, and specifically in Los Angeles County. Please share your thoughts on the meaning and significance of that finding.

Bill Witte: First of all, I think one of the reasons that’s true is that Los Angeles County has a very high percentage of low and very-low-income households. You have both a supply and a demand problem. You have a relatively expensive housing market and an often lengthy and expensive approval process for new development,

In the Bay Area, which might even be less affordable, housing prices are even more astronomic but incomes are generally higher. That’s fundamentally not the case in Los Angeles.

What are the implications of this phenomenon?

First of all, it is worth considering the context in LA County for middle class residential options, which is related to a whole basket of issues, including quality of schools and other quality of life concerns. A lot of the working and middle class moved out of inner city neighborhoods to distant suburban areas in the ‘90s where housing is more affordable. So, an obvious problem arises from commuting—the time, the effect on families, and transportation costs, which have risen as gas prices have risen. That’s one problem. Another problem is the City and the County find it increasingly difficulty to support or attract the middle class, and that impacts a city’s economic base. The net result: middle class jobs may be less likely to locate in urban LA and LA County.

Is it fair to conclude that the Trulia Trends Report found affordability has worsened in the past year? Have home prices have climbed faster than incomes and home mortgage rates have risen?

I think it is true; but, it’s a question of degree. You have a coastal California with a relatively expensive housing market, but you also have a significant percentage of the population whose incomes are below middle class, and with job growth concentrated either in “knowledge economy” jobs that pay very well, or lower paying service jobs. There is a disconnect. In addition, one result of the recession is a much greater difficulty for first time homebuyers to qualify for mortgage loans. The for-sale housing market is doing very well at the upper end but not so well at the lower end.

Would you accept that today’s LA housing market, as some have suggested, simply reflects reality—that the rich are getting richer, the poor poorer, and the middle class is collapsing?

It would be easy to generalize and come to that conclusion, and there is certainly evidence to support it. I think it’s more complicated than that, though. For example, it’s still very difficult and takes a long time to build housing for all income levels in LA, for a whole variety of reasons.  

Time is not your friend if you’re trying to keep housing affordable. Interest rates change, costs go up, etc. It certainly would behoove LA to try to lock in predictable land use controls and zoning to better enable projects to proceed at a more expeditious pace.

Second, there needs to be continued focus on the availability and quality of public services, including schools. You have affordable housing, for example, throughout much of the American South. But, if the public schools and other services are subpar, the mobile middle class isn’t going to always want to be there. It will be interesting to watch how newly energized urban neighborhoods like Downtown LA, where a new charter school is opening, evolve in this regard.

Would a homeowner that migrated to California’s outer suburbs in the ’90s—middle class and working class families—be able now to move back into the inner city or inner suburban neighborhoods, whether in the Valley, Mid-Wilshire, Silverlake, or Torrance, and find housing that’s affordable?

No. But it’s more complicated than that because even if they did, you have to look at why they moved out in the first place. Affordable housing was clearly one driver, but so was perceived quality of life—schools, public services, and things of that nature. Since the Recession, the outer suburbs—homeowners in the Antelope Valley, the Inland Empire—have experienced not only a great decline in housing prices, which were artificially inflated, but also a recognition that they can have a lot of the problems that they thought they left behind.

If you want to look at the glass as half full, you might say that we’re approaching a moment when, if improvements in mass transit continue, the time might be right to attract the middle class. In order to find housing that is affordable, however—at least in the city—most families will have to trade off space and size of home for shorter commute times and access to shopping and other services.

At one level, it is a lack of supply. You’ve got a city that is increasingly built up, and the ability to provide the “traditional” middle class, single-family home with a yard, etc. is increasingly limited and difficult.

So the price of existing urban homes continues to go up because people aren’t building any more of them. It is fair to ask: Can what planners consistently talk about—that is, increasing density, walkability, all the smart growth principles—appeal to the middle class looking for affordability? I think that’s an open question.

Related is one of the largest and most successful development companies in the United States. As a developer of rental and multi-family urban housing, how do you view the challenge of housing affordability for the middle class?

We’re quite active in developing rental and multi-family urban housing. As you know, we have kind of a hybrid business model in that we develop a lot of large-scale, high-density urban housing that, frankly, is expensive, and a lot of very affordable, low-income housing, which is serving the lower-middle class. Absent a change in overall quality of life indicators and land to produce housing that appeals to that traditional middle class family, it’s a challenge.

Purely as the developer responding to market conditions, if you build high-rise, if you build high-density, it’s much more expensive. It is virtually impossible in high-rise construction to serve working and middle class families, purely on an affordability basis, even assuming that the product would appeal to them.

There are a lot of reasons, particularly along transit corridors, to have high-density housing. But almost by definition, unless land prices can be taken out of the equation by public ownership of land, that housing is going to be relatively expensive because of the high cost of constructing it.

If you were drawn back into public life, much like when you worked for Mayors Feinstein and Agnos in San Francisco 30 years ago, and were asked by the Mayor of Los Angeles to advise on housing policy for the middle class, what would you advocate?

One thing we actually did when I worked for Mayor Feinstein in San Francisco, which is as applicable today as it was then, was to identify any surplus—publically owned land that could reasonably be approved or zoned for housing—and essentially invested that land or donated the cost of that land in return for some measure of affordability. The cost of land is only one of the factors that affect the cost of housing, but removing it from the equation might very well enable the production of housing affordable to the middle class.

I don’t know how actively or aggressively that policy has been pursued in LA. There are a lot of small infill public sites, which couldn’t really accomplish very much. But is there significant land under the ownership or control of public bodies in the county that might be used in this regard?

I suspect the answer is yes. You have to look at those things the public sector can actually control. Land ownership, and therefore cost, is one. Zoning is another. Ultimately, use of whatever public funds might exist for housing is the third.

There are only so many ways to skin the cat. I accept that the government has a role to play here, but the role is not unlimited. They don’t have unlimited arrows in the quiver. 

Related develops a great deal of rental housing. Six years ago the City of Los Angeles had a pot of $108 million for affordable housing, which today is down to $26 million. Median rent in LA was $1,850 in the first quarter of 2014, up more than 13 percent over the first quarter of 2013, and 8 percent over just the quarter before. What’s your read of the rental market in LA, and is the market meeting the needs of the city’s middle-income residents?

Rents are going up consistently, although two things are happening. The new product being built is at the higher end because of the cost of land and construction, so whether it’s Downtown, Hollywood, or the Westside, most of the new rental housing construction is higher-end housing—virtually all of it.

What’s not happening is a so-called filtering effect, where people move up to the more expensive housing, thereby freeing up the older, more affordable stock that then becomes able to serve a more affordable market. There are a couple things going on. First, entry-level home ownership is becoming increasingly difficult. Some of it is the rise in cost of housing, although we still have historically low interest rates, but a lot of it is the pendulum swinging toward difficulty in qualifying for mortgages. Six years ago it was too easy, and now it’s arguably too difficult. People aren’t leaving to become homeowners—they’re staying at those price points. So the housing market overall, while extremely strong, is challenged in terms of affordability.

Second, I don’t know data on this, but I suspect that we are losing as much of the very affordable rental stock as we are producing. This point is exacerbated, as you mentioned, by the fact that subsidies for affordable housing with the end of redevelopment, for example, have declined precipitously. We might just be breaking even in terms of increasing the supply of affordable housing. It’s a very challenging time for affordable housing at all levels—both for sale and for rent.

The flip side is that there are historically low interest rates, which likely will be with us for at least two to three more years. One thing that the City of San Francisco did a few years ago—and it’s a version of what LA has tried unsuccessfully—was to pass a local measure to raise funds for affordable housing. They did it by avoiding the trap that has made it difficult in most cities, which is as a tax that requires a two-thirds vote to achieve. That’s very difficult to obtain.

The City essentially voted to commit a portion of its general fund, which could be attributed to increases in property tax revenues, to affordable housing—a “post redevelopment” version of tax increment financing. San Francisco is both a city and a county, so it was able to avoid the city-county revenue skirmishes so common in LA and elsewhere. But LA is going to have to explore similar solutions if it has any hope of addressing the affordability problem.        

The Housing Authority of the City of Los Angeles currently provides the largest stock of the city’s affordable housing. How does its investment in the housing stock compare to other cities’, and how do you as a developer interact with HACLA? 

We have completed four redevelopments of older, obsolete public housing, including two in LA: Harbor Village in Harbor City and Pueblo del Sol in Boyle Heights, which we did with McCormack Baron Salazar. We’re now working on two new, very large ones: the Sunnydale project, over 80 acres with 780 units in San Francisco, and a similar sized project in Sacramento called Marina Vista.

The problem now is that the program that funded most of those—HUD’s so-called Hope 6 program—has essentially been defunded, and there’s a follow on to that called Choice Neighborhoods, which has limited funding that’s highly competitive. You’ll note that Jordan Downs, LA’s entry in those sweepstakes, was unsuccessful this year in getting funds. At the moment, Jordan Downs is the city’s main focus.

But there’s a more fundamental problem in public housing stock all over the country, which relies on operating subsidies from the federal government. Those have steadily been cut back, so even if housing authorities were managed at the highest level, which often they are not, you couldn’t possibly run them efficiently with that system. What you’re seeing now—we’re involved in four of these in San Francisco—is a HUD program called RAD. We’re doing one of these in the City of Richmond for the City of San Francisco Housing Authority. Under that program, housing authorities faced with an inability to maintain existing public housing stock because of those cutbacks are letting private developers—non-profit and for-profit—acquire and renovate existing public housing. They are giving project-based Section 8 rental assistance to those projects—converting them, if you will, from publicly owned projects to privately owned ones that are permanently affordable.

It’s leveraging tax credits and other funds to pay for the upgrades and renovations. It’s not just sustaining the stock, but improving it as well—because existing public housing, which may not have been built so well to begin with, is now beginning to fall apart. I don’t know if the Housing Authority of the City of LA has any plans in that regard, but it is certainly something worth looking into in terms of long-term preservation of low-income housing.

You mentioned it would be better for affordability if the development approval process were streamlined. Community plans in LA were meant to do precisely that, an agreement between communities and the effort to create more housing by right. But only one community plan has been adopted in the City of Los Angeles in the past 10 years, and that plan—the Hollywood Plan—has been invalidated by the courts. Does the LA City Planning Department have adequate resources to do “real” community planning and to get to the goal you just suggested?

Unfortunately the department, as far as I know, lost staffing during the recession as public budgets were cut back. Now, we’re in a boom, and there are massive development proposals everywhere. They haven’t, to my knowledge, had staff reinstated. I think the mayor’s proposal to combine Building & Safety with the Planning Department in some way creates some efficiencies there. But, no, the department clearly does not have the resources necessary to accommodate the growth that’s on the table right now.

Does it surprise you to know that the city’s planning department, at the nadir of the city’s budget crisis, had $1.5 million available for community planning—a function of a 3 percent surcharge on all planning and development permits—but, despite dedicated funding, few planners have been assigned to this priority function?

Yes, it does surprise me. I didn’t know that, and I don’t know the reason for it.

An example of this phenomenon is Santa Monica, where new development has effectively been shut down because the city was hit with this wave of development proposals. Apart from the usual concerns about traffic, there was a concern that they simply cannot process them all. They don’t have the staffing for it. So, whatever your view is of new development, if you’re looking to increase opportunities for the middle class or others, being unable to expeditiously process new development in any form is not a good thing.

You mentioned that redevelopment was eliminated almost two years ago by Governor Brown. Are there any bills in process at the state level that you could support as a possible substitute or replacement for redevelopment?

On the one hand, the governor has been fairly outspoken in saying that he’s not generally in favor of a state role in promoting affordable housing—he thinks local government should deal with that as they see fit. On the other, I’ve been part of a small group that has been meeting with Claudia Cappio—her technical title is Director of California Housing Finance Agency, but she’s clearly the governor’s person on housing. She is quietly, or maybe not so quietly, exploring a variety of things that might be done at the state level—some administrative, some requiring legislative action—that might be able to gain the governor’s support.

It’s going to take some time, though. I don’t think we’re going to see anything in this legislative session, although there are a number of bills. I don’t think the powers that be have coalesced around a single approach. That’s a challenge in a state this big and diverse, particularly if the focus is affordable housing.

The market-rate development community—which we are a part of—is very busy right now, so there’s not pressure from the development community in general. The pressure, if there is any, is coming from advocates for affordable housing. At the moment, it’s been difficult to get those voices heard. 

Lastly Bill, should you agree to another interview a year from now on the same subject, what—if anything—will be different?

If you look historically, initiatives for affordable housing tend to come out of booms in the economy, perhaps for obvious reasons, because the so-called affordability gap increases, focused on lack of affordable housing increases. I think a year from now you will see a more concerted effort at the state level to pass legislation that provides some additional resources for affordable housing. It’s been a two or three-year effort, and these things don’t happen over night

Second, because I know it’s a priority of Mayor Garcetti’s, I think you will see some initiative for the City of LA. It’s tough to do all these things right away when you’re first elected to office. Beyond that, I don’t know that it’s going to be different. You’re still going to have an affordable housing problem, and you’re not going to have demonstrably more affordable prices in the market a year from now.

You may see some loosening up of underwriting criteria for first-time homebuyers. There’s a lot of pressure at the federal level to have that happen through Fannie Mae and Freddie Mac. But if we don’t do something about the supply of affordable housing, and if we don’t continue to focus on the quality of life in urban neighborhoods, then I don’t think you are going to see a significant change.