Ken McCormick on Resurrecting Redevelopment for Missing-Middle Housing

State leaders have taken the position that California needs 1.3 million new homes and apartments built in the next several years to address our affordable housing shortage. Simply put, they are trying to force cities to induce developers to build more affordable housing by overriding any notion of local planning. The expectation is that market-rate housing builders will leap at the privilege for building more density by agreeing to include more affordable units in their projects, the so-called density-bonus strategy.

 It won’t work. It brings to mind Shakespeare’s adage, “The fault lies not in our stars, but in ourselves.” The State helped bring about our housing shortage when it eliminated its redevelopment mechanisms in 2012, the 57-year-old state instrument that allowed cities and counties to capture future taxes to facilitate current growth, including housing units.

As construction prices rise, due to a mixture of global price trends, reduced immigration and strong demand for contractors in California as the economic expansion continues, market-rate builders cannot possibly build enough homes for the sector of our population that most needs these new housing units: our middle class workforce. Despite historically low interest rates, today’s market-rate builders build either luxury or near-luxury housing units in order to cover their soaring costs (including rising government fees). The state’s plan is for developers to pay for the privilege of building more luxury housing density by adding a few low-cost units each time, somewhere between 5% to 15% of the total built, depending on local and state rules. The result is a bi-nodal distribution of new units being built in California: roughly 90% for the very wealthy and 10% for the very poor, in the best of circumstances.

At this rate, to address the 1.3 million shortage for affordable units, market-rate developers would have to produce some 10 million or more luxury units in the next 10 years, about a 50% jump in our housing stock. Alternatively, State planners might anticipate that developers would begin building so many new luxury units that rental prices will fall dramatically, thus making housing more affordable. It’s not going to happen that way. Developers won’t build if rental prices start falling below marginal construction prices. Banks wouldn’t lend to California’s housing sector in that scenario anyway, so construction would come to a halt, and prices would start rising again.

The root of the problem is not just some cities’ reluctance to see more housing units built under their general plans, as State leaders would have us believe. The problem lies in the State’s termination of redevelopment laws, the primary tool whereby cities had been able to subsidize housing creation using future local taxes, essentially a loan against future tax revenue. The only other major form of housing subsidies today comes from federal involvement, generally more inefficient and bureaucratic than state-wide redevelopment.

True, local redevelopment agencies had many issues. As a tool to energize economic development, redevelopment housing strategy tended to favor old-style urban renewal, clearing land and building large low-income “projects”, poorly designed and inadequately maintained. But a state-wide strategy to enable cities to borrow and invest is the only way we’re going to build housing again for the surge in workers who mostly reflect our 1.3 million housing unit deficit.

We’re not even sure that’s the right number. State leaders haven’t really made a case to support that forecast, haven’t provided the demographic data to guide cities and builders to understand where the shortage lies. Intuitively, most California policy makers and builders agree that the biggest deficit is for workers, particularly entry level workers, young people graduating from high school or college who cannot afford to leave home on their beginning wages and salaries.

So what’s to be done? Guided by principles of new urbanism (smart-transit, pedestrian-oriented policies), we need a new statewide housing agency – not to build, but to provide subsidies to cities for induce small-scale housing projects throughout the state, units that target somewhere between the metric of “low income” (80% of median income) and near-luxury level (about 200% of median income). Embracing a strategy to retain and attract a workforce is more than good-hearted – it makes economic sense. It will pay for itself by the rising tide of productivity and taxes, the principle of “tax increment” on which redevelopment was based. It is an imperative requirement for California’s growth.

The important element of such a program is that city plans should distribute projects around California’s cities and towns and avoid the historic stigma of concentrated subsidized housing. Such projects could range from a few units to twenty or so, but nothing much larger. In 1975, then-Governor Jerry Brown embraced the concept of “Small is Beautiful – Economics As If People Mattered.” It is an economic development approach that multiple small projects are better for society in the long run than a few number of massive government projects. Small-scale workforce housing is exactly what California needs.

The main difference between such a strategy and today’s environment is that the state as a whole, rather than over-stretched families and struggling individuals, would be the party providing housing investment, and young people might begin moving back here rather than leaving. The investment would be earned back in multiple by enabling new workers to live and produce in California, fueling our growth. It’s time the State stopped blaming the cities for our housing problems and did something realistic about it.