Affordability, Inclusionary Zoning, and Housing Policies
Three letters to the editors of the Flathead Beacon, Daily Interlake, and Whitefish Pilot
Defining Affordability
Defining Affordability
This is the first of three letters in which we describe the principal features of the City Council’s effort to provide affordable workforce housing and in which we offer an alternative perspective. As will be apparent from these letters, the City Council has ventured into an open-ended realm of social and economic engineering that impacts ownership rights by shifting responsibilities for “workforce” housing from employers to builders or to the public. In addition to its technical and practical challenges, this venture raises fundamental questions about the role of government in a society that traditionally values free-market economic decisions.
The City’s 2017 Strategic Housing Plan (the Plan) seeks to limit the operation of a free-market housing economy with a policy of “deed restricted housing.” The Plan envisions government-imposed occupancy limits as well as price controls on rents and sales of housing units. It then introduces the concept of “workforce housing,” meaning units which are deed-restricted for occupancy “by households that include at least one local employee.” Homes which are not similarly restricted are described as “part of the free market.”
To implement the Plan, the City’s 2019 Inclusionary Zoning (IZ) ordinance applied permanent affordablity requirements to a range of major and minor subdivisions and planned unit developments. 20% of all new dwelling units in such developments were required to be deed-restricted. For rental units, the annual rental could not cost more than 30% of the annual income of households earning 60% to 80% of Area Median Income (AMI) published by the US Department of Housing and Urban Development (HUD). Depending on the renter’s “income range” the maximum rent was limited under a formula to be determined by the Legacy Homes Administrative Procedures (the Procedures). (No such Procedures appear on the City’s website, even though the City recently converted the requirements of the 2019 IZ ordinance to a voluntary system that provides incentives to developments that comply with affordability requirements.) “Ownership units” were required to be similarly deed-restricted such that they would be affordable to households earning 80.01% to 120% of AMI, and the initial sale price could not exceed an amount calculated under the Procedures. Further, a builder was required to disperse affordable ownership units throughout the income range such that the “average” of units were affordable for rental by households earning 70% of AMI and for purchase by households earning 100% of AMI.
The IZ ordinance is burdened by substantial technical defects. A glaring example is the arbitrary nature of its definition of affordability which relies on HUD income statistics. In 2019 HUD reported Flathead County Median Family Income (MFI) as $69,900, a figure nearly 31% greater than the $53,400 AMI reported on the Whitefish Housing Authority website for 2019 (presumably also derived from HUD data). A second example is the IZ ordinance’s use of “income” as the only eligibility criterion for affordable housing by prospective tenants or purchasers. The ordinance does not define income and does not consider savings, investments, property ownership, debt, gifts, or non-taxable trust or estate distributions. As a result, the legislated meaning of “affordable” was, and remains, a remarkably arbitrary and imprecise measure of a person’s or household’s ability to pay rent or to purchase a home in Whitefish.
Giuseppe “GMan” Caltabiano and Jim Ramlow
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References:
– Whitefish City Ordinance 19-15, passed on 7/15/2019
– Whitefish City Ordinance 19-10, passed on 7/3/2019
– United States Department of Housing and Urban Development “FY 2021 Median Family Income Documentation System” and its “Median Family Income Calculation Methodology” for Flathead County (https://www.huduser.gov/…/il/il2021/select_Geography.odn )
– Whitefish Housing Authority’s website
Why Housing Price Controls Don’t Produce Affordable Housing
Due to state law changes in 2021, the Whitefish Strategic Housing Plan now depends on government incentives to builders of affordable housing. It should have been no surprise that the City’s previous mandatory program of “inclusionary zoning” did not produce significant gains in affordable housing units. The current incentive program is not likely to do so either.
The Whitefish Legacy Homes Program enacted in July of 2019, and re-enacted in substance in August of 2021, creates multiple requirements for affordable units within a development. Ownership and rental units must be in the same proportion as “market rate” units. Affordable units must be “architecturally compatible” with surrounding unregulated units and must be “distributed evenly” throughout a development to avoid “segregation” of the affordable households. Even the timing of construction and marketing of affordable units is regulated – these must be conducted “concurrently with or prior to” construction and marketing of the market rate units. The builder must then charge more to its free-market buyers or tenants to make up for its loss on regulated units.
Government control of rental rates is not a new idea, though deed restrictions on sale prices (along with multiple design, location, scheduling, and marketing regulations) is a more recent strategy. But decades of experience demonstrate that neither idea is likely to attract additional private investment in workforce housing. When the government limits the rate of return on private investment to less than what the investor would expect to receive in a free market, the investor will understandably look for free-market alternatives.
Price controls and regulations such as the Whitefish ordinances create strong disincentives to the construction of affordable housing. In study after study, housing economists have identified consequences just the opposite of what the price controls intended. Owners convert rent-controlled apartments to condominiums and sell them at market rates. Empty-nest tenants remain in units that are larger than they need because the rent is low, while families can afford only smaller units. Owners are reluctant to properly maintain units when the cost of maintenance cannot be recouped in market rate rents.
The Whitefish requirement of deed-restrictions creates a still greater disincentive to construction of affordable housing. Even if an owner wishes to sell a deed-restricted unit, the sale price will be determined by the City rather than by prevailing market prices.
The consequence of inclusionary zoning price controls coupled with Legacy Homes regulations is predictable. The more the City regulates the housing market, the fewer affordable housing units that market will create.
Giuseppe “GMan” Caltabiano and Jim Ramlow
A Self-Sustaining Housing Market
The challenges associated with policies designed to influence housing prices differ in kind from the traditional municipal government functions of maintaining streets, water, sanitation, police, and fire systems. That is because economic planning necessarily involves regulation, incentives, and disincentives of private economic decisions.
Government economic planning depends upon a reliable system of data collection objectively identifying the current demand for production of services or commodities, requires credible modeling about that need over some future time frame, requires current and future consensus about planning goals, and requires insight into the likely intended and unintended consequences of a proposed strategy. Government policymakers, no matter how well-meaning, are not that prescient.
Official planning produces a cause-and-effect cycle of private economic decisions. Property owners, builders, lenders, and potential buyers must consider whether and how to invest time, labor, and money in a housing market influenced by a maze of federal, state, and local regulation, incentives, or disincentives. The results are seldom what economic planners had in mind. Rent control, for example, will help affordability in the short run for current tenants, but in the long-run decreases affordability, fuels gentrification, and negatively impacts the surrounding neighborhood.1
A more reliable strategy is to make investment in housing a rational economic choice for the numerous actors with a stake in the housing market, including potential buyers with limited incomes. Rather than enacting or encouraging new restrictions on builders and property owners, our community should first re-examine existing policies that add to the cost of housing. Thoughtful, cost-oriented revisions of policies such as zoning, building codes, architectural design requirements, impact fees, permitting fees, and property taxation are likely to produce meaningful gains toward a sustainable housing market.2 For example, current Whitefish architectural standards for multi-family housing make no mention of affordability.
Our community can draw on a considerable pool of local expertise for the purpose of revising its policies. Architects and builders could, for example, provide highly relevant input into cost-effective methods of design and construction which may not fit current codes or architectural standards, yet still offer attractive, safe, durable, and comfortable housing. Builders and buyers could then make private investment decisions in a market for scaled-down housing.
The goal should be a financially self-sustaining housing market free from political manipulation. Rather than viewing less burdensome regulation as a step backward, Whitefish residents, property owners, and businesses could see them as a constructive step forward in addressing its residents’ housing needs.
Giuseppe “GMan” Caltabiano and Jim Ramlow
1 https://www.brookings.edu/research/what-does-economic-evidence-tell-us-about-the-effects-of-rent-control/
2 https://www.brookings.edu/blog/the-avenue/2018/08/06/both-renters-and-homeowners-could-benefit-from-better-housing-policy/