Market, Not Govt., Builds Cheaper Housing

JAN. 17, 2012

By WAYNE LUSVARDI

Is the demise of redevelopment hurting the poor?

El Monte Mayor Andre Quintero says it is. He’s bemoaning that, when Gov. Jerry Brown  and the Legislature killed redevelopment, the source of funds for affordable family housing subsidies was eliminated in his city.

But El Monte doesn’t need funds from redevelopment for affordable family housing.  The real estate market is already providing it, at least for one of the two zip codes in the city.

El Monte is a city of 118,874 people.  It is a working-class suburb of the city of Los Angeles.  It has older housing stock, 59 percent of which is renter-occupied and 41 percent is owner-occupied.

El Monte Housing Already Affordable

The definition of affordable housing by the U.S. Department of Housing and Urban Development is for a household to spend no more than 30 percent of its income on housing. Well, 30 percent of the $41,948 annual median household income in El Monte is $12,584 a year. That’s $1,049 per month.

According to California licensed real estate appraiser Charles B. Warren, for November 2011, the median home value in El Monte was $240,000 in zip code 91731 (source: Dataquick.com).  Warren stated the monthly mortgage payment today on a $240,000 home in El Monte would be $1,034 per month at a prevailing 3.169 percent interest rate on a 30-year loan, assuming zero down-payment.  That would be $15 less than the 30 percent HUD threshold.

In other words, there is no apparent need to continue to divert redevelopment property taxes from the public schools in El Monte to subsidize affordable family housing.

Prop. 22 Retains Redevelopment Funds Locally

Warren said the way redevelopment works in California is that 20 percent of all the property taxes in a commercial redevelopment project are set aside for affordable housing.  The 20 percent for affordable housing is diverted away from public services such as police, fire, parks and public schools.

Brown indicated in his Jan. 5 state budget revision that $5 billion would have to be cut back from public schools for the upcoming 2012-2013 fiscal year. Coincidentally, about $5 billion in property taxes were diverted from the state budget for redevelopment each year.  Twenty percent — or $1 billion — of the $5 billion in property taxes for redevelopment were further allocated to “affordable housing.”  Under Proposition 22, which voters passed in Nov. 2010, local redevelopment agencies were allowed to retain their affordable housing funds.

Only new monies for affordable housing would be cut off because new redevelopment projects would be cancelled. But should those cities be allowed to keep their affordable housing funds if there is no need for them?

Affordable Housing is a Trick

Warren added that the way California redevelopment law apparently redefined affordable housing as “new” was an end run around Proposition 13, the 1978 tax limitation initiative.  Warren said that, traditionally, affordable housing was old, obsolescent and located farther away from shopping centers and public services. That is what made it “affordable.”

“Affordability in housing is like affordability in cars,” he said. “Older cars are more affordable. Less luxurious cars are more affordable. Of course, the more new cars there are, the lower the price for used. Nobody claims that everybody has a right to a new luxury car. That claim is equally preposterous for housing. Building new market-rate housing lowers the cost of used housing. That’s an affordable housing program that demonstrably works.”

But under California redevelopment, affordable housing is new, with luxury amenities, and is often located on pricey commercial land next to public transit centers or light rail lines. Thus, by redefining affordable housing as “new,” it increased the property tax base and circumvented Prop. 13. The problem is that most of the property taxes from that higher tax base went to city halls rather than public schools.

Markets Provide

The unintended consequence of Prop. 22 and Brown shutting down redevelopment is that affordable housing funds from redevelopment projects may no longer be needed to build inexpensive housing.  The collapse of the housing bubble has allowed market forces to provide affordable ownership and rental housing from existing housing stock in many communities.

That’s also true of areas where housing prices have dropped dramatically, such as Stockton, Sacramento, the Inland Empire in Southern California and the older working-class suburbs of Los Angeles. These areas also likely would not need to continue to build the unnecessary affordable housing that does nothing but perpetuate redevelopment bureaucracies and rob public schools.

Markets, not government, provide affordable housing.