How to create jobs: End inclusionary housing laws

Aug. 13, 2012

By Wayne Lusvardi

For decades, about 170 cities across California have been mandating that developers overprice about four out of five new housing units by as much as $148,000 per unit to exclude truly affordable housing from their communities.  The legal mechanism they have been doing this with has ironically been called “inclusionary housing.”

But this municipal bunko game has recently been exposed for what it really is in a court of law and was overturned.  Back on May 24, 2012, Santa Clara Superior Court Judge Socrates Peter Manoukian ruled San Jose’s inclusionary housing ordinance was invalid.  San Jose was forced to revise its inclusionary housing laws in 2010 after the California Court of Appeal prohibited the City of Los Angeles from enforcing its affordable housing ordinance in 2009 in the case of Palmer/Sixth Street Properties versus City of Los Angeles (175 Cal. App. 4th 1396).

In the San Jose case, the local Superior Court concluded what has been obvious to everyone except those political elites and special interests who benefitted from the law.  For decades, about a third of California’s cities and counties had been deliberately overpricing some 80 percent of newly built housing under the guise of mandating 20 percent of its new housing for affordable buyers and renters. In San Jose, developers were mandated either to set aside about 15 percent of new-built housing units for low-income households, or pay an in-lieu fee of about $122,000 per unit.

No “Nexus” Between New Housing and Non-Affordability

The court ruled that the inclusionary housing law in San Jose failed to provide “a legally sufficient evidentiary showing to demonstrate justification.” San Jose’s inclusionary housing ordinance failed to provide any reasonable connection — called a “nexus” in legal language — showing that inclusionary housing fees related to any increased community need for subsidized housing as a result of building new market-rate housing.  The court case citation is California Building Industry Association versus City of San Jose, No. 1, 10, CV 167289.  Even the American Civil Liberties Union filed a brief on Aug. 2 in support of the Building Industry Association’s subsequent similar case against the City of Santa Rosa.

The Building Industry Association conducted a “nexus” study that found inclusionary housing fees added $20,000 to $148,000 to the price of each new housing unit. Real estate developers have had to jack up the price of the other new housing units by 5 to 19 percent to pay for this “exaction” — a term meaning legal extortion.

In the past, cities have been able to get courts to validate this swindle by only focusing on the proverbial tree instead of the forest.  In other words, cities were successful in getting courts to only look at the lack of construction of brand new affordable housing units, not the price of all new housing.  The larger price exclusion of truly affordable housing as a result of the inclusionary housing law was never looked at.

The courts apparently were never asked in the past to rule on whether raising the prices of 80 percent of all new-built housing far above market prices was really pricing the bulk of moderate-income buyers out of the housing market. Inclusionary housing is really a way to exclude most true market rate housing out of communities while throwing a bone to low-income housing.

Inclusionary Housing Is Way to Get Around Prop. 13

It is also a way to get around the restrictions for property tax reassessments under Proposition 13, the 1978 tax limitation initiative. By pumping up property tax assessments, cities could pay lavish retirement plans for unionized municipal employees.  And as the property tax base rose, cities had even more money to purchase open space around exclusive hillside homes to stop more new housing development.  By enhancing the view premiums of hillside homes, the property tax base could be increased all the more.

Open space conservancies became a racket to shake down vacant hillside landowners in order to enhance the values of greedy surrounding homeowners under the guise of environmental preservation.  It even evolved to the point that cities could invoke eminent domain to buy open land for its lowest use, even though the eminent domain code specified property had to be appraised for its highest use.

Inclusionary Housing Created Local Housing Bubbles

What resulted was a local housing “bubble” having nothing to do with sub-prime or zero down payment home loans.  Cities with inclusionary housing laws were not any more morally superior than the proverbial Wall Street “banksters” who made out like bandits with sub-prime loans.

In the past, cities have contended that no brand of new affordable housing was being built in their cities.  They alleged that new housing construction was excluding low- and moderate-income homebuyers.  But what inclusionary housing laws really did was change the definition of affordable housing from older, obsolescent housing to brand new housing.  Previously, affordable housing was considered to be in areas with older housing stock. What partly made housing affordable was that it was not compliant with newer building codes and modern design standards and tastes.

Market Housing Ladder as Solution

What creates truly affordable housing is the housing price ladder in a process called the “move up market.” This is a process whereby “move up” buyers wanting larger or newer homes buy brand new homes.  The older homes they sell can then be purchased by the next income level of homebuyers and so on down each step of the housing affordability ladder.

As each level moves up into better housing, the housing at the bottom price rung then becomes affordable to low- and moderate-income households.  In other words, if you want to create affordable housing, then build new housing that will end up creating low-cost housing at the bottom of the price ladder. But inclusionary housing allowed first-time homebuyers to jump to the top of the housing ladder and get new luxury housing to boot.

What stopped the music in the game of musical chairs of inclusionary housing was the shut down of all redevelopment agencies in California in order to plug the state budget deficit.  Twenty percent of all property taxes from redevelopment went toward affordable housing.  Without redevelopment subsidies to non-profit low income housing agencies and for-profit affordable housing builders, inclusionary housing has unraveled.

Patronage and Corruption Are Impeding Economic Recovery

Inclusionary housing has existed without being overturned for so long because it created a wide base of political patronage across political boundaries.  The powerful realtor lobby wouldn’t oppose it because it created a local housing bubble that raised all housing values in a community.  The building industry initially opposed such laws.  But courts repelled their challenges. Builders had to play along with the game of inclusionary housing until the plug was pulled on redevelopment subsidies.  Non-profit low-income housing agencies obviously wouldn’t oppose it because of the artificial jobs it created.

Likewise, state planning bureaucrats that mandated each city approve an affordable “Housing Element” in their General Land Use Plans wouldn’t have opposed it because it created their jobs.  Who cared if inclusionary housing was really exclusionary housing?  If there were enough artificial jobs and patronage to go around, everyone would myopically justify inclusionary housing out of their own self-interest. Those who drank the inclusionary housing “Kool-Aid” became too drunk to see the program for what it was.

Inclusionary Housing Furthers Urban Sprawl

Ironically, inclusionary housing created what is called the “push down-pop up” housing market in Southern California.  If you “pushed” truly affordable housing out of older cities along the California coastline in politically “blue” areas, that market would “pop up” in politically “red” inland areas.

Families that couldn’t afford to buy in upscale Pasadena with its high inclusionary housing and parks fees would end up buying in Rancho Cucamonga or Fontana in San Bernardino County.  So inclusionary housing was fueling “urban sprawl.”  But when the state legislature passed an anti-urban sprawl law — SB 375 in 2008 — they made no attempt to repeal inclusionary housing laws in what are called “general law” cities across the state. General law cities operate mainly according to rules laid down by the Legislature.

Then there are charter cities, which have more autonomy in writing their own laws. They could pass their own inclusionary housing laws without the concurrence by the Legislature.

Deregulation is Solution

What the inclusionary housing law fiasco has taught us is that, for there to be an economic recovery, California must deregulate many of its laws.  Unemployment is mainly a local government problem, not a problem that can be cured by mere state or national policies.  What is impeding a housing-market recovery in California is not just “underwater mortgages.”  It is local inclusionary housing ordinances and the whole state bureaucratic apparatus of affordable housing mandates.

Local communities like San Jose may soon realize that repealing inclusionary housing ordinances can create real tax-generating jobs.  In turn, this will likely trigger a horse race in each community to do likewise, or eventually local politicians will not be re-elected.  Unions may be able to buy legislators, but jobs buy votes of the electorate.

Currently, local governments in California are desperately exploring highly risky solutions to re-ignite the housing market to bring about an economic recovery.

San Bernardino is exploring using eminent domain to buy out the excess portion of over-mortgaged loans.  If housing prices drop further, or the courts rule that the county must also pay damages to lenders for cherry picking the best loans from their loan portfolios, San Bernardino could be left with an even deeper hole to dig out of.

The Poway Unified School District in inland San Diego County is issuing highly risky “capital appreciation bonds” that run the risk of sucking all the equity out of home values today in return for a stagnant real estate market in the future.  It is probably not coincidental San Diego County has a quarter of all affordable housing mandates in California.  The only exception in San Diego County is the city of Escondido, which is Republican.

The building industry association is leading the economic recovery, not corrupt school districts or cities wanting to bail out local communities with risky bonds and eminent domain of over-mortgaged homes.

Instead of risky bonds or socializing mortgages, California should look to repealing all of its affordable housing mandates across the board to restart the move-up housing market again.  But this has almost no chance of happening as long as self-serving unions, bureaucrats, non-profits and politicians remain as obstacles to the private market.  What politician would dare cross the unions that have bought and paid for their votes?

Unemployment is a local problem

So unemployment will remain mainly a local problem that is mostly blamed on outside forces such as Wall Street, a Republican-controlled U.S. House of Representatives or the powerless Republican minority in the California legislature.  As long as Democrats can divert attention away from the jobs-sucking machine of inclusionary housing, they will remain in political favor.  But how long will it be before realtors, retailers, industries and low-and-moderate income homebuyers form a coalition to meaningfully deregulate housing laws and other regulations in order to bring about an economic recovery for everyone?

Of course, there will be many phony political reform efforts funded by the unions and the Democratic Party to confuse voters, just as there are now.  But how long can that continue before even Democratic voters see the obvious: inclusionary housing was really exclusionary housing that created local housing bubbles that have priced housing out of reach of the working and middle class?  Sub-prime loans were a way to get around this local price bubble by making cheap money available to unqualified buyers.  That ruined the value of our currency and imperiled the U.S. internationally.  What started out as a local affordable housing program ended up ruining the national banking system and the economy.

As the saying goes, “All politics is local.”  And so is our current managed Depression. Solutions can mostly be found at the local level.  The courts — the only half-uncorrupted branch of government in California — apparently are the only way to overcome the political sclerosis of inclusionary housing and bring about an economic recovery.  The overturning of local inclusionary housing laws may portend a significant change in favor of free markets and an economic recovery.