Luxury Apartments under Construction, 4th and Madison, 1900 (wikimedia)

In liberal Seattle, almost everyone agrees that affordable housing is important, although people are as not as quick to speak well of its cousin, reduced housing prices. Meanwhile, new, dense development is both accused of eliminating affordable housing and being the ultimate source to provide it. I think both sides end up talking past each other because both positions contain a caricature of the segmentation (or lack thereof) of the market.

On my side, there’s a very heavy reliance on the law of supply and demand. Build more units and prices should go down. The dynamic turns up again and again in human endeavor and carries a strong presumption of truth. But if we view the real estate market not as a single pile of commodities but as a series of smaller markets segmented by taste, demographics, and income, the situation gets more complicated and obscures the debate sufficiently to allow people to believe many different things in good faith.

For one thing, even a higher mean unit price may not indicate that housing has become less affordable. In an economically marginal neighborhood, replacing a parking lot with a luxury condo tower will almost certainly increase the mean cost of a housing unit in the neighborhood. However, the impact on the actual existing stock of “affordable” housing is  less clear. There is certainly more supply for people who especially want to live there, driving prices down; however, an influx of wealthier people will bring objective improvements in some senses, particularly in nearby retail property value, local school performance, and so on. As a density guy, I’m inclined to applaud objective improvements in quality of life; I’m not worried about “gentrification” per se, but displacement.

Secondly, “affordable” is often appropriated to mean “whatever I and my peer group can afford,” but in fact the right prescription is different for the bottom and the middle of the income spectrum. A robust free market will never provide housing for the very weakest among us; in the absence of subsidy, destroying low-income housing for a new building is simply destroying low-income housing for good. However, meaningful middle class housing subsidies don’t plausibly scale, partly because they will eventually be built into the price. Anyone concerned about a middle class remaining in the city must accept a large scale plan to make expansion of housing economic. Approve a trickle of projects, and only the most profitable ones (i.e. those targeting high incomes) will move forward.

Lastly, there are long-standing prejudices in favor of home ownership and single-family homes in some segments of society. If these are non-negotiable for you, as they are for many people, bulldozing a row of single-family homes for apartments is a pure loss, a reduction of the supply of the lifestyle you desire. That said, the market is not nearly perfectly segmented, and many single-family dwellers would be equally happy in an apartment or townhome, or would gladly accept something else if it meant more cash in their pockets. Furthermore, the city shouldn’t be obligated to enforce anyone’s personal aesthetic preferences; there are much more important policy objectives to fulfill.

Unfortunately, we’re unlikely to get the properly controlled experiment that removes all doubt about the complete range of impacts.  I think the short term effects on housing costs are murky enough that government finesse in managing the market is worthwhile. But aside from nonprofit efforts, in the long term today’s affordable housing comes from yesterday’s luxury flats, and cutting off the supply of the latter will deny our children the former in the absence of massive, unsustainable public subsidy.

110 Replies to “Real Estate Market Segmentation”

  1. Remember that replacing the parking lot with the luxury condo tower will decrease the cost of other housing as much as it increases the cost in the location of the tower – it’s just more diffuse.

    1. Well I mention that possibility. If changing demographics reduce crime or make the schools appear to perform better, that’s going to create a secular increase in values.

      1. Some of it probably moves, some of it is probably actually reduced by the additional social capital that wealthy people bring.

    2. I will just say that no one has ever said (that I see at least) that replacing a parking lot with housing destroys affordable housing.

      I do think that tearing down SFH to build apartments could easily increase the prices of SFH, which might be okay as long as the average unit doesn’t rise in price.

  2. I’d generally agree with your analysis, but I’m unclear on why projects targeting the high end would a priori have the highest margins. High-end projects presumably cost more to build in addition to bringing higher prices. Is there a reason to believe the rent/sales price to construction cost ratio is different at the high-end than in the middle tier, say?

    1. There is a base level of cost for any project due to regulation: fire exits, smoke alarm, building permits, environmental review, design review, etc. These cost the more or less the same whether you are building $1 million condos or $100K condos, which suggest they make up a larger portion of the price of the $100K condo, and indicates you can get a larger margin assuming the equation looks like

      margin = price (amentity level) – (Base cost + cost(amenity level))

      and the first derivative of price > the first derivative of cost.

      It’s tricky because the curves may not be straight, there’s diminishing marginal returns and as things get more expensive it because tougher to sell.

      1. Developers in other contexts can and do target middle income consumers for new construction. What are the factors that would prevent a developer from doing so in an urban core?

      2. I suppose it depends on your definition of middle income. Even the 1% can only buy so many houses.

      3. Land value is the driver in determining the value level that will be built. If it’s waterfront obviously the housing built will need to support top tier rents or sale prices. Raising the height limits has a similar effect. If a project can’t be built to maximize the potential the land will most likely sit vacant or remain with whatever existing development exists.

    1. Succinctly put. Actually, we have some level of an experiment – it’s called Vancouver, B.C. There, the construction of all those new housing units constrained the rental increases in the older units. Those older units are the ones that became more affordable over time.

    2. A lot of older multi-family stuff here is depression area and was built for people very very poor by today’s standards. They were always meant to be affordable. Queen Anne houses on the other hand never were.

      1. A lot of Capitol Hill mansions were definitely built for the rich but by morphing into shared residences have become “affordable”.

  3. This is a nice way of looking at the issue, Martin. You’re right we cannot make experiments, but there are obvious things we can do to make sure we build affordable housing without necessarily subsidies.

    If we care about the cost of housing, we should also care about the cost of construction. This is one of the reasons scrapping the environmental reviews (something that is being discussed now) for small projects is a good idea. Another idea is to eliminate parking requirements not just near rail transit but for anything that is considered “moderate-to-low income” or “workforce housing”.

    There’s lots more like this. Sadly even these are controversial, but hopefully we can make some progress.

    1. Elevators are another expensive but not absolutely necessary thing. I wonder how elevators shake out in the code, especially in LR zones.

      1. Off topic, but isn’t it great that tall buildings find it important to include at least one mass transit vehicle? If only cities were this smart…

      2. Eliminating elevators would require ADA exemptions at the national level. Hmm, that’s something right wing politicans might be interested in.

      3. You don’t need elevators in townhomes, those are low-rise usually. I bet low-rise apartment buildings these days do.

      4. Even for people who are not disabled, elevators are extremely convenient when moving furniture or other heavy equipment into and out of the apartment.

      5. Elevator mandates for tall buildings are a really good idea for a very large number of reasons. Someone should figure out how to make bulk standardized elevator production relatively cheap. Elevators are *not that complicated*; it really ought to be viable.

    2. Well, eliminating actual parking is harder than just the requirements. Unfortunately (in my opinion at least) all the new market-rate residential in SLU includes parking despite it not being required in an Urban Center.

      For elevators, I think the rule is 4+ floors must have it… I remember reading the 12-unit Park Modern in the U-District tried to get out of it and couldn’t http://futureshack.aiaseattle.org/node/6

  4. The inevitable population bust as people flee the big cities will provide an answer. Portland and the Bay Area are shrinking. Seattle reached its growth peak a decade ago and will no doubt fall.

      1. Suburbs winning regional diversity race

        A review of 2010 Census data shows sizable growth in Portland’s Latino and Asian populations, but those groups grew even more swiftly in most of the suburbs. Portland’s black population grew only slightly in the last decade, while its Native American population fell 7.5 percent.

        Portland went from 75.5 percent white in 2000 to 72.2 percent in 2010, making little progress in shaking its image as one of the nation’s whitest, least diverse big cities. In contrast, the proportion of minorities rose more briskly in 15 of 19 suburbs in the tricounty area.

        The reasons are varied, but Portland has the region’s most expensive housing, and hasn’t kept pace with the suburbs in job gains.

        http://www.portlandtribune.com/news/story.php?story_id=131543424559503100

    1. “The inevitable population bust” John, April fools was yesterday. The Bay Area and greater Portland are still growing. Seattle is growing and is at it’s highest population ever.

      1. Portland population growth slows to a crawl

        The sustainable-equitable-yada-yada planning cabal keeps packing in the city’s neighborhoods with junk infill on the theory that millions of people are moving to Portland any minute now, but that premise is simply false. The net in-migration to the city over the past year was a mere 2,070 people.

        We’ve been using 1.4% as the annual growth rate on our Portland per-capita debt clock, but it’s obviously too high. And so we’ve cut it back to 0.7%. At that rate, it will take an entire century for the city’s population to double, and 20 years from now, the population will still be under 675,000. It’s hard to deny that the high-rise schlock that the city is subsidizing and otherwise forcing on its residents is based on a bogus assumption.

        http://bojack.org/2011/11/portland_population_growth_slo_1.html

        (He provides links to data in the text.)

      2. Why are you linking to articles about other cities? Why not link to articles about how the population of Mars has been stable for eons?

      3. I love how allowing developers to build higher, if they choose to make that economic decision, is equated with high-rises being subsidized and forced upon the city.

        As opposed to sprawl, which is supposedly not subsidized or forced upon the region. Even though it’s mandated and subsidized by suburban zoning (parking minimums, FAR limits, etc).

    2. Portland and San Francisco are both growing. This is fact. I’ve always wondered how this guy manages to troll so many blogs and websites 24/7. Does he have a job? Or a brain for that matter?

      1. Having a brain lets one be a fully informed citizen and do more than two things at once.

        The fact that you didn’t read the evidence I posted at 10:54 am when you posted your insult at 10:59am indicates…that you…do not…have one.

      2. The census is all the proof I need. The piece from some anti-density hack blog doesn’t even agree with you. It said Portland is growing slowly. That’s still growth. The Bay Area attracts so many people that it is also growing. So you’re wrong on both.

      3. good questions. I’ve given up trying to respond to his counter-factual statements and citations that don’t show what he says they’re showing.

      4. Portland is not growing. It hasn’t added any net jobs in 15 years. Any net job growth in the metro area has occurred outside of the area served by its transit system.

  5. There are other economic models out there, we just never talk about them in America. For example, a large percentage of Singaporeans live in government supplied housing. There is less of a sense of extremes of living standards there compared to here even though the wealthy classes often employ domestic servants, the average Singaporean is not scrapping to make ends meet, or coping with medical bills.

    As for the private market for housing, the government has extensive anti-speculative policies according to the website:Global Property Guide – http://www.globalpropertyguide.com/Asia/Singapore/Price-History
    Yet a robust mortgage and housing market exists alongside their public housing sector. One tool that the island city nation is using is opening up more land for development. (cue surprised squirrel video)

    It was interesting to observe in my travels that a public housing sector seems to fare well in places like Singapore or Malaysia compared to the United States.

  6. Great follow-up to yesterday’s post, and I agree with almost everything you wrote. There’s one assumption that I’d challange. I’m not positive you’re wrong, but I do question it.

    “destroying low-income housing for a new building is simply destroying low-income housing for good”

    Picture a closed city, with 100,000 people, 1,000 of which are homeless. If the richest 1,000 people decide they want bigger, nicer housing with a better view, they’ll pay to build those homes. Let’s say the developer bulldozes 100 old run down houses to build up. The sum total of homes just went up by 900. Give the market a bit of time, and people move around, but the sum total of homes has still increased by 900. The owners of the 900 now empty homes (likely the least desirable homes) can either let them sit empty, or they can rent them out for as much as they could get. In the case of the homeless people, as long as they could come up with some amount of rent that is greater than the taxes and upkeep on the homes, it would benefit the home owners to let them rent these homes. And homeless goes down by up to 900 people.

    Sure, there were some big constraints on that model – it’s a closed city, for one. But the effects and incentives are the same if you open the city, or increase your boundary area to a region, a state, a country, or the world. Every additional home in a prosperous city* should result in one household somewhere having a new place to live.

    * I add this just because that’s where the jobs are. Build homes in the middle of nowhere and you’re less likely to find people that will want to live there at any cost.

    1. I’d have to think about some of the limitations of your closed city model, but I’m simply not optimistic that those 900 homeless people are going to make rent; the barriers to entering the rental market for these people are huge.

      I want to emphasize that I’m talking about the extreme low end of the market.

      1. Well then, ignore the homeless. Just think about those that lived in the 100 homes that were demolished. Will their rents go up or down, with 1000 more homes on the market?

      2. Under the very controlled assumptions you’ve laid out, and speaking of the set of tenants that are “housable” in the conventional sense, I believe their rents would go down IF all the other residents in your game of musical chairs can rent profitably in the remaining housing stock. Because of that problem and market friction, we certainly have non-mentally-ill people living out of their cars even though there are empty homes in some places.

      3. Then we’re pretty close and I should probably end the debate here, but I’ve got a bit of time.

        “IF all the other residents in your game of musical chairs can rent profitably in the remaining housing stock”

        I don’t see that as much of an if. The richest people’s homes won’t just sit there, and if they do they’ll lower the price or rent until someone’s tempted to move in. Some rent is better than no rent, unless you believe the market will improve in the near future.

        “certainly have non-mentally-ill people living out of their cars even though there are empty homes in some places”

        Perhaps. But there will certainly be more people housed after the build than before it.

      4. In the case of single-family homes, sure. But if you drop rent in a building to fill those last few units, you might end up losing money as you’ve set a new floor for your other tenants. See also Andrew’s comment about how renting to marginal tenants can be a real pain.

      5. Some rent is better than no rent, unless you believe the market will improve in the near future.

        From experience I can tell you that “no rent” is much, much better than “renters who don’t pay, need to be evicted and trash the place”. Not paying your rent isn’t a crime, btw, neither is trashing the house you are renting. And have fun trying to enforce a judgement on the absolute most marginal renter.

      6. [Martin] True. But this effect surely existed before the new units were built. So there’s now an additional 1,000 units on the market – meaning in the apartment complex you describe there’s now another empty unit or two. At some point it becomes worth the owner’s while to drop rents.

      7. Seattle is seeing an unprecidented increase in new apartments being built yet rents are going up. True, many aren’t yet on the market but I doubt you’ll see anything other than a stabilizaton of rent at the new higher cost. Housing supply is driven by demand. No developer is going to build a trendy new building with the thought that they are magically going to create demand. You can increase demand by increasing wealth or you can manipulate the market like we saw with the real estate bubble. Here’s one way to lower rents; government programs to help buy up foreclosed property. Make it attractive enough and people will stop renting and buy up the empty foreclosed homes. Drop in demand coupled with fixed supply equals drop in rent. Although that will be offset by owners jumping on the condo conversion bandwagon.

      8. Absolutely agree with your analysis. The major problem is really at the extreme low end of the market, the ‘can’t make minimum rent’ end. There are far, far, far too many people in that position right now.

        A guaranteed minimum income policy would deal with that, but that’s too ‘left-wing’ for most politicians to consider, even though Milton Friedman proposed it. Which just goes to show that ‘right-wing’ these days implies ‘make poor people suffer’. :-P

      9. Some rent is better than no rent, unless you believe the market will improve in the near future.

        Seems rational enough in theory, but in reality property managers do tend to keep rents high and just take the short-term financial hit from the vacancies. They do this because it’s far more profitable when the building fills in, in the long term. See The Station at Othello Park for a current, local example.

        Wait a few years to find someone willing to pay $1200 instead of filling it instantly at $800, and you can easily make up the money you lost in the years of vacancy.

      10. Rather than rents actually lowering with increased supply what is much more common is a reduction in price growth. If I’m having a hard time renting units I’m not going to be raising rents any time soon.

        That said if there is enough of a glut and the owners can’t afford to lose the cash flow (not uncommon for individuals with a handful of rental properties) you will see rents drop. This has happened in some parts of Seattle with SF homes and condo rentals.

      11. rents drop. This has happened in some parts of Seattle with SF homes and condo rentals.

        Where? Rents are being driven up everywhere in King County because people are too spooked to buy. The big boys though are stepping up to the plate. Outfits like Equity Residential are happy to own you. OTOH, some of the old dogs are getting whipped. I wonder what Wright Runstad’s loss of the PacMed Building will do to plans for the Spring District. Looks like Amazon Fresh is going to have a long term lease thanks to the musical chairs played by the parent company. Bezos is ruthless and smart.

      12. @Lack, @Chris: What I’ve seen more often, and which actually matches both of your intuitions, is one-time rent discounts. Sign a 12-month lease, and they’ll give you a month free, sometimes even two months. Generally it’s amortized over the course of your lease, but even if not, that’s how most people think of it.

        Savvy renters can (and do) leave after the 12 months, and find another building with a similar special deal. But often, people get to the end of their lease and decide it’s not worth the hassle to stay.

        This is a very cheap way to attract renters in a poor economy. No one would ever rent an apartment that advertised a guaranteed rent increase of 8%, and yet that’s exactly how these deals work!

      13. Guess what your mortgage payment would be if you’d bought back then.

        Interesting question. Have I moved in the past 20 years? Did I live in a condo or townhouse? If so, what were my HOA dues? Did I need to take a home equity loan because my entire life savings was tied up in a down payment?

        I actually considered buying a condo at one point. One of the first things the realtor told me was, look at the HOA dues. If they’re low, then that means they haven’t discovered the major problems with the building yet. If they’re high, then that sucks, but the selling price will be lower to compensate. But still, what’s the point of buying a unit if you’re stuck with $800/month dues? That’s half my rent, and I don’t have a mortgage payment.

        For a lot of reasons, owning a condo is a sucker’s game — even with the mortgage interest deduction. It could be better if the laws were different, but they’re not. So if you want to live in a dense environment, lifelong renting (and saving the money you would have put towards principal) is often the best option.

      14. So if you want to live in a dense environment, lifelong renting (and saving the money you would have put towards principal) is often the best option.

        Sometimes, maybe. Often… no. Remember, somebody owns all of the housing units and “often” (much more often than not) the landlords aren’t the net losers. Of course that requires a “buy and hold” strategy. If you’re you’re going to move in five years or so then buying isn’t such a great option. Sure you could become a landlord but if you’re out of the area and not able to do basic property management things then that becomes a money pit. But, if you were looking at buy vs rent in 1992 and have stayed in the area you’d be so far ahead by buying it almost covers your retirement. Renting for twenty years… nada! Eventually even transit advocates get old.

      15. @Bernie: You’re completely ignoring the facts, and just repeating your original assertion.

        What about HOA fees? What about the laws that require landlords to keep rented units in good shape, but say nothing about condos? What about the huge premium that condos currently have over equivalent rental units? What about the opportunity cost of not investing the money that would have been tied up in a single, non-diversified investment? What about maintenance costs? What about insurance?

        Landlords do well precisely because none of these things matter. They own the whole building, and own it for a long time. They have enough money to diversify their investments. They have enough information that they can make repairs at appropriate times, rather than (as condo builders can and do) building something they know is shoddy so that they can save money.

        The fact that someone can make money by owning a building does not mean that everyone should own their own building, any more than the fact that someone can make money by owning a farm means that everyone should grow their own food. Modern society is based on doing what you’re good at and paying other people to do the rest. My landlord is better at managing and maintaining property than I am; what’s the problem with her earning a profit for doing something I don’t like to do? (The fact that renting is cheaper is simply a bonus.)

        Again — owning a condo is nothing like owning a house. It’s just not a good deal. Owning a house, sure. But SFH land isn’t where I want to live.

      16. owning a condo is nothing like owning a house.

        Sure it is. You get a tax deduction for interest paid. You have the inflation protection. And you have all of the downside like having to foot the bills for repairs. Buying a condo is perhaps more complex than buying a house; more like buying a house with a bunch of partners. Most of the shoddy condos are apartment conversions. But just like a house the buyer has to do due diligence. There is no shortage of shoddy SF builders and if you’re buying an older home you really have to be careful. Buying isn’t for everybody but over the long term, you’re working life, it’s an investment whereas rent is simply an expense. For some people that expense is worth it. The difference between buying real estate and other investments is that you have to live somewhere. So that rent money can either work for you or for someone else. If after 30 years your house is worth nothing… then that’s exactly where you would have ended up paying rent. Check your numbers, the short term cost of renting vs. owning has almost leveled out.

      17. Bernie,
        A couple of things:

        1. I did in fact see prices for rental houses and condos drop during the worst of the recession. They’ve gone back up since. They still aren’t what they were, especially to the upper end of the market.
        2. A lot of landlords aren’t big REIT’s or investor groups. A lot of SF rental homes, individual rental condos, and small apartment buildings are owned by individuals without deep pockets.
        3. Owning is not always a better bet than renting, even if you plan on staying in a place long-term. It really depends on what you are paying in rent vs. what the monthly cost to own a similar dwelling is. Now to really take advantage of the situations where renting is the “better” choice you need to invest the monthly difference between renting and owning which few people do.

    2. Here are a few issues with the closed city model:

      1) Friction to moving, this is really non-trivial. If you’ve ever sold a house, you know what I mean.

      2) Dead-beat renters. I know from experience as a landlord that it takes a long time and a lot of money to get from the moment a renter stops paying rent until you can start getting rent again. First you have to start the eviction process, go to court, wait for the sheriff to come and evict. If the sheriff does a good job or the evictee is agreeable, you don’t have to bring the sheriff around again. Often you do, maybe several times. Then you have to clean the place up and get it into shape so it can be rented again.

      3) You can remodel two units into one, or ten into one if you want. There’s an apartment building on first hill (I think the Marlborough?) where there’s a top-floor penthouse built from three or four smaller apartments. I almost bought that place when it was going to be condos, but they went apartments and I didn’t get the chance.

      1. 1) Couldn’t friction be considered trivial given enough time or a large enough market? I may not want to move, no matter how good a deal the place the place down the street is. But if there are a thousand more people just like me, one of us will want to.

        2) I agree. But this just raises the minimum cost, just like taxes or upkeep. People with very little income still won’t be able to afford a place. But people with enough income to eventually come up with a deposit will.

        3) I’ll buy that as a weakness. And I think there are a lot of other weaknesses along a similar line. But is the conversion effect large or small? Or would conversions happen in the other direction? If the market did have enough friction and a large home wouldn’t sell, maybe someone would convert it into a dozen cheap units.

      2. 1) Given “enough time” we have to handle all kinds of other possibilities, like people dying people getting born, divorce, etc. If not, I think, the model cannot provide many insights. Even in the closed model, given enough time to eliminate friction, wouldn’t someone have already found housing for those marginal renters if it could be done profitably? You shouldn’t have to wait for the absolute richest housing to “trickle down”, we could just attempt your conversion model: some into many, or build a new building somewhere for someone.

        2) Outside of very rare circumstances (there was an NPR thing about a town in North Dakota without enough housing), the marginal renter who doesn’t have a place is not someone you can rent too. The people beneath the floor of affordability precisely the people for whom we need public housing. In reality, not the model, the marginal renter you can rent to is maybe someone who is choosing between Seattle and Auburn or the Puget Sound area and Phoenix (or whatever), in the closed model, likely isn’t the case or we’d see the “conversion effect” mentioned above.

        3) The housing destruction effect can be very large, see Detroit.

      3. 1) We can certainly talk about those other factors, but it’s a bit beyond the scope of a comment section discussion. Regarding whether we could just build low-income housing at market rate, the answer is yes. But I was trying to address the more difficult question of whether building high-income housing can “trickle down”.

        2) My point is that a unit built is a household housed. In an open model, that family might be moving in from outside the state. But then their home is available at a slightly lower value. But the open model gets messy, so I find it useful to start with closed models.

      4. Yes, all I am saying is “low-income” and “absolute most marginal renter” are not the same thing. And landowners don’t rent for altruism, they do it for money, and the supply of housing can change even without “development”. The cobb apartment buildings downtown came from former office space, and the former owners of the Smith tower want to turn it into condos. You can imagine things going the other way, maybe apartments becoming hotels, or combining, if rents start to get too low.

      5. I’m going to emphasize again that if there is a large population of people who are below the ‘can’t reliably make rent’ level, they have a problem larger than housing; those people have other needs and need to be given *money outright*. Our society seems unwilling to actually do this.

        If there’s a smaller population of such people, the mentally ill, spendthrift, and otherwise incapable of handling their own money, they need public housing, obviously.

    3. Why exactly would 100 homes be replaced by 1000 residents? Why not assume a one for one replacement? Maybe some of those 1000 will opt for multi-family living, but I would guess not a lot of them would. Some may value a better view, but some would place more value on a quiet neighborhood and good schools.

      One way for those latter people to get their bigger house would be to buy a tear-down in a gentrifying neighborhood and build a nicer house. Bye-bye affordable housing, hello increased housing prices.

      1. True, [aw]. Replacing low-income housing with sprawled single family houses is removing low-income housing for good. The trick to increasing affordability is to increase density.

        (though I question how this is applicable to Seattle – where is anyone tearing down apartments and building single family homes?)

      2. I said one-for-one, meaning tearing down a SF home for a bigger, better SF home. Show me some place outside Manhattan where the 1% richest would prefer to live in an apartment or condo. Even there, you might find a three story brownstone converted to SF (complete with a parking garage in the lowest level).

      3. Your argument is a bit confusing. If you’re building big beautiful houses, I assume you need more space than one affordable apartment or even one small affordable house. Again, where in Seattle is this happening?

        But taking your argument at face value, one-to-one replacement in a closed model doesn’t touch affordability. There’s still 99,000 homes for 100,000 people. The poorest housed people will just be living in different homes. Remember, those richest people moved from somewhere in this city, and someone moved into their homes – the number of homes is unchanged.

      4. You might be surprised, latest data (2009) a quick search turned up is an income of $344,000 puts you in the top 1%. I’d bet that pretty much covers all of the high end apartments being built in DT Bellevue as well as the most luxurious units in Seattle. But a lot of the most expensive multi family being built in Seattle is senior housing where residents don’t have much income but have accumulated wealth and are done with the house on Mercer Island, Magnolia, etc.

      5. Matt, I don’t see what’s so hard to understand. You hypothesized that 1% of the wealthiest moved into better housing, but they displaced only .1% of the existing housing stock. I’m just challenging that assumption.

      6. [aw] I’m challenging the assertion that demo’ing affordable housing always removes affordable housing. I showed why that’s not the case if you build up. If you build sprawl, then that assertion would be true.

    4. If the richest 1,000 people decide they want bigger, nicer housing with a better view

      Let’s review how this played out in Bellevue. Not a closed city but with the toll on 520 we’re working on it := What happened in the 90’s and through 2008 is developers bought up perfectly good 30 year old homes on one acre lots and bulldozed them to build McMansions. This drove up property and construction prices everywhere. Maybe a few homeless people got construction jobs but the homes rich people moved out of didn’t get put on FreeCycle. Ah, but you said “build up”. Well, that happened too; to the tune of about 5,000 units in DT Bellevue. There were maybe 1,000 affordable units destroyed for a net increase of ~4,000 but that didn’t drop rents a dime in Crossroads, now did it?

      1. 3,000 more households can afford to live in Bellevue that couldn’t before. Rents may not have dropped in Crossroads*, but they dropped somewhere relative to what prices would have been.

        And bulldozing homes and building McMansions doesn’t change anything. Yes, those homes go up in price, but the rich people that move in moved out of somewhere else.

        *isn’t that a mall? sorry, don’t know Bellevue at all, despite working there for years. there’s no there there.

      2. You should hop on RR B sometime. Get off at Crossroads and look around. Prices have gone up everywhere. Saying “relative to if nothing had been built” is an impossible comparison. It’s like saying “if there was no economic growth”. You fundamentally alter what you’re looking. You’re not dropping chesse to a fixed number of rats.

        bulldozing homes and building McMansions … but the rich people that move in moved out of somewhere else.

        And the people that lived in the house that got bulldozed moved somewhere too. Maybe downsizing to the former McMansioner’s abode albeit at greater cost. Developers build houses because of demand, not to drive down the cost of living. Housing will never be like corn 5 for a dollar because there was an unexpectedly good growing season.

      3. “Saying ‘relative to if nothing had been built’ is an impossible comparison” This is sort of my point. You say “let’s review how this played out in Bellvue”, but you’re not comparing it to what would have happened. Less supply would have meant higher average rents, since you didn’t touch demand.

      4. Or less demand would mean less supply. In fact, even ardent supply siders are really looking at how to increase demand through more supply; like build a new freeway and you’ll generate more daily trips. Eliminate property taxes and you’ll increase the supply of housing. Eliminate the GMA and building permits and you’ll increase supply. Of course you’ll also have a bunch of substandard construction sprawled all over the landscape.

  7. Seattle’s housing mix is still heavily tilted towards SFHs, but not as heavily as it was. There is no need to reduce the SFH supply to increase the supply of multifamily units. As we’ve seen with SLU and Belltown, there are ample opportunities to increase density in areas that can more easily handle larger populations by redeveloping disused buildings and vacant lots.

    1. And we don’t need to have as many restaurants as we do now – we can get by with a few dozen. But then the price per meal would skyrocket…

      I don’t think we need to open up every SFH zone to 500′ development. But it wouldn’t hurt to, for instance, expand our urban villages a bit and raise the density. Let’s give the market something to work with.

      1. open up every SFH zone to 500′ development

        Sounds like a great idea! Even better lets remove height and FAR limits city-wide (along with eliminating parking minimums).

    2. Our housing mix, within city limits, recently went majority multifamily, depending on how you define multifamily (like how you classify certain types of townhouses).

    3. Well, with our extensive billion dollar transit system, it should be easier than ever to live in a low cost suburb, drive to free parking, and find a job in the Transitosphere with good take home pay.

  8. We did just run an experiment on increasing housing supply in excess of demand. It was called the real estate bubble. The lack of demand (i.e. actually being in the market for a home as opposed to just wanting a free pony) was met by financing schemes that let people soak up the additional supply. And yes, in the end it did drive the price of homes down by about 20-30%. It also created 8% unemployment pretty much offsetting the affordability. The only way an over supply of MF housing will be built is a similar government manipulation of the market which would have the same result. But being much more concentrated might take much longer to recover.

    1. We’re not talking about overbuilding. We’re talking about reducing regulations to allow the market to build enough homes to meet market demand.

      The economic crash wasn’t caused by an oversupply of housing. It was the realization that a bad financing model was being used. Nobody lost their job because there were too many houses. They lost their jobs because people couldn’t/wouldn’t pay for these houses (well, among many other things, but this was the trigger).

    2. just a small quibble here, it wasn’t supply that suddenly changed, it was the demand side that changed due to economic conditions. Housing obviously takes significant time to come to market. Yes, lots of new construction in various markets but it wasn’t a sudden appearance of those units coming online that broke the market. It was the sudden removal of capital borrowing from the market coinciding with sudden loss of income for millions of people that made them unable to afford housing compounded by a destructive invention called derivatives.

    3. Well…that’s one story, but like Rashoman, there are differing perspectives.

      Houses are like stars on Sneeches.

      Those Sneeches with stars consider themselves superior.

      But if a star making machine comes around, the Sneeches without stars will pay money to get a star.

      At that point the Sneeches with stars will try to get rid of their now devalued stars.

    4. “The lack of demand (i.e. actually being in the market for a home as opposed to just wanting a free pony)”

      You’re blaming the middle-class non-buyers because the developers would only build luxury units the median income couldn’t afford?

      1. You need to get out of the blame game to rationally look at supply and demand as it relates to housing. It’s just an often overlooked fact that wanting does not constitue demand. Housing is a lot like cars; a durable good. As soon as there is an oversupply building shuts down until it’s corrected. We’re already seeing this in Seattle where so many apartments have come on line because of the shift in preference to rent vs. own. Developers know that it’s always to some extent a boom bust cycle and to make money you have to be first in and first out.

      2. The supply is $1100+ housing. The demand is $650-1000 housing. The builders are not building what the market demands; they’re all chasing a small-number of upper-income people until there’s not enough of them to go around, and they’re deluding themselves that people who haven’t gotten a net income increase in 15 years can pay ever-increasing rents. That’s why these new units are remaining empty for months.

      3. If there was a $500 delta between the supply and the demand apartment vacancy rates in Seattle would be “through the roof”. The latest data I remember reading had it at around 5%. That’s about as low as it can possibly get because of people moving. The market says the demand is there for even higher rents. If not then new apartment starts would disappear. Again, you’re talking about what you want which is different than what demand is.

      4. Perhaps the market demand in Seattle is being driven by people of means from the suburbs choosing to move back to the city leaving the less well off to move out of the city to where rents are more closely matched to their income.

      5. Charles: this is documented to be happening elsewhere. It’s a bad situation when the people who move out of the city to cheaper housing find they can’t afford to get to work. This is a rare situation — in previous centuries when rural areas were poor and cities were rich, there usually used to be ‘farms to go back to’. The Dust Bowl might provide some clues as to what will happen next….

    5. However this bubble did not extend to rentals.

      It was a SFR bubble, which spread to the Condo market as well. And when the bubble popped the rental market got even tighter.

  9. I think the bottom line is, if you don’t build enough housing to meet demand all housing will become expensive. If you do build enough housing some housing will become expensive (new housing) while other housing will not (old housing).

  10. The main issue is whether sufficient middle-class and low-income housing is along the frequent-transit network. Then both rich and poor can choose to get around without a car. In Pugetopolis, the poor and lower middle class are being pushed to south King County (especially Tukwila, Southcenter, Burien, Kent, and Des Moines) where transit is infrequent except along 99, and anything requiring a transfer takes up toward an hour or more. That’s if you live near a bus stop; the cheapest apartments are furthest from the bus. The professional middle class can afford the TOD or semi-TOD along ST2 Link and 45th, but for the lower middle class it’s more spotty: sometimes you can find something and sometimes not. RapidRide C, D, and E will help although I’d call it “barely over the frequent threshold, and not enough for travel time”.

    So, we can either increase the supply of housing near frequent-transit stations and hope that eventually it trickles down, or we can expand the frequent-transit network to bring enough area into it that the high-end market is saturated and the price-premium for living near a frequent-transit station diminishes.

    There’s also the land-use efficiency of the old building to consider. Some older, cheap buildings are 3-story and use their lot space efficiently. Others are automobile-scaled space hogs, which rob people of the units that could be within walking distance. While single-family houses are inherently lower density than multifamily units, there’s also a distinction within them: some houses are small and have a small plot, while others are large and have an even larger lot. The issue, of course, is large houses in a transit station’s walkshed.

    Also, whatever happened to carports and exterior covered walkways? Pre-1970s apartments often have these, and they’re much cheaper to build than enclosed parking and heated hallways.

    1. Your point is correct: if there isn’t enough frequent transit, then the areas near frequent transit will all be upscale; you have to saturate the upscale-near-transit market before you can get downscale-near-transit properties.

  11. I’ve not seen anyone but Mike Orr broach the following subject: Affordable housing isn’t occuring with the current building cycle because developers are all building luxury-style condos and apartments. How about someone build something that doesn’t have granite countertops in the kitchen, or fancy fixtures in the bathroom? There’s a market for regular apartments that don’t have lots of fancy extras–does every new complex have to have a fitness center or an elegant lobby? All that does is increase the costs of each individual owner/renter. When I was condo shoping years ago, I skipped past all of the new construction because I didn’t want that, and I’m sure there’s a lot of people who, if given a clear choice and good information, would choose NOT to have the high costs that come with new construction. Sure, go ahead and build it with the best insulation, heating, air circulation and all that, but how about only one sink in the bathroom instead of two? How about a regular shower/bath instead of a huge jacuzzi? If you want a mix of people living in SLU, Belltown or even Downtown, then you need a mix of apartment/condo styles. Not everyone wants or needs a big gas fireplace in the lobby with gold-colored sofas and goose-down pillows. Right now, the only people who can afford a unit in the new buildings there are all relatively wealthy, which means there’s not a mix of people.

    1. Well, it’s broached in the post: constrict supply to a trickle, and you’ll increase the focus on the high end. Let a thousand flowers bloom, and you’ll increase room for experimentation.

      1. But, over the past 10 years or so, what has been built in SLU, Belltown, Downtown other than luxury-style condos and apartments? Or besides a few low-income apartments? The housing construction market has only been bad for four years or so, but before that, only high-end units were being built. I finally chose an apartment conversion for me condo choice years ago…

      2. Low rent housing is being built. Yesler Terrace, Rainier Vista and other SHA projects are the only way low end housing gets built on high end land. What do you think the property Yesler Terrace sits on would sell for if it were open for market rate highrise construction? You can rent a 2 bdrm for $800 in Everett because the land is cheap. Builders aren’t putting in granite countertops and gold plated bathroom fixtures their because there’s no demand.

    2. How about someone build something that doesn’t have granite countertops in the kitchen, or fancy fixtures in the bathroom? There’s a market for regular apartments that don’t have lots of fancy extras–does every new complex have to have a fitness center or an elegant lobby?

      Because the marginal cost of adding these fancy extras is incredibly tiny, compared to the increase in unit value. This is why (and I’m just going to keep repeating this) developers will always build for the top of the market.

      1. That’s my point, then…people want to have a mix in their neighborhood, but because of developers, they are basically getting the same kind of person, over and over. Or, in SLU, Belltown, etc, you’re getting the high end marked with a few scattered low-income housing and homeless shelters…Not everyone wants a condo building with a pool and athletic center, but would still like to live in a relatively modern building in or near downtown…

  12. I certainly think your points are smart and logical, but I feel like you’ve fallen victim to your own criticism of talking past the other side.

    As much as we talk about affordability, I honestly think the deeper issue is gentrification. Gentrification at its core is when a new demographic comes in and dramatically upheaves an existing community, changing social, cultural, and societal norms in the neighborhood. I tried to explain it a bit in this post:

    http://urbdp598.wordpress.com/2012/03/05/lions-liquor/

    A simple way of illustrating this is a small retail sandwich shop in a lower income neighborhood. For years they may have been selling cheap cultural favorites to the community. But as higher income individuals move in, with significant more disposable income, they have every incentive to change their products and cater to these new potential customers. Often the wealth gap is so high that this change is worth it even if the richer residents remain a minority of the population.

    I think its a completely rational decision but as you can imagine it upsets a lot of long-time residents. I think its these issues that cause a lot more of the friction and outcry than the numbers game of affordability.

    1. Gentrification happens because those neighborhoods are often the only affordable ones left – people are simply forced into them. If you upzone and make room for them citywide, it’s not a problem.

      1. How does that work? You’re upzoning neighborhoods that are already more expensive right? Or people wouldn’t be gentrifing “the only affordable ones left”. The upzone is going to increase property values demanding higher cost replacements than what existed prior to the rezone. If necessary it’s better to upzone the less expensive neighborhood. Market forces have already determined that’s where people want to move to and it keeps housing as affordable as possible.

      2. Typically the argument goes something like this: Low income, low rent neighborhood gets upzoned, as it’s a prime target for redevelopment. Low-rent houses / small apartments are bulldozed to make way for new, larger, desirable, fancy structures. Higher income residents from other, neighborhoods move into the new buildings. The previously low-income neighborhood becomes classy and trendy. Rents go up. Low income residents are displaced.

        However, those new slightly higher-income residents wouldn’t be moving in if there was more rental space available in their previous neighborhoods (assuming they weren’t all just moving closer to work).

      3. It would make sense to upzone neighborhoods where rents (and demand) is high. However, historically that has not typically been how it is done – upzones are fought in the expensive neighborhoods (keeping them private and exclusive) and executed in the cheaper neighborhoods as “urban renewal”.

        Thankfully, as a country we’ve seen the error of our ways, and I think we’re definitely getting better at avoiding the same traps and bad decisions of the last century.

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