How to solve the housing affordability crisis

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Per the NY Times today, there is an acute shortage of affordable rentals all over the country and primarily in cities where the economy is doing well.

The reporter spends a bunch of time detailing how terrible the situation is, and very little time talking about solutions, except to point out that the government could spend more money.

But there is a very simple, costless way to increase the available housing stock: Change zoning rules.

Developers are always happy to build projects that make sense. The problem is that so-called work-force housing doesn’t make sense in expensive areas, because land suitable for building dense buildings is expensive.

But cities control the cost of suitable land, because they can always create more of it by re-zoning residential areas for denser development.

For example, here’s what you would do to rapidly create affordable housing in LA at little to no cost to the government:

  • Select a few areas that have good public transportation but which are not particularly desirable (probably along the Expo line)
  • In each area, identify a few blocks worth of R1 or R2 zoned land
  • Re-zone those blocks R4 with 3:1 FAR and 40′ height limit
  • Provide a special reduction to parking requirements stipulating one parking space per unit of up to three bedrooms
  • Provide special, expedited plan check for rental (as opposed to “for-sale”) projects in the designated areas
  • Waive plan check and permit fees

Here’s what would happen: The people who own the relevant lots would receive very high offers for their properties from developers, who would pay cash, close quickly, and begin swinging hammers shortly thereafter. Within a year or two, many of the re-zoned, 7,500 sq ft lots would contain buildings with parking on grade (ground level) and 18 new apartments spread over three stories above. Each apartment would be around 900 sq ft with 3 beds and 1 bath, and would come with one parking space.

Each approx. 20,000 sq ft building would cost around $3-3.5MM, all-in, to build. To get a 5% yield on $3.5MM, the owner would need Net Operating Income of $175,000 / year. That would mean getting roughly $270k / year in rent, or $1250 / month / unit. If the owner wanted to be a bit more aggressive, he could ask for $1400 and raise his yield.

The beautiful thing about this strategy is that it is almost free to the city and works on an enormous scale. For example: If you re-zone a block with 40 total lots on it, you potentially get 720 new units. As you can see, you don’t need to do too many of these special zones before you make a real dent in the affordability problem.

What’s the downside? Well, you have some angry single family owners on those streets. But they get a windfall as their properties appreciate with developer demand, so we ought not to cry for them. And you get some stress on city infrastructure (more kids in the local school, more people at the park, etc.)… but you have dramatically increased property tax revenue to pay for it (the tax on a $3.5MM building is roughly $44k  / year, vs., say, $3k for the beat-up old single family home you’re tearing down).

A final note: If you think carefully about the above proposal, you will see that it basically replicates the conditions under which development in LA took place between 1920-1970. Not surprisingly, those were years during which most of our housing stock was built and housing was relatively cheap. It was only after restrictions on land-use came into being that development got very difficult and housing got much more expensive.

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