Housing solution is complex

Jim Brush, in his Tribune Commentary of March 10, shares his discovery of the reason that we have a crisis of unaffordable housing in Healdsburg: lack of supply, and the solution: completely terminate the Growth Management Ordinance.
This prescription will find favor with those who would benefit from construction and marketing of expensive housing, but will not solve the problem. Brush is correct that construction of new housing must be part of the solution. However, simply removing most restrictions on market rate homes would be counterproductive, and the idea that lack of supply is the only factor is nonsense.
Brush’s article of faith, that housing prices are primarily determined by supply and demand, is destroyed by examination of the actual data.
John Gilderbloom, et al., in their 2008 study, Inter-city Rent Differentials in the U.S. Housing Market 2000…, compared rental prices and vacancy rates for 149 medium sized American cities. Vacancy rates are economists’ standard measure of housing supplies. It turned out that where vacancy rates were between 0 and 10 percent, rental rates and vacancy rates showed negligible correlation. Vacancy rates are almost always below 10 percent. The authors conjecture that perhaps at vacancy rates in the 15 percent and above range, supply would become a significant factor. In normal circumstances, supply is not the most important factor.
Adam Smith codified the “law” of supply and demand. Smith made clear that the market would only function correctly when all players in the economy operated on a level playing field, without big differentials in wealth. He assumed that all actors were yeoman farmers and small artisans, and was violently opposed to any kind of monopoly power.
It turns out that none of Smith’s assumptions hold. The trend in 21st century capitalism is toward greater and greater differentials in wealth, to the point that today 62 billionaires have as much wealth as half the world’s population, and in the U.S., the Walton family has more wealth than 42 percent of all Americans put together. These are just two examples of a ruinous illness in the system.
Please dwell a moment on the consequences. There are distortions in our economy that classical economic theory can’t begin to deal with.
Some of the distortions’ ramifications that have brought us to our current pass: before the great recession there was a huge housing bubble – builders built larger, more expensive housing than most needed or could afford; real estate agents upsold buyers; mortgage agents deceived both the buyers and underwriters about buyers’ ability to pay, and pushed mortgages with excessive rates and costs; financiers bundled and sold the mortgages, and derivatives based on them, at inflated costs; rating agencies furnished phony ratings of these securities.
When the collapse happened, more than seven million houses were foreclosed or short sold, changing millions of Americans from homeowners to renters. The very wealthy bought up huge numbers of the foreclosed houses at pennies on the dollar. Many units were kept off the market until prices rose again.
From 2009 on, rental prices rocketed upwards. In many regional markets, the next bubble is now underway. In Healdsburg many properties have been bought – not by people moving into the units, but by speculators looking for the fastest growth, and for an investment that won’t lose all value in an uncertain market.
On many blocks in town there are multiple units that are almost always empty. Second homes, 32nd homes, 582nd homes … when so much of supply is snatched up not by the end users, but by middleman speculators with mountains of cash, any sensible functioning of the law of supply and demand is preposterous.
Adjusting our GMO to incentivize new affordable building, if done right, may lead to the building of dozens of new affordable units, but will not make up for the loss of existing low-income housing, that is being taken away at a higher rate. Even to achieve that inadequate goal, “If done right” is the operative phrase.
An important factor that the growth-solves-everything advocates ignore is that building new expensive housing brings in wealthy residents who demand services from additional low-income workers … creating a need for additional low-income housing. San Francisco did a study that discovered that building new market rate units created a need for 30 to 40 percent as many low-income units, just to keep even with the new demand created. So to even slightly get ahead, we need an inclusionary affordable housing rate at or above 40 percent. But let’s not fool ourselves that this will be a complete solution.
 Robert Nuese is a member of Healdsburg Fair Rent.