The Folly of For-Sale Affordable Housing

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Thursday, March 13, 2008 | In North Park, a curious, but not surprising, thing has happened.

Developers built a condominium project, La Boheme, in 2006 with 224 units. They set 45 of them aside as so-called affordable units. The builder is selling three of these identical one-bedroom condos for $183,701 each. Not $183,702 and not $183,700. No, the asking price is exactly $183,701.

They are affordable units, set aside for those with average incomes, as part of a government assistance program that controls their price. Local government must manage and enforce restrictions on who buys these homes, who lives in them and what they do with them over time.

The other day, as my colleague, the insightful Ms. Bennett, revealed, one of the normal condos in the development -- a place whose value is not controlled by the authorities -- went up for sale a few weeks ago. This is not the interesting part. Condos in San Diego are like churros in the touristy streets of Baja -- they're being sold everywhere you look.

What makes this one interesting is that the asking price for it is less than the prices of those homes set aside as affordable. The sellers are asking $168,000 for the condo.

Yes, it has happened.

The market, without even trying, just did what the government has spent millions of dollars and hours trying to do.

The city of San Diego, through its Redevelopment Agency (read City Council) gave the developer of La Boheme $3 million in exchange for the builder's commitment to construct 45 "affordable" housing units. These condos must be set aside from the market for years. And the city must pay for its Housing Commission to oversee these condos over that time. The commission has to make sure that the buyers of these condos don't rent them out. The commission has to make sure that the buyers of these condos don't sell them for more than the government determines. The Housing Commission has to make sure that it follows these buyers of these condos closely and that it tracks the public records of these condos as if it didn't have anything better to do. You can't let these people get home equity loans, for instance.

Taxpayers have to pay for all of this oversight.

All to make sure these condos remain "affordable."

And yet, some of the hundreds of San Diego condos the taxpayers didn't have to fund -- the condos that the market financed and built -- look very likely to become more affordable than the ones we have to spend millions overseeing.

For the last several years, local government officials have scrambled to try to do something about what they deemed the "housing affordability crisis." They watched housing prices soar, fretted at complaints from constituents who couldn't afford to join the game and wanted to do something. They have tried many things, but one of the most prominent efforts has been to pay developers to build so-called affordable units.

You can't just build an affordable unit and then sell it to someone who you determine deserves it. You have to do a lot more than that. Because as the housing prices soared, you had to make sure that the Joe Lunchbox you sold it too didn't just sell it to someone for twice what he paid.

This takes effort and it takes time. One local agency, the Southeastern Economic Development Corp., or SEDC, for example, didn't take the effort or the time -- though it did offer the money to help build the affordable units. After an exhaustive investigation, another colleague of mine, Andrew Donohue, found that SEDC had allowed people who purchased affordable homes to resell them in short time for as much as $100,000 in profit.

You see, when the government tries to control something, like say, the housing market, it struggles. Sometimes mightily.

There are two main things wrong with the government trying to create affordable housing units for people to buy.

One: it doesn't make any sense. Yes, you might get some people into homes who might have had to rent. But what's the point? You also strip them of some of the financial benefits of owning a home.

If you buy a government-controlled affordable home, you can't rent it out to someone if you move. If the value of the home rises, you are prohibited in many ways from enjoying that windfall. You have to split the proceeds with the government or you are restricted from selling it for the true market value. In fact, the only full benefit of owning an affordable condo might be that you can let your dog puke on the carpet without worrying what the landlord might say.

I suppose that's nice.

But the main financial benefit of owning a home is to build equity -- wealth that can eventually be taken to purchase another home or send a kid to college or expand your kitchen. Unfortunately, with affordable condos, the government decides what kind of equity you can build.

The second reason that it's awkward for government to try to control the market value of some homes is that it protects those homeowners from some of the risks of homeownership. The market value of a government subsidized affordable condominium will never actually drop -- the government will see to that.

If the point is to help people experience homeownership, protecting them from ever seeing their home value drop is protecting them from the experience.

What's the point of making people homeowners if you strip homeownership of its benefits and risks?

You do get the benefit of knowing more people are "homeowners." But we are paying a steep price to provide a few people this lofty title.

Those who really just want to make housing easier to afford for the area's neediest have found there are better paths. The Housing Commission has shied away from the practice of paying builder to build affordable houses and then ensuring they remain affordable. The commission has millions of dollars to spend to make sure people have affordable places to live. But it has decided that it's more practical to subsidize rental housing, and to help first-time buyers with reasonable loans and down-payment assistance. These efforts also cost money, but they don't put this government agency into the position of trying to control the cost of an asset like a home.

"It is much more difficult and costly to monitor for-sale affordable housing units. Every time the thing is resold it has to be sold at an affordable price to a qualified buyer, which requires long-term involvement and oversight," said Peter Armstrong, the supervising project manager for the Housing Commission.

So why does the city of San Diego keep doing it?

At La Boheme, the city gave the developer $3 million even though it claims that the developer was willing to finance the project in its entirety. If the city's documents are to be believed, the units all would have been built without this public investment. But we had to make sure they were affordable.

The market is correcting from the mania that hoisted prices to the crisis levels that so worried San Diego leaders. And now, there is a good chance that the market would have priced many of the La Boheme units at similar levels or below what the complex government formula spit out.

What caused home prices to go up so fast is exactly what is causing them to collapse now: the consequences of mortgage lending unshackled by rationality.

Unfortunately, like many, city leaders assumed not that those consequences would come home but that we had entered a new reality in which home prices never fell. They could have invested that money in rental assistance to help people cope with living costs. They could have invested in infrastructure to help develop the businesses that depend on sewers and water.

Instead, they decided to invest more than $3 million into something we are close to getting for free.

Please contact Scott Lewis (scott.lewis@voiceofsandiego.org) directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.

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