One of my favorite subjects....and solutions. Firstly, I've got to say "I'm talking up my book". Meaning, I believe people want, and prefer, to live in, or near, city centers - the ones that already exist today, big and small. So, I'm not a supporter of building our way to lower prices unless it's infill. That said, you mentioned the answer, or least part of it - (re)zoning. The other part is off-site construction. Bring all that together and we'll have really cool homes (all types), reinvigorated areas in, or near, where people want to live and lower prices. Problem solved :) Thanks, Brian
"housing costs no more than three times median income." Quick Google: Median Boston area income = $89,212. Which means roughly $270,000, yes? Boston median housing price? QG = 718,045. Kyrie eleison. Love the conversation, tho!
Thanks Rob for your well laid-out thoughts. Converting investor leases to mortgages is particularly interesting and something that could help with fair housing. I have seen in my analysis of the Realtor antitrust cases that the Mandatory Offer of Compensation has facilitated absentee investor ownership of residential housing to the significant detriment of local neighborhoods. It would be preferable to see some of the billions extracted from the settlement re-directed to local fair housing and affordability efforts. It would be more just that the money is pooled and used to fund initiatives to better negatively affected low-income neighborhoods rather than $20 to somebody that sold their house in 2022. I enjoy your missives and look forward often to your podcasts with Greg. Don Moore
I'm in Los Angeles and very active in the Build Baby Build conversation as an opponent. Since you're a lawyer, I'd love to hear your thoughts on why all this rezoning doesn't end up being a "taking" of the existing property owner's rights when their values plummet as high-rises start to dwarf their low-rises.
Except that people reasonably purchased in good faith based on longstanding circumstances and you yourself said that the new "need" is based on something that could readily be changed.
Interesting thoughts. As a small time builder focusing on infill development and someone with a real estate portfolio of student rentals, I don't love the idea of of MADRE decimating my source of income. I build and rent high quality housing. Some people don't want to own a house; college students are a good example of when renting is preferred to owning. But there are others: Ramit Sethi is a famous example of someone who could afford real estate but would prefer to rent. I'm active in pushing for local zoning reforms in my city of Grand Rapids Michigan, and our City Commission just legalized ADUs across the city. That's a positive step, but using setback requirements, I calculated the actual buildable square footage on an upcoming projects 44'x124' lot, and setbacks only allow for 45% of the square footage to actually have any housing on it. And I'm limited to building just 2 stories. Eliminating setback requirements would likely double the amount of space we have to build things. Eliminating height restrictions would allow for cities with limited land to develop upwards. I like the idea of a federal law that preempts local municipalities from restricting the type of density allowed to be built in residential neighborhoods. As a developer, density is my friend when it comes to making projects pencil out. I'd love to be building 5 over 1s instead of duplexes, but it's illegal in most parts of my city. We also could eliminate double loaded corridors which would allow for significantly nicer apartments to be constructed using point access blocks like most European cities. We could also allow up to 6 units or less to be built under the IRC vs. the IBC. It's less strict, and most smaller developers are much more familiar with it, so it's easier/cheaper to use. It may have been you that said this, but 100 years ago housing was plentiful and low quality. Now, it's high quality and a luxury good. I think we went too far on that spectrum and should allow for lower quality housing to be built. Adding additional insulation requirements makes things more expensive. Mandating sprinklers in all houses makes things marginally safer, but the cost is somewhere $20-30k/home. I don't thing it's worth it. Parking mandates are another huge waste of space. In the space that 2 cars occupy you can build an apartment for 2 adults and 1 or 2 children. When a developer is forced to pay to install parking, they don't care whether the tenants use it, they're going to get charged for it even if indirectly. Allowing developers to determine the anticipated need means some people who don't have cars can get lower market rate housing because the developer doesn't have to amortize that infrastructure cost.
But... 80% tax on net income means you still turn a profit on things like college housing. OR, you could always offer them seller-financing for a couple of years, and then they can sell it back to you. I'm sure we all can figure it out.
Ramit Sethi and his landlord can figure it out, once they all know the environment and the new math.
Most of the barriers to building new housing are from the government, hence, the solution must come from the government -- hopefully by eliminating most of the regulations.
I've worked in residential lending for 30 years and have put away for my retirement by purchasing residential rentals. My partner and I would be pretty hard done if your MADRE plan went into effect for ALL residential rental income.
My partner and I have worked our butts off at our day jobs for decades and put most of or investable savings into real estate -- first by keeping our homes as rentals when we moved on from them and then buying other rentals once we were in a financial position to do so. (I work in real estate, so invest in what you know, right?) Our net worth worth and retirement would be mortally wounded.
Setting aside for a moment, the how glut of homes hitting the market all at once as every rental owner dumps property would affect prices (I get that flooding the market with supply is is a feature, not a bug), we could theoretically replace some of our rental income with mortgage interest on the sole single family rental that my we own. But our other properties are multi-family. Multi-family properties are where MADRE falls apart for me.
We own two duplexes (both of which I lived in before converting to rentals) that we might be able to sell on private notes to someone else who wants to live in them and defray their cost of housing with rent from the other unit.
But the rest of what we own are 4- to 12-unit properties. I'm genuinely curious what you imagine would happen to properties like these.
Owner-occupants wouldn't purchase them -- they're purpose-built to be rental housing. We could try to sell them to another landlord, but of course, no sane person would want to tie up a bunch of capital in residential rentals given the high tax rate. And again, we'd be in good company trying to figure out how to unload them. They would become white elephants.
We wouldn't have an incentive to keep the properties. Property management is hard work and entails real risk. If you're a conscientious landlord, there's not THAT much profit left after properly maintaining a building. Trying to live on 10% or 20% in retirement would be financially untenable and, frankly, not worth it. (We'd likely need those hours in the day to work at other jobs because we wouldn't be able to retire.)
The only endgame I can see is that, en masse, folks like us would walk away. We'd stop paying our mortgages and property taxes. The buildings would fall apart. Eventually banks and counties would own them. At that point... ? They become public housing? Or they get torn down due to lack of upkeep? I don't know how things don't get dystopian.
My partner and I view ourselves and being in a customer service business. We rent apartments to low-to-moderate income tenants -- a few on section 8 vouchers, bartenders and gig workers, young families, etc. We take pride in ownership and provide quality housing to folks who are not in a position to purchase a home of their own. Even if a median priced home is 3x median income, 50% of people by definition earn less than that. For a good number of those people homeownership still wouldn't be an option and those people have to live someplace.
Final side note: in my experience, non-profits make so-so landlords. I've been around a number professionally and even purchased an apartment building from one. They'd run it into the ground with lack of upkeep and did a top-to-bottom remodel to turn the apartments back into nice spaces people could enjoy (and healthily) call home.
If this is just a Modest Proposal and you're trying to push buttons, you got me.
But if not, MADRE is an idea I don't hate for single-family houses. Maybe two-unit properties. Maaaaybe 3- or 4-units for multigenerational living. But for property 5+ unit apartment buildings, I think you kind of need to leave a profit incentive for private landlords to provide housing options for those who can't or don't choose to own a home.
I'm not sure what you mean? The context I used low quality in was how housing was built 100 years ago: no building codes, balloon framed, no insulation, etc. But they weren't slums. My grandparents built their house themselves one room at a time as they got the money to do so and their house was still less than 1000 square feet. What housing are you calling new-fangled slums? I'm reminded of a quote from Yuval Noah Harari in Sapiens: "One of history’s few iron laws is that luxuries tend to become necessities and to spawn new obligations. Once people get used to a certain luxury, they take it for granted. Then they begin to count on it. Finally they reach a point where they can’t live without it." AC is a good example of something that used to be a luxury good and now it's something many can't live without. And obviously that comes with a cost.
I like the thought process and some of the ideas that you are proposing. The simple answer, like you said is to just build. In NJ, where each town is mandated by the State Supreme Court, to continue to build "afforable units" the challenge is the drain on the infrastructure (schools, emergency services, roads, trains to NYC, etc. etc.). It is akin to putting a plan in place without really completely thinking it through.
One thing that also needs to be discussed is what is considered affordable housing? It seems to change everywhere you go. In NYC, whether the mayor is Republican, Democrat, they spew the virtues of Affordable Housing, but can affordable housing really occur in one of the most unaffordable places in the US? Even if I live in an affordable homein NYC, the gatorade at my local Bodega is still more expensive than the $2 for $5 32 oz gatorades I can get at the local Wawa or Quickchek. That is just one measly example. Gas is more, parking is more, eating is more. etc etc
I think the most basic thing is the first thing you mentioned. Can we start by limiting institutional investors from buying Single Family Homes and then go from there.
In most cases, infill development more than pays for the additional infrastructure cost used through increased property taxes. This is a basic tenant of the Strong Towns movement. As an example, I recently finished constructing 4 townhouses on a 2 lot. One was a fire-damaged house and the other was vacant. The property taxes collected on those parcels went from a measly $3xx/year to around $23k/year which will forever be adjusted by inflation. An almost 2x order of magnitude increase is a boon to local infrastructure. Great point on what "affordable" means. Typically it's defined as spending 1/3 or less of one's income on housing. Usually, "affordable" housing means subsidized by the government. But market rate affordable housing would simply mean that the market rate is less than 1/3 of a person's income which I think is a better goal. We already have market rate affordable cars; they're old cars like my 2009 Prius. If we decided to have a government program for affordable cars very few would see it as logical to offer folks a $5k Tesla with the government subsidizing the rest. Affordable things are naturally older things. But with affordable housing, the idea is that everyone should have a new house which doesn't work. Plus, this results in there still being neighborhoods where only poor people live. I think a city is much more vibrant when the classes mingle instead of are segregated.
Yes the taxes on new housing should theoretically offset the infrastructure needs but typically it lags behind. Additionally, like you said, a 3Bed 2Bath home is knocked down in my town to make way for 5Bed 4Bath home and the taxes go up on the property from $10k a year to $18k-$23k. Not necessarily more affordable but the house will sell due to demand. When we look at our country, what is affordable is one area of the country is unaffordable in another. $100k salary in NJ is a lot different than a $100k salary in Iowa.
Hey ROB,
One of my favorite subjects....and solutions. Firstly, I've got to say "I'm talking up my book". Meaning, I believe people want, and prefer, to live in, or near, city centers - the ones that already exist today, big and small. So, I'm not a supporter of building our way to lower prices unless it's infill. That said, you mentioned the answer, or least part of it - (re)zoning. The other part is off-site construction. Bring all that together and we'll have really cool homes (all types), reinvigorated areas in, or near, where people want to live and lower prices. Problem solved :) Thanks, Brian
"housing costs no more than three times median income." Quick Google: Median Boston area income = $89,212. Which means roughly $270,000, yes? Boston median housing price? QG = 718,045. Kyrie eleison. Love the conversation, tho!
Thanks Rob for your well laid-out thoughts. Converting investor leases to mortgages is particularly interesting and something that could help with fair housing. I have seen in my analysis of the Realtor antitrust cases that the Mandatory Offer of Compensation has facilitated absentee investor ownership of residential housing to the significant detriment of local neighborhoods. It would be preferable to see some of the billions extracted from the settlement re-directed to local fair housing and affordability efforts. It would be more just that the money is pooled and used to fund initiatives to better negatively affected low-income neighborhoods rather than $20 to somebody that sold their house in 2022. I enjoy your missives and look forward often to your podcasts with Greg. Don Moore
I'm in Los Angeles and very active in the Build Baby Build conversation as an opponent. Since you're a lawyer, I'd love to hear your thoughts on why all this rezoning doesn't end up being a "taking" of the existing property owner's rights when their values plummet as high-rises start to dwarf their low-rises.
Long complicated answer but the short version is, that which zoning gave, zoning can take away without it being a Taking.
Except that people reasonably purchased in good faith based on longstanding circumstances and you yourself said that the new "need" is based on something that could readily be changed.
Interesting thoughts. As a small time builder focusing on infill development and someone with a real estate portfolio of student rentals, I don't love the idea of of MADRE decimating my source of income. I build and rent high quality housing. Some people don't want to own a house; college students are a good example of when renting is preferred to owning. But there are others: Ramit Sethi is a famous example of someone who could afford real estate but would prefer to rent. I'm active in pushing for local zoning reforms in my city of Grand Rapids Michigan, and our City Commission just legalized ADUs across the city. That's a positive step, but using setback requirements, I calculated the actual buildable square footage on an upcoming projects 44'x124' lot, and setbacks only allow for 45% of the square footage to actually have any housing on it. And I'm limited to building just 2 stories. Eliminating setback requirements would likely double the amount of space we have to build things. Eliminating height restrictions would allow for cities with limited land to develop upwards. I like the idea of a federal law that preempts local municipalities from restricting the type of density allowed to be built in residential neighborhoods. As a developer, density is my friend when it comes to making projects pencil out. I'd love to be building 5 over 1s instead of duplexes, but it's illegal in most parts of my city. We also could eliminate double loaded corridors which would allow for significantly nicer apartments to be constructed using point access blocks like most European cities. We could also allow up to 6 units or less to be built under the IRC vs. the IBC. It's less strict, and most smaller developers are much more familiar with it, so it's easier/cheaper to use. It may have been you that said this, but 100 years ago housing was plentiful and low quality. Now, it's high quality and a luxury good. I think we went too far on that spectrum and should allow for lower quality housing to be built. Adding additional insulation requirements makes things more expensive. Mandating sprinklers in all houses makes things marginally safer, but the cost is somewhere $20-30k/home. I don't thing it's worth it. Parking mandates are another huge waste of space. In the space that 2 cars occupy you can build an apartment for 2 adults and 1 or 2 children. When a developer is forced to pay to install parking, they don't care whether the tenants use it, they're going to get charged for it even if indirectly. Allowing developers to determine the anticipated need means some people who don't have cars can get lower market rate housing because the developer doesn't have to amortize that infrastructure cost.
Well, there are tradeoffs with MADRE of course.
But... 80% tax on net income means you still turn a profit on things like college housing. OR, you could always offer them seller-financing for a couple of years, and then they can sell it back to you. I'm sure we all can figure it out.
Ramit Sethi and his landlord can figure it out, once they all know the environment and the new math.
Most of the barriers to building new housing are from the government, hence, the solution must come from the government -- hopefully by eliminating most of the regulations.
I've worked in residential lending for 30 years and have put away for my retirement by purchasing residential rentals. My partner and I would be pretty hard done if your MADRE plan went into effect for ALL residential rental income.
My partner and I have worked our butts off at our day jobs for decades and put most of or investable savings into real estate -- first by keeping our homes as rentals when we moved on from them and then buying other rentals once we were in a financial position to do so. (I work in real estate, so invest in what you know, right?) Our net worth worth and retirement would be mortally wounded.
Setting aside for a moment, the how glut of homes hitting the market all at once as every rental owner dumps property would affect prices (I get that flooding the market with supply is is a feature, not a bug), we could theoretically replace some of our rental income with mortgage interest on the sole single family rental that my we own. But our other properties are multi-family. Multi-family properties are where MADRE falls apart for me.
We own two duplexes (both of which I lived in before converting to rentals) that we might be able to sell on private notes to someone else who wants to live in them and defray their cost of housing with rent from the other unit.
But the rest of what we own are 4- to 12-unit properties. I'm genuinely curious what you imagine would happen to properties like these.
Owner-occupants wouldn't purchase them -- they're purpose-built to be rental housing. We could try to sell them to another landlord, but of course, no sane person would want to tie up a bunch of capital in residential rentals given the high tax rate. And again, we'd be in good company trying to figure out how to unload them. They would become white elephants.
We wouldn't have an incentive to keep the properties. Property management is hard work and entails real risk. If you're a conscientious landlord, there's not THAT much profit left after properly maintaining a building. Trying to live on 10% or 20% in retirement would be financially untenable and, frankly, not worth it. (We'd likely need those hours in the day to work at other jobs because we wouldn't be able to retire.)
The only endgame I can see is that, en masse, folks like us would walk away. We'd stop paying our mortgages and property taxes. The buildings would fall apart. Eventually banks and counties would own them. At that point... ? They become public housing? Or they get torn down due to lack of upkeep? I don't know how things don't get dystopian.
My partner and I view ourselves and being in a customer service business. We rent apartments to low-to-moderate income tenants -- a few on section 8 vouchers, bartenders and gig workers, young families, etc. We take pride in ownership and provide quality housing to folks who are not in a position to purchase a home of their own. Even if a median priced home is 3x median income, 50% of people by definition earn less than that. For a good number of those people homeownership still wouldn't be an option and those people have to live someplace.
Final side note: in my experience, non-profits make so-so landlords. I've been around a number professionally and even purchased an apartment building from one. They'd run it into the ground with lack of upkeep and did a top-to-bottom remodel to turn the apartments back into nice spaces people could enjoy (and healthily) call home.
If this is just a Modest Proposal and you're trying to push buttons, you got me.
But if not, MADRE is an idea I don't hate for single-family houses. Maybe two-unit properties. Maaaaybe 3- or 4-units for multigenerational living. But for property 5+ unit apartment buildings, I think you kind of need to leave a profit incentive for private landlords to provide housing options for those who can't or don't choose to own a home.
"Low quality"? Call it what it is - new-fangled slums.
I'm not sure what you mean? The context I used low quality in was how housing was built 100 years ago: no building codes, balloon framed, no insulation, etc. But they weren't slums. My grandparents built their house themselves one room at a time as they got the money to do so and their house was still less than 1000 square feet. What housing are you calling new-fangled slums? I'm reminded of a quote from Yuval Noah Harari in Sapiens: "One of history’s few iron laws is that luxuries tend to become necessities and to spawn new obligations. Once people get used to a certain luxury, they take it for granted. Then they begin to count on it. Finally they reach a point where they can’t live without it." AC is a good example of something that used to be a luxury good and now it's something many can't live without. And obviously that comes with a cost.
I like the thought process and some of the ideas that you are proposing. The simple answer, like you said is to just build. In NJ, where each town is mandated by the State Supreme Court, to continue to build "afforable units" the challenge is the drain on the infrastructure (schools, emergency services, roads, trains to NYC, etc. etc.). It is akin to putting a plan in place without really completely thinking it through.
One thing that also needs to be discussed is what is considered affordable housing? It seems to change everywhere you go. In NYC, whether the mayor is Republican, Democrat, they spew the virtues of Affordable Housing, but can affordable housing really occur in one of the most unaffordable places in the US? Even if I live in an affordable homein NYC, the gatorade at my local Bodega is still more expensive than the $2 for $5 32 oz gatorades I can get at the local Wawa or Quickchek. That is just one measly example. Gas is more, parking is more, eating is more. etc etc
I think the most basic thing is the first thing you mentioned. Can we start by limiting institutional investors from buying Single Family Homes and then go from there.
Always appreciate your input.
Thanks for the thoughts.
I agree that infrastructure is a big part of this -- any affordable housing plan needs to take that into consideration.
As for what is "affordable", I'll go with the government's definition: housing costs no more than three times income.
In most cases, infill development more than pays for the additional infrastructure cost used through increased property taxes. This is a basic tenant of the Strong Towns movement. As an example, I recently finished constructing 4 townhouses on a 2 lot. One was a fire-damaged house and the other was vacant. The property taxes collected on those parcels went from a measly $3xx/year to around $23k/year which will forever be adjusted by inflation. An almost 2x order of magnitude increase is a boon to local infrastructure. Great point on what "affordable" means. Typically it's defined as spending 1/3 or less of one's income on housing. Usually, "affordable" housing means subsidized by the government. But market rate affordable housing would simply mean that the market rate is less than 1/3 of a person's income which I think is a better goal. We already have market rate affordable cars; they're old cars like my 2009 Prius. If we decided to have a government program for affordable cars very few would see it as logical to offer folks a $5k Tesla with the government subsidizing the rest. Affordable things are naturally older things. But with affordable housing, the idea is that everyone should have a new house which doesn't work. Plus, this results in there still being neighborhoods where only poor people live. I think a city is much more vibrant when the classes mingle instead of are segregated.
Yes the taxes on new housing should theoretically offset the infrastructure needs but typically it lags behind. Additionally, like you said, a 3Bed 2Bath home is knocked down in my town to make way for 5Bed 4Bath home and the taxes go up on the property from $10k a year to $18k-$23k. Not necessarily more affordable but the house will sell due to demand. When we look at our country, what is affordable is one area of the country is unaffordable in another. $100k salary in NJ is a lot different than a $100k salary in Iowa.