Nobody Builds Affordable Housing

“Nobody builds affordable housing!” It’s a common and well justified complaint, one I personally sympathize with quite a bit. It’s also true for reasons that most people who say it don’t understand. Correcting this misunderstanding of where affordable housing comes from would help a lot of people.

“Just make developers include market rate or below market rate housing in their development!” That’s a common suggestion for how to produce more affordable housing, but it’s misguided and misunderstands where affordable housing comes from. This approach actually drives up the cost of housing for everyone.

There’s no such thing as brand-new affordable housing. New housing is almost always market-rate or above-market-rate, with a strong preference towards above-market-rate, aka luxury properties. And not only is that fine, it’s actually great for everyone, if we understand how housing markets work.

When people build homes for themselves, they build the best home they can afford. Almost nobody builds a brand-new dump on purpose. Why would you? If you can afford to build a new home, you’re going to make it as good as you can afford, for yourself, and your own benefit, right?

But most multi-family housing – apartments – aren’t built for an owner-occupier, they’re built for investors. And investors don’t just want somewhere to live like an owner-occupier does, the investor wants to maximize their return on investment. This is how investment works, it’s literally the purpose of investing – to grow wealth. When an investor develops a new multifamily property (since we’re only talking about residential properties, I’m just going to say “property” or “development” from here forward), the investor reasonably wants to get the highest return they can get. And the way to get that highest return is from building luxury properties, which are also called “Class A”.

“Class A” really just means, top-end right now. You have Class B, which is pretty nice but not brand new, and generally just above market rate to market rate. Then comes Class C, which is older and a bit worn and dated but still acceptable, generally lower end of market rate to below market rate. Then you have Class D, which is colloquially termed as a dump, tenement, or otherwise nearing the end of its useful life. In many places Class D would be the only properties that are qualified for Section 8 rental assistance, but some of the lower-end of Class C may qualify too.

Nobody builds brand new Class C or Class D properties. It just doesn’t make any sense to do so. Even the government doesn’t build Class C or Class D properties except when they’re building public housing projects – which, notably, they just don’t do anymore, because the Projects are generally agreed by all to be terrible places to live, and the government doesn’t do a good job of… anything. (Name one thing.)

Residential properties have a lifespan. Traditional housing would have a useful life of 100 years, but the pace of technical improvement in society doesn’t really permit a 100-year useful life anymore without remodels. The useful life of a property, as society accelerated, has shrunk to around 50 years.

Some of the more modern iterations of 1+5 multifamily housing (1 ground floor of reinforced concrete construction plus up to five stories of wooden construction on top of the concrete) are only designed for a 25-to-30-year useful life, the idea being that when it’s time to redo, a contractor will “scrape off” the “+5” of wooden construction and build a new “+5” on the existing concrete base.

Nobody builds affordable housing, because nobody ever really has, except when poor people build their own shanties to live in for themselves, and the United States generally does not permit shanty-towns (yet). Commercial housing is built to maximize its return on investment, and the best way to maximize that ROI is to build for above-market rents, or luxury housing. Just about everyone who can afford to develop properties prefers to build “Class A” properties, because that’s how you maximize your return.

“Just make developers include market rate units” doesn’t work, because the market-rate or below-market rate units reduce the total return profile of the investment. And when the financiers are looking at where to put their money, they have what’s called an “opportunity cost”. That is to say, if they put their money in one investment, they can’t put it in a different investment. So if they invest in something less profitable, they’re sacrificing the potential returns from the more-profitable investment, and financiers won’t do that – they’ll just invest in a different property that doesn’t have low-cost units.

“Well then have the government subsidize it, and force them to include the low-cost units!” But that doesn’t work either, because the government already subsidizes real estate development very heavily, to the point where most new real estate development doesn’t even generate revenue for the government subsidizing it for most of the property’s life. And now the property needs more subsidies in order to produce a similar return profile, which means that more public money is being used to enrich people who are already wealthy (poor people don’t finance property development, and that’s an incontrovertible fact).

Why should tax money subsidize the profits of the rich? So that the poor get a break on housing costs? A break on housing costs… so that the poor can pay their income to the rich. That makes sense to you? 

And the poor are already paying most of the taxes anyway! Public taxes at the local level mostly come from property taxes, sales taxes, payroll taxes, and government fees for services. Cities – the primary source of real estate development subsidies – don’t get the majority of income taxes, which go to the IRS, though some cities do have income taxes. Cities also don’t get fuel taxes, which go to the State.

Sales taxes get passed on to the people buying things, and as a proportion of income, poor people spend more of their income on purchases than rich people. Property taxes? Well, guess what champ, those get bundled into rents, so poor people end up paying the property taxes for the rich people. Payroll taxes? Businesses (owned by rich people) consider those costs in their payroll structures, and most of that payroll tax is paid for by the employee, not the business. Even for high-income earners, for example at $10k per month, the business pays $800 in payroll taxes and the individual pays $2600.

Rich people don’t make their money from earned income, like paychecks, they make their money from unearned income. Those are capital gains from an increase in value of invested assets, like real estate, securities (debt payments and bonds, or investments in private companies), dividends, and equities.

You don’t end up with extra bodies to occupy as you get richer. A person with an income of $35k and a person with an income of $5m both eat roughly the same amount of food, wear the same amount of clothes, and can be transported by a single vehicle at a time. The price of one’s food goes up as a person gets richer, as does one’s home, one’s vehicle, etc., but not proportional to income. A poor person may spend 1/3 of their income on food, and 1/3 of their income on housing, and 1/3 on everything else, but a wealthy person doesn’t spend their income proportionally. Yes, the cost of their food, vehicle, housing, and everything else may be dramatically higher in an absolute sense, but it’s dramatically lower in a relative sense. Nowhere near 1/3 of a $5m income goes to housing, or 1/3 of it to food. Most gets saved, and in economics, savings is equal to investment. The more a person can save, the more they invest. The more they invest, the more unearned income they get. This creates a spiral where the poor get poorer because they consume most or all of their income, whereas the rich get richer because they invest most or nearly-all of their income.

Proportionally, poor people pay out most of their income on survival, whereas rich people bank most of their income and reinvest it, which in turn grows their income further, making them even richer. And these investments mostly go into businesses that the average person relies on to survive, increasing the value of those businesses, which drives up the price of investing into those businesses, and in doing so making it harder for average poor people to afford investing a material amount of wealth into businesses that could grow the poor person’s income. It’s a spiral, and the poor keep losing with every dime transferred from them to the rich – public subsidies for housing included!

Something like 7/8ths of publicly traded equities (shares of ownership of a business) are owned by 1/8th of the population. This is why “Wall Street” doesn’t reflect “Main Street”, and why a good economy for Wall Street doesn’t translate into an improvement in the lifestyles of the average person, because corporations are mostly owned by the rich, and corporations gain most of the benefits from a cost-of-living increase. Increasing the cost of living by increasing taxes on consumption or property primarily reduces the wealth of the poor, while making rich people richer! It’s just basic economics. On top of that, there’s a hell of a lot more poor people than there are rich people. This means that the taxes paid into the city that are then used to subsidize real estate development are disproportionately paid by poor people, who then occupy that real estate development and pay their income to the wealthy owners.

Why exactly should the meager earnings of the poor be used to subsidize real estate developments owned by the rich, so that poor people can pay even more of their incomes into the pockets of the rich? Using government subsidies for housing only exacerbates the problems in our economy, making the rich richer and the poor poorer. Mandating the construction of market-rate or below-market-rate housing reduces the amount of housing available, which in turn raises the cost of housing for the average person – e.g. the poor. Subsidizing or incentivizing the construction of market-rate or below-market rate housing may increase the amount of housing available, but it does so by using tax money to improve the return on investment for the real estate developers and property owners, which means that this approach also is at the expense of the poor, and to the benefit of the rich.

Well dammit, how do we get affordable housing?

There’s a saying, “The best time to plant a tree is 20 years ago, the second best time is today.”

Affordable housing – market rate, or sub-market rate housing – is nothing more than Class A luxury properties that have aged, and been surpassed by newer housing developments with newer amenities, newer fixtures, newer floorplans, and so on.

That old ramshackle house east of Troost that’s now a Class D, Section 8 house? When JC Nichols built that house in the early 1900s, it was a Class A luxury property owned by the rich. What changed? The date on the calendar. The house aged and became less attractive. As it aged, and was surpassed by new housing, it became a Class B property, then a Class C, and is now a ramshackle old Section 8 Class D housing whose next step in its economic life is to burn down, collapse, or be torn down. Rarely remodeled and modernized, but sure, that does happen sometimes.

The number of residents in a community isn’t fixed, and is subject to a constant flux as people move around the community, into the community, and out of the community. Births and deaths obviously play a role in this too, as new children are born, and later move out of their parents’ house, have kids of their own (usually), and eventually die.

When new Class A properties are built, some of the residents of the current stock of Class A housing move to the new property. Some residents new to the area are drawn to move in, too. But what about the units from the other local properties that moved out, and into the new property? Well, someone moves into those too! And as people move out of the slightly older building and into the slightly newer building, those open slots in the slightly older building are filled by people moving up or moving in. And this continues on down the line – someone vacates a Class B unit to fill a Class A unit, then someone vacates a Class C unit to fill that Class B opening, while someone vacates a Class D unit to fill the Class C.

Sure, it goes the other way too, if people fall on hard times, but in the general course of history, as difficult as things may seem right now (and this statement of ‘maybe it seems hard right now’ is true at all points back through human history), we have been on a long upward slope of lifestyle expectations for 10,000 years.

20 years ago, we didn’t have fiber internet, wi-fi, or big screen TVs. Now even poor people have those. 40 years ago, we didn’t have built-in AC, dishwashers, internet, thermally efficient windows, ceiling fans, or ceiling lights. 60 years ago, we didn’t have nice countertops, numerous cabinets, entertainment centers, attached garages, garbage disposals, fire escapes, or even necessarily light switches. 80 years ago, we didn’t have built-in ovens, stoves, refrigerators, central heating, or wall plugs. 100 years ago, we didn’t even have any toilets or showers. Obviously that’s not 100% the case, as some properties are always a bit ahead of the times, but in general, your average property from these time frames would not have the described features that most of us now expect. What was a Class A property then is now a disgusting fire hazard now. What someone would build as a Class A then would never be built today.

There are so many things we take for granted as necessities that simply were not present in previous generations of construction. And we didn’t get those things by retrofitting existing buildings (sure, that happens sometimes, but not always), we got them by building new properties that had these now-basic-requirements built in from the very beginning. That is to say, we got these new features by building Class A properties, which transformed former Class A properties into Class B, turned Class B into Class C, Class C into Class D, and made Class D uninhabitable slums. Properties age and slide down the scale. And this process requires new properties to be built continually to reflect the changing standards of society.

That’s how we get affordable housing – we let developers build as many damned luxury units as they possibly can. We stop imposing requirements on developers to include low-income units, we stop subsidizing construction, and most importantly – we stop obstructing the construction of new units by denying permits or requiring builders to build less-profitable properties that shifts investment elsewhere, whether to other geographic locations, or into other markets or types of investment entirely. The United States is millions of units short on construction because of these dynamics of imposing counterproductive obligations on builders – denying permits for new construction, requiring subprime units in new construction, and subsidizing new construction to include subprime units.

If we simply let builders build, and let the builders build for the people who want and can afford to occupy new Class A properties, the drive upwards of living standards in Class A will move the entire chain of humanity upwards. “A rising tide lifts all boats” may not always be true, but in real estate, it works pretty well. These new units will be filled with people from former-Class-A properties, which will shift older properties down and residents up, and so on as previously described. And as the number of new properties increases, the cost of residency will decrease (or, more likely, increase less quickly) in older properties, which will let people in lower incomes move up the ladder. As it always has been, forever.

As this process continues, the older Class D properties will become uninhabitable and get torn down, to be replaced by new Class A properties. This is typically smeared as “gentrification”, which in fact can be a bad thing if done in the wrong way. But does anyone think that tearing down burned-out uninhabited abandoned husks on the east side of Kansas City is really a bad thing, even if it means that these fire hazards and “attractive nuisances” are replaced by “apartments for rich(er) people”?

There’s no feasible solution to building brand-new low-income housing that doesn’t result in burdening poor people, and instead of beating our heads against the wall we should simply reflect on the lessons of history and recognize that, realistically there has never been significant construction of new low-income housing by markets. And before we rush to “well then have government do it”, that simply enriches the wealthy more. Everything the government does makes rich people richer, that’s how it works. “But have the government run it!” And now we have Projects again – tenements. A place to stash poor people and pretend they don’t exist. That’s not a solution, it’s just another burden on the average taxpayer.

There’s really no way to get low-income housing except to build new luxury units, and then let them get old. That will take a while, so it’s best for everyone if we get started now. Let’s let builders build, because the more Class A properties we build, the less expensive housing becomes, and the more low-income units we end up with over time.

That’s how it’s always worked, and it just can’t work any other way that we’ve figured out yet. So let’s do what works, and build more top-end housing every chance we get, so that standards of living continue to rise and housing gets more available and more accessible for everyone.