Supporting a Whole Housing Ecosystem

While affordable housing policies understandably focus on housing subsidy and incentive programs to improve economic security and access to opportunity for low-income families, recent research underscores the importance of market-rate development as another means of reducing housing costs. The housing market, for all its geographic and product type variation, is also an ecosystem with considerable interdependence. There is more for affordable housing advocates to support about new market-rate development than may be clear to a casual observer.

It turns out that elements of “Econ 101” apply to a substantial degree in the housing market. A number of studies over the past decade or so have shown how housing becomes more expensive overall when demand outstrips supply. And there has been a lot of attention among researchers lately on the extent to which restrictive local zoning suppresses new development and, as a result, drives up housing prices. High-cost cities can often bring down median rents with efforts to increase supply.

But, does it follow that adding to the supply of market-rate housing units would help alleviate affordable housing shortages? A report from California’s Legislative Analyst’s Office (LAO) suggests that the answer is yes, but responses from experts show that not all are in agreement.

The LAO report finds that more market-rate development would help lower-income renters—even though most new apartments are priced at the top of the market—for two primary reasons.

First, more market-rate development can slow the growth in housing price and rent increases in a community, reducing displacement of low-income renters. The LAO report finds that between 2000 and 2013, Bay Area census tracts with above-average concentrations of low-income households that built the most market-rate housing experienced “considerably less displacement” of low-income households than census tracts with similar low-income populations but very little market-rate construction, regardless of the presence of an inclusionary housing policy.

Second, increasing market-rate housing can alleviate competition for available units among higher- and lower-income households—a concept that economists describe as “filtering.” The idea is that in supply-constrained, high-cost housing markets, some higher-income households will by necessity occupy homes and apartments that could be affordable to those with lower incomes. When other housing options are available, higher-income households will move into them, freeing up a lower-cost home for occupancy by those with lower incomes, leading to a chain reaction down the line. Looking at census data from Los Angeles and San Francisco, the report finds the following: “Housing that likely was considered ‘luxury’ when first built declined to the middle of the housing market within 25 years.”

A 2013 study by Stuart Rosenthal of Syracuse University provided an unprecedented analysis of filtering over time. Assessing four decades of census data, Rosenthal estimates that housing filters by almost 2 percent per year nationally—presumably with substantial variation by local area. “At that rate,” Rosenthal notes, “the real income of an arriving occupant in a 50-year-old home would be 60 percent less than the income of an occupant of a newly built home. These estimates confirm that filtering is a viable long-run, market-based source of lower-income housing.”

The Limits of Market-Rate Housing

Neither the LAO report nor the Rosenthal study should be interpreted to mean that market-rate development never displaces lower-cost housing units or that bringing down median rents is equivalent to ensuring that housing is affordable for low-income households. As long-term housing subsidies have expired, hundreds of thousands of federally subsidized, rent-restricted units have effectively “filtered out” of the affordable inventory over the last 20 years—replaced or “repositioned” to serve higher-income households. Even in less restrictive local development environments, preserving the existing supply of workforce and affordable units is essential for a healthy housing market.

There also are likely limits on the extent to which new market-rate development can help boost the supply of more affordable housing. A Zillow analysis of six of the country’s highest-cost housing markets found that while part of the reason for their worsening rental affordability problems was due to population growth outpacing the issuance of new building permits, there are “diminishing returns” to the number of new permits issued: “The change in affordability between 200 normalized permits and 400 is larger than the affordability delta between 400 and 600.”

A review of the LAO report by notable scholars of urban planning identified two major concerns with the study. First, some of the rapidly growing parts of the Bay Area are in unincorporated areas rather than central cities. In areas where new supply can be added without redeveloping existing parcels, shouldn’t displacement pressures be low? The reality of displacement may be very different in central cities that are largely built up. Second, filtering happens quite slowly. According to Dan Immergluck, a professor at the Georgia Tech School of City and Regional Planning, rent for a typical apartment can be expected to drop about 9 percent over 30 years. If new development is occurring only at the high end, apartments will have deteriorated and will need expensive renovation before they become affordable to lower-income households.

Common Ground

While there is more to understand about the level of contribution that market-rate development can make in the broader housing ecosystem, restricting development only worsens matters. Too little supply will make it harder for middle-income families to find an affordable home and will make it more expensive for subsidies to serve households with lower incomes.

Developers of market-rate housing and advocates for affordable housing can find common cause in efforts to increase housing development for people of all income levels. “Exclusionary zoning” practices, unduly long local regulatory approvals, and egregious neighborhood-level opposition affect apartment developers of all stripes. Enabling the private market to work more efficiently—encouraging a more holistically healthy ecosystem—can help make progress on an important public policy challenge: ensuring that every American can access the foundations of opportunity.