Understanding The Mysteries Of "Affordable Housing"

Our incoming mayor thinks that New York City has a "crisis" of not enough "affordable housing."   And certainly if you try to rent or buy an apartment in the private market, you will find that in Manhattan and the trendy areas of Brooklyn there is no such thing as a place you can afford with a middle class income.  Should the government try to fix this problem?  Any such effort is doomed to be a very expensive failure.

The old real estate cliche is that there are three important things:  location, location, and location.  It's an exaggeration, but contains a huge element of truth.  In housing, the bricks and mortar are generic, and the thing above all others that makes a home special (or not) is the location.  A place in bad condition but a good location can be fixed up; a place in a bad location is always going to remain in the same location.  For better or worse, in Manhattan you could have the smallest, most broken down one-room studio apartment and it would still be worth around $500,000.  Two bedroom apartments start at close to $1 million.  Meanwhile, in Detroit you can buy mansions for about $10,000 -- and if you have one of those to sell, you may not even get the $10,000.

And it's not just Detroit.  Many cities in the U.S. are losing population, and in those cities the price of housing falls way below the cost of new construction.  A good way to look at it is that if new construction is allowed and essentially unlimited, then the cost of new construction puts a cap on the price of housing  -- if you don't want to pay what someone is asking for an existing home, you can just build a new one.  But if a city is shrinking, then there is no reason to build new houses, and the price of existing ones can just keep falling.  Detroit is one example, but there are many others,  In upstate New York, cities like Utica, Syracuse and Buffalo have long had declining populations and extremely inexpensive housing.  In Buffalo there are hundreds of houses for sale for under $100,000.  Syracuse and Utica are smaller cities, but the situation is comparable.

Closer to home, we have Philadelphia.  Take Amtrak through there and you will see vast tracts of abandoned houses that could be bought up for a song.  But nobody wants them.  And still closer, we have New Haven, Bridgeport and Norwalk, Connecticut.  Bridgeport is the sorriest of that sorry group, although not so down and out as Buffalo.  Lots of houses in Bridgeport are available for under $100,000.  They also have excellent train service into New York.  You could buy a family a house in Bridgeport for approximately the one-year cost of subsidizing them to live in Manhattan.  Does the breadwinner need to get into the City to work?  The annual cost of an unlimited Metro-North ticket from Bridgeport to Grand Central is about $4500 -- a small fraction (about 5%) of the cost of subsidizing this family to live in Manhattan for that year.

But can the price of housing rise way up above the cost of new construction?  Easy -- just restrict how much can be built in a high demand area.  Here in New York, we have endless ways of doing that, from rent regulation (making it extremely difficult to remove existing tenants) to landmarking to zoning to Community Board approval for any significant change to anything.  And then, of course, there's the reservation of a substantial portion of the very limited land for affordable and low income housing.  I'm not saying I'm necessarily against all of that (just most of it), but at least we should be honest with ourselves and admit that the "crisis" of affordable housing is largely artificially created, an unintended consequence of pursuing other seemingly desirable goals. 

When the demand for housing is so strong that it drives the price well above the cost of new construction, then the price of the land will rise to make up the difference.  So existing landowners are huge beneficiaries of Manhattan's restrictive development policies.   That would be some small fraction of the hated top 1%.  I wonder if de Blasio realizes the extent to which policies he favors benefit this group?  Very unlikely.

In the very restricted private development market in Manhattan, we now have super-expensive projects setting price records and competing on the basis of luxury amenities and special finishes.  But how's it going in the government-controlled subsidized sector?  Not so good.  It seems that, despite many good locations that would be highly valuable in today's marketplace, the New York City Housing Authority is running out of money and the buildings are falling apart.  From Nicole Gelinas in the New York Post on October 21:

Gotham’s public housing, more than half a century old, is crumbling.  Fred Harris, real-estate chief at the New York City Housing Authority, told the Municipal Art Society last week it would cost NYCHA $17 billion to get its 2,596 buildings into a “state of good repair.”

With about 170,000 apartments in its buildings, that $17 billion repair bill would be $100,000 per family -- enough to buy every one of them a house in Bridgeport.  (OK, there aren't enough houses in Bridgeport to take them all.  But if you're willing to consider places like Philadelphia, Baltimore, Buffalo and Detroit, there are plenty.)

And the $17 billion is going to come from where exactly?  Many NYCHA projects have substantial amounts of unused land -- they are of the "towers in the park" architecture style that became trendy back in the 50s.  NYCHA came up with a proposal to generate some real money by selling or leasing some of that land to private developers to build market-rate buildings.  Of course the public housing tenants protested -- it would block their views!  Their champion was of course de Blasio.  For now, it looks like that proposal is dead.  However, it's unlikely that the Feds are going to be coming up with the repair money, so good question, what is de Blasio's next move.  

We have in plain view all over the city the results of failed socialist housing theories, and we have just voted to double down on more of same.   It's just one of the mysteries of "affordable housing."