Maui Council on verge of worsening housing crisis

by Keli'i Akina, Ph.D. President/CEO Grassroot Institute, July 17, 2022

In a misguided effort to create more affordable housing, the Maui County Council is about to make the problem worse.

The Council is considering a measure, Bill 107 (CD1), that would lower the cost of homes designated as “affordable” by changing the rules that govern how the sellers can price them. The bill was approved by the Council’s Affordable Housing Committee and had a first reading by the full Council yesterday. It will take up the bill again on Monday.

Though the intention of Bill 107 is to lower Maui home prices, it attempts to do so by creating new price controls for affordable homes. Unfortunately, history demonstrates that price controls inevitably lead to scarcity. In a county that is already suffering from a housing shortage, additional price controls will drive the price of the average home even higher.

If Bill 107 is limited to only a certain sector of housing, how will it affect housing prices as a whole? To understand the ripple effect of Bill 107’s price caps, it is necessary to review the existing rules on affordable housing.

Maui currently requires a certain number of homes in any subdivision to be set aside as workforce housing. Those homes must be sold at below market rates to qualified buyers who earn between 80% and 120% of the median income for the area.

There’s a complex formula that governs exactly how that pricing system works, but to put it simply, the cost of the mortgage plus interest can be no more than 30% of gross household income. This system was set up to encourage the construction of affordable homes without making it impossible for homebuilders to get a return on their investments.

Homebuilders need some incentive to take on the risk, expense and difficulty of constructing new homes. Already, the workforce set-aside contributes to higher average housing prices.

After all, construction costs don’t go down just because a home is sold at below-market rates. This forces homebuilders to raise the prices on the remainder of the homes to ensure that their projects as a whole are profitable.

Bill 107 makes the below-market prices for workforce homes even lower by requiring total housing costs to fit within 31% of gross household income.

“Total housing costs” under this bill include not only the mortgage and interest, but also homeowner association fees, property taxes, private mortgage insurance and home insurance. Such additional costs can vary, but on average, adding them to the total price that can be charged for workforce housing lowers the actual sales price of the home by 20% to 22%.

For example, a hypothetical three-bedroom home for a family making 80% of the median area income may be sold at $374,900, well below the market rate. Under Bill 107, that same home would have to be sold at $283,671, a difference of $91,229 or 24.33%.

That same home sold to a family making 120% of the median area income, which still qualifies for below-market affordable housing, would currently be sold for $562,300. Under Bill 107, the sale prices would be reduced to $444,055, a difference of $118,245 or 21%.

Remember that homebuilders would not be saving an additional 20% on the construction of the affordable homes. The assumption is that they would simply have to take that additional loss. In fact, Bill 107 is especially badly timed given that the recent surge in inflation has made construction in Hawaii substantially more expensive.

This bill would make it near impossible for homebuilders to realize returns on their investments. As a result, they likely would switch their focus to building homes that don’t trigger the new affordability requirements, such as very high-end properties, or stop building altogether. That, in turn, would further reduce the stock of available housing and drive the average housing price even higher.

Like too many community activists and Maui County lawmakers, Bill 107 ignores the economic reality of supply and demand and attempts to “solve” the housing crisis by tinkering with prices.

Given that what we really have is a lack of supply, policymakers should be focusing on ways to encourage housing growth, not throwing up new barriers to development.

Adam Smith, one of the world’s most famous advocates of economic freedom ever, wrote: “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.”

The same is true of homebuilders. When it is no longer in their interest to build homes, they will stop. Then we will have even fewer available homes, higher housing prices and more people moving to the mainland because they can’t afford to live in Hawaii.

It is time that we stopped treating homebuilders as the enemy, and “profit” as a dirty word. If we are going to solve Hawaii’s housing crisis, we need to build more homes. It’s as simple as that.

Forget Bill 107. All it would do is erect another roadblock and leave us worse off than before.
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This commentary was Keli’i Akina’s weekly “President’s Corner” column for July 16, 2022. If you would like to have his columns emailed to you on a regular basis, please call 808-864-1776 or email info@grassrootinstitute.org.  

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Testimony: Kent expands on Maui housing bill flaws

from Grassroot Institute of Hawaii, July 21, 2022

The following is Joe Kent’s oral testimony before the Maui County Council on July 18, 2022, regarding Bill 107 (CD1).

According the measure, it would establish “a new method of determining the sales price of an affordable dwelling unit to include the total housing costs associated with home ownership such as principal, interest, taxes, homeowner’s insurance, private mortgage insurance and homeowner’s association dues.”

Kent, executive vice president of the Grassroot Institute of Hawaii, submitted written testimony regarding the bill on Friday, July 15.

At the Monday hearing, in the Kalana O Maui Building in Wailuku, Kent communicated with the Council from Oahu via Zoom.

TRANSCRIPT:

Joe Kent: Aloha Chair [Alice] Lee and Council members,

My name is Joe Kent, and I’m the executive vice president of the Grassroot Institute of Hawaii.

We’re an economic research organization and a nonprofit taxpayer watchdog that promotes the values of individual liberty, economic freedom and accountable government. I am a paid lobbyist for our institution.

Bill 107 seems to be a well-meaning attempt to lower housing prices, but respectfully, our analysis of the bill is that it would hurt the people it’s supposed to help. 

The bill would affect the price calculations for all homes that qualify as affordable housing, and through a complicated means, it would effectively lower the price that an affordable home can sell for by around 20 to 25% which would lead to developers taking losses.

The county could cover those losses, but that would mean taxpayers would be paying to refund developers for their costs. 

In other words, Maui residents who are struggling to pay their mortgages would be also paying for the mortgages of their neighbors.

If it’s done through bonds, then taxpayers would have to repay the bond plus interest. And interest rates are high right now. This means more money would be going towards debt service instead of paying for infrastructure like roads, bridges, water, electricity and so on.

Another point is that any money from the county or from foundations does not have to be granted to developers to cover their losses.

Developers are not guaranteed that money from the county. They would have to spend money and take a huge risk of a loss on a project with the hope that the council would look favorably upon them. And as we know, the council often does not always look favorably upon affordable housing projects.

So in summary, there ain’t no such thing as a free lunch. There is no way to hide the losses except by pushing it onto either developers or taxpayers.

Either way, this bill increases the risk for home builders who may be taking significant losses, especially when it comes to 100% affordable housing projects.

Thank you for allowing me to testify.

Council member Yuki Lei Sugimura: Thank you Mr. Kent. So you were saying that the proposed legislation, you’re saying that you’re against it going to developers and more to the individual homeowners?

Joe Kent: What I’m saying is that there was previously, in previous testimony, a rebuttal that the county could repay the losses to developers from this bill. But I’m just saying that there’s a problem with that concept because that money would be a scarce resource. It would be directed away from paying for rents, for example. A lot of renters are on the verge of becoming homeless on Maui, and so this would direct money away from them and towards developers instead.

Sugimura: OK. Thank you.