The Affordable Housing Industrial Complex

from The Antiplanner, October 27, 2023

Early this week, Grassroot Institute executive director Keli’i Akina interviewed the Antiplanner about affordable housing, why it costs more than regular housing, and why the Hawaii Housing Finance & Development agency refuses to release records that would help the public understand where their money is going. The interview was posted on YouTube late Wednesday evening.

Affordable housing is a nationwide scam and Hawaii is far from the worst offender. As the state with the second-least-affordable housing in the nation, however, local politicians are prone to promoting affordable housing subsidies as the solution to housing affordability problems, which doesn’t work as they are two different issues. The Antiplanner suggests that affordable housing subsidies should solely be in the form of vouchers directly to low-income people, not subsidies to developers who build costly projects at taxpayers’ expense.

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‘Affordable housing’ making housing worse for everyone

from Grassroot Institute, Nov 2, 2023

The topic of “affordable housing” is omnipresent in Hawaii, but affordable housing is not the solution to the state’s “housing unaffordability,” says Randal O’Toole, president of the Thoreau Institute and a Grassroot Scholar.  

On the latest episode of “Hawaii Together” on ThinkTech Hawaii, O’Toole joined program host Keliʻi Akina, president and CEO of the Grassroot Institute of Hawaii, to discuss why building more so-called affordable housing will not solve the state’s housing affordability crisis — and what can be done instead. 

He said “affordable housing” is basically “housing that’s subsidized for people who are so poor that they can’t afford to buy or rent housing that’s on the market,” whereas “housing affordability” is “a measure of whether housing is affordable to everyone in a market, not just low-income people.” 

He attributed Hawaii’s housing challenges to the 1961 State Land Use Law, the first of its kind in the nation to restrict the amount of land available for new housing construction. He noted that since 1969, the median home price in Hawaii has surged from being less than three times the median income to nearly 10 times the median income today. 

But, O’Toole said, rather than “abolishing or amending” the State Land Use Law, Hawaii’s politicians have opted to subsidize so-called affordable housing construction. 

“That helps the few people who get those subsidies,” he said, “but it hurts everyone else because oftentimes those subsidies are made at everyone else’s expense. We have all kinds of taxes to pay for these subsidies.” 

Ultimately, O’Toole said, “if we’re going to talk about housing affordability, we have to abolish the Land Use Law. The solution is to take care of what caused the problem in the first place”

TRANSCRIPT

10-24-23 Randal O’Toole with Keli‘i Akina on “Hawaii Together”

Keli‘i Akina: Aloha, everyone, and welcome to “Hawaii Together” on ThinkTech Hawaii. I’m Keli‘i Akina, your host and president of the Grassroot Institute of Hawaii. 

Well, as you know, one of the issues we talk about at Grassroot a lot is how can we bring down the cost of housing in Hawaii for everyone? 

You know, there’s a federal program that tries to answer that question by subsidizing builders to construct local affordable housing. Yet, that program is very costly to administer, and it has had a lot of programs with corruption and favoritism. Is that something we can make better, or are there simpler ways to make housing less expensive? 

Those are some of the questions that I’m going to ask our guest today — a very special friend — Randal O’Toole. He’s the president of the Thoreau Institute and a scholar for the Grassroot Institute. His expertise is something you’re going to be amazed at as we open up some important questions. 

But first, let me welcome Randal to the program. Randal, you’ve been in Hawaii often, but welcome back via Zoom. 

Randal O’Toole: Thank you very much. I’m glad to be here. 

Akina: Well, you’ve got decades of experience working in forestry management and urban development. Your counsel here in Hawaii has been important to us on issues as wide-ranging as the environment and the rail. Can you tell us a little bit about your background and how it is that you’ve gained such an interest in issues that are very important and relevant to us in Hawaii?

O’Toole: Well, you’re right. I actually started in forestry and I have a degree in forestry. And I started working on forest policy issues in the Northwest, and I was invited to get a master’s degree in urban and regional planning at the University of Oregon. 

And so, studying urban regional planning, I quickly discovered that they were empirically barren. They based all  their ideas on intuition, and they were almost always wrong. 

And so, I soon developed a strong critique of urban planning, including the idea that we need to make housing more expensive in order to get people to live “right” — because, supposedly, people were living in the wrong way, and the path towards right living was forcing people out of single-family homes by making housing more expensive.

And so, ever since then, I’ve been a strong critic of urban land-use policies that are practiced in states all across the country, as well as transportation policies. 

Akina: Well, we’ve appreciated your input here. You’ve certainly been a significant voice for the public, as well as public officials. 

Now, we talk about affordable housing in Hawaii all the time. It’s a phrase that is used by virtually every politician when running for office and making promises, to managing their terms. 

And yet, “affordable housing” may be a misnomer because what often the government is working on is not necessarily affordable. 

What’s the difference between affordable housing and housing that is actually affordable?

O’Toole: Well, there’s a lot of confusion between the terms “affordable housing” on one hand and “housing affordability” on the other hand.

 “Affordable housing is basically housing that’s subsidized for people who are so poor that they can’t afford to buy or rent housing that’s on the market. “Housing affordability” is completely different. It’s a measure of whether housing is affordable to everyone in a market, not just low-income people. 

And so, the standard way of measuring it is we compare the median price of homes against a median income — family income — in a region. And if the prices are no more than three times incomes, then anybody can afford a home. 

Generally, there’ll be a range of incomes, but there will also be a range in home prices. And so, if prices are three times incomes, then the lowest income people can find a smaller or less luxurious house and the highest income people can find bigger, more luxurious houses. 

If prices rise and incomes don’t — so that they’re four or five times median incomes — they become less and less affordable. 

You can’t afford to get a mortgage for a house that is five times your income. A bank will not lend you the money on a house that’s five times your income unless you have a down payment that’s equal to almost half the price of the house. So, if housing is five times incomes, then housing is unaffordable.

So, what’s happened is, states like Hawaii have passed policies that have made housing unaffordable. This started with the 1961 [State] Land Use Law. And it was followed by many amendments to that law and additions to that law that collectively have made housing less and less affordable so that in 1969, the median home in Hawaii was less than three times the median income. Today, it’s almost 10 times the median income, meaning very few people can afford to buy or rent a home in Hawaii. It’s a real hardship on people. 

So, instead of fixing the problem, instead of abolishing or amending the Land Use Law, politicians say, “Well, we’ll just subsidize some affordable housing.” Well, that helps the few people who get those subsidies, but it hurts everyone else because oftentimes those subsidies are made at everyone else’s expense. We have all kinds of taxes to pay for these subsidies. 

And so, we drive the price of housing up, and then the people who are hurt by this are hurt twice — first of all, because they have to pay more for housing, and second of all, because their taxes are increased to pay for the housing subsidies that politicians are proposing to use to remedy unaffordable housing. 

Affordable housing is not the solution to housing unaffordability. The solution is to take care of what caused the problem in the first place. 

And by using affordable housing as a solution, we create an environment where developers are spending exorbitant amounts of money because there’s very little control over what they do in order to get affordable housing subsidies. 

And yet, we’re not solving the problem; we’re actually making housing less affordable. 

Akina: Well, thank you, Randal. It looks as though in our pursuit of the holy grail of quote “affordable housing,” unquote, we have actually made housing unaffordable for all. 

But let’s take a bigger picture before I come back to Hawaii. Tell us a bit about the state of home building across America in general and where Hawaii fits into that picture. 

O’Toole: Well, Hawaii was the first state to pass a land-use law that restricted the amount of land available to build new housing on; that was in 1961. California passed a law in 1963 that ended up having the same effect, even though that wasn’t the [California] legislature’s intention.

In 1973, Oregon passed a law that was intended to have the same effect as Hawaii. It was intended to restrict the amount of land available for new housing. Washington state passed a similar law in about 1990. Florida passed a law like that in 1988. And several New England states, including Massachusetts, Connecticut, Rhode Island, and Vermont and New Jersey and Maryland passed similar laws in the 1980s and 1990s.

So, what we see is, we have on the coasts, the West Coast and the East Coast — particularly the Northeast and Florida — have experimented with these laws restricting housing. And most of the rest of the states don’t have anything like it. You don’t see anything like that in the Midwest. You don’t see anything like that in the South, except for Florida, which incidentally repealed its law in about 2011. And you don’t see anything like that in many of the western states. 

So, we have now a dichotomy. We’ve got these coastal states where housing has become really expensive. And then we have the central states where housing is more affordable. So, it’s no surprise that we’re seeing rapid growth in the more affordable states like Texas and North Carolina, which escaped passing any of those laws, even though it’s on the East Coast.

And meanwhile, people are migrating out of the states that passed those laws, like California, Oregon and Hawaii. 

So, we have this sharp contrast, and it really is a good experiment because it shows that if you pass a law that restricts how much housing, new housing you can build, guess what? It makes housing unaffordable.

And, except for in Florida, politicians in these states have not said, “Maybe we need to repeal these laws.” Instead, they’ve said, “Oh, we got to defend the Land Use Law, even though people are complaining about unaffordable housing. We’ll just throw affordable-housing money at it instead.” 

Akina: What I hear you saying is that it’s a simple matter of supply and demand. And that through our land-use laws, we are creating conditions that restrict the supply. Would you say that’s the cause of the apparent shortage of housing in Hawaii and its high cost? 

O’Toole: That’s right. And you have to keep in mind that Americans want to live in single-family homes. And so, one of the remedies that planners have proposed is, “OK, we’ve drawn these boundaries around our cities, and we won’t let anybody build new single-family homes outside those boundaries. And we’ve filled up all the land inside the boundaries, so how are we going to get more housing?

Well, the remedy they proposed is, “Let’s abolish single-family zoning, tear down single-family homes, and build apartments on them, on those lots.” The problem with that is, as I say, Americans want to live in single-family homes.

So you reduce the supply of the kind of housing people want in order to increase the supply of the kind of housing people don’t want, and you say, “This is going to make housing more affordable.” But no, it’s going to make the kind of housing people want less affordable, and then it’s going to produce perhaps an abundance of housing that people don’t really want.

There’s another problem that high-density housing tends to be more expensive to build, but that’s a side of the point that people just don’t want to live in that kind of housing. 

Akina: Randal, going back to the subject that I opened up with in my introduction, I made a reference to a low-income housing tax credit program, and wondered if you could clarify for us a little bit why that is not a very helpful program.

O’Toole: All right. Well, let’s go back to the 1950s when Congress is giving money to cities to build low-income housing, and the cities were often using it to build high-rise housing. And they were built by the government and then managed by the government. And these high-rise housing projects often failed miserably.

As I say, people want to live in single-family homes. They don’t want to live in high-rise housing. And particularly, if your income is low, you build these high-rise housing projects, they become magnets for crime. And so, within a few years after building them, they found they couldn’t give them away; they couldn’t get people to live in them at all. And most of them, outside of New York City, were eventually blown up. 

So, in 1986, we had Republicans running Congress, and a Republican president, and they revised the tax code. And among other things, they said, “Maybe instead of having the government build low-income housing, we should have the private sector do it.” And, you know, people believed in privatization and things like that, so it sounded very attractive. Let the private sector do it. 

What they should have said was, “Let’s take away all government barriers to housing, like urban-growth boundaries and restrictive zoning and rural areas and things like that. And let builders build what they will build, and that will make housing affordable.” 

Instead, they said, “What we’re going to do is we’re going to give builders tax credits.” That is, they won’t have to pay as much income taxes. And if they don’t have any income taxes to pay, they can sell these tax credits to somebody else who won’t have to pay income taxes because of the tax credits. 

And then, we’ll give the tax credits out to the states — and right now, it’s about $10 billion a year in tax credits. Each state gets a share, depending on their population., And then the states hand them out to developers. 

Developers come up with proposals to build housing. They have to promise that a certain amount of that housing will be rented or sold only to low-income people for 30 years. And then, if their application is approved, they get a tax credit that can be used to build it. 

Now, the states have added other housing subsidies, and the federal government has other housing subsidies. So, oftentimes, if you’re a developer, you can build a project that gets 80[%] to 90% of its capital costs covered by tax credits and other housing subsidies. 

Which means you put up very little of your own money. You build a big development, you’re restricted as to what you can rent the units for, or sell them if they’re for sale. But, since you put almost no money into it of your own, you still make an enormous profit on it. 

And that’s how it works, and we’re seeing that happen. And what it turns out is, the private sector, when it’s given the same perverse incentives that face public housing authorities, doesn’t do that much better than the public did before.

Akina: You know, that’s a great explanation as to why we simply can’t say “private sector versus government.” Because even when government hands over a larger role for the private sector to play, it’s got its tentacles of regulation wrapped around it. 

Now, you’ve been looking at our specific situation here in Hawaii. And recently, you filed an open records request with the [Hawaii Housing, Finance and Development Corp.]. I think you were trying to find out how it’s been spending its funds on affordable housing, or what we call affordable housing. 

Now, Randal, that was back in July, I believe, of 2023. Have you gotten any results? Has the agency provided the information that you’ve requested? 

O’Toole: Yes, I’ve gotten a result, and the agency basically denied my request. And the argument is that there are some kind of corporate secrets in the information I requested. 

And here’s the situation: It turns out that the developers who are building so-called “affordable housing” end up spending, on average, twice as much money per square foot on that housing as it cost — if your cost was, cost you, if you hired somebody to build you a single-family home.

And so, I wanted to find out why is it that so-called affordable housing costs twice as much as private housing. 

And one way of answering that question is to look at the applications the developers submit to the housing authorities. These applications tell how many square feet are in the housing units, how much those housing units cost, which means you can calculate the cost per square footage.

And it breaks down the cost into things like architects’ fees and consultant fees and construction costs and land costs and all sorts of other things. 

And then it also shows — the applications also show what percentage of homes, of residences are going to be made available to people of different income levels, such as 60% or 50% of median family income, and what rents they’re going to charge and who the actual developers are and things like that.

So, I don’t see that there’s any secrets in here. This is information that ought to be public information because it shows where our tax dollars are going. 

And while you can often look up and see what the total cost of a project is and how many square feet are in that project, and then calculate that, “Oh yes, it’s costing twice as much as a project if I were just going to hire somebody to do it for myself,” without getting the details that are in these applications, it’s really hard to tell what is driving the cost. Why is the cost twice as much? 

I have some hypotheses, but I need to look at these applications to be certain. 

Akina: Well, I don’t want to in any way cut short the due diligence that I know you are committed to in your research. But could you give us a little glimpse into some of your thoughts, some of those hypotheses as to why there is this price, this cost disparity?

O’Toole: Well, the most important disparity that I’ve seen in other states — I’ve been able to look at these applications in Colorado and in Washington state. And the projects I’ve seen in Oregon and California and Hawaii tend to follow the same lines. 

What’s going on is that urban planners have decided that we should live in multi-family housing, especially housing that’s on transit lines. So that we will then, instead of getting in our car and driving to work, we’ll walk downstairs of our apartment, and then hop on a bus or a train to get to work. And they think this is a way of reducing climate change, but they were in favor of this long before climate change was an issue. They just think that Americans would be better off living in apartments. 

And for various arcane and totally absurd reasons, they have settled on the five-story apartment building as the optimum. Six stories is OK, four stories is OK, three stories is not so OK. Four to five is really their optimum.

The thing is, you build a two-story house, and you basically build it out of wood; you’ve got a concrete foundation, and then you build it out of wood.

 If you build a five-story apartment building, you have to build a lot of — use a lot of steel. You have to have concrete separating each floor in order to provide fire shields so that if one floor catches on fire, it doesn’t ignite all the other floors. You have to have a lot more steel to hold up all that concrete. 

Plus, Americans won’t climb four flights of stairs to get to the top of the fifth story. And so, you won’t be able to rent those out unless you put in an elevator. Elevators are really expensive. 

All of these things mean that the cost of five-story buildings per square foot is about twice as much as the cost of two-story houses.

And so, it’s my hypothesis — and it seems to be verified looking at the applications I’ve seen in Seattle and in Denver — it’s my hypothesis that these five-story buildings are the reason why so-called affordable housing costs so much. 

And one of the things that it says is, we’re handing out all of these tax dollars to people to build affordable housing, and it’s being used very ineffectively. If it costs twice as much per square foot, they’re only building half as many units as they could be building. And taxpayers should be upset about the ineffective use of it. 

Akina: Well, going back to the tax credit issue we were talking about, I’m sure that Hawaii is not alone in terms of the issues that you’re looking into with regard to transparency and corruption.

But beyond that question, the tax credit has been criticized for funding affordable housing units that cost much more than they should. Our own Sen. Stanley Chang has raised similar questions about the program. What are your thoughts about that? 

O’Toole: Well, let me just give you an example. Recently, there was an article in a major publication, The New York Times or Washington Post or something like that. It said, “San Francisco has figured out the solution to affordable housing.”

And so, they built a five-story building, and it had hundreds of affordable housing units, and they only cost $400,000 per unit. And they said previous ones that had been built in San Francisco cost $700,000 per housing unit. So that sounds like a great victory, reducing the cost per housing unit from $700,000 to $400,000. 

Well, looking up this project, I was able to determine that the average size of the housing unit in this project was 260 square feet. So $400,000 divided by 260 square feet is $1,500 a square foot. That’s expensive even for San Francisco, where the average cost of construction is about $600 to $700 a square foot.

So, we’re throwing money away, you know, letting it go down the drain in order to build so-called affordable housing units, and patting ourselves on the back by saying, “You know, we’re helping all these low-income people by squeezing them into 250- or 260-square-foot housing units.” 

That’s not socially just. That’s not equitable. It’s especially not socially just to adopt policies that make housing really expensive and then combine them with policies that force low-income people into third-rate housing — third-rate in both the quality of the housing, the size of the housing and the desirability of the housing.

So, we have, socially, we are compounding socially unjust policies on top of other socially unjust policies. 

Akina: In a typical housing development which was built using these tax credit funds we were talking about it before, what are some of the rules for how long the affordable units must be rented at affordable rates? What if somebody wants to sell their project-built house to someone else? 

O’Toole: Well, generally, they often do sell them or they hire other people to manage them, but they are required to rent them at affordable rates for 30 years. 

Well, the affordable housing tax credits was created in 1986, so that means the first ones that were built are already well past that 30-year limit.

So today, a lot of the ones we are building are not expanding the supply of affordable housing. All they are doing is replacing other ones that have gone off the market because they’ve passed their 30-year limit. So, it’s become a case of running as fast as you can to stay in one place. 

Akina: Do these rules create a perverse incentive for property owners?

O’Toole: I think the perverse incentive is created for developers. I think there’s a small group of developers that focus on this kind of housing. One of the curiosities in the law is that 10% of the projects have to be run by nonprofit organizations. 

So, we get massive nonprofits like Habitat for Humanity that are creating an aura of altruism as they spend huge amounts of taxpayer dollars. And they just hire out other developers to build it, hire out other people to manage it. All they do is feed the money out, and it’s very inefficient. 

Akina: Randal, what are the top reforms that you would recommend for the tax-credit program?

O’Toole: Well, number one, you know, if we’re going to talk about housing affordability, we have to abolish the Land Use Law. And then there will still be some people who can’t find affordable housing, but the number will be a lot smaller than it is today. 

And let me just say that only about 14% of Hawaii is — only about 10% of Hawaii is urbanized; it’s just a little more in Honolulu in Oahu. The other three islands are mostly rural, so it’s not like abolishing the Land Use Law is going to lead to the entire island system being paved over. So, we need to abolish that law.

And then to provide affordable housing for the people who really need it, the way to do it is to forget about the developers, but focus on the people who need it and provide them with vouchers. 

We already have a program like that called Section 8 vouchers. It works pretty well. We don’t need all these other programs where we’re feeding developers and encouraging them to spend, you know, $500 a square foot on new homes when the private market is building them for half that cost.

Akina: Well, I certainly hope we can look at those reforms and go even further as we move to a more rational understanding of how to make housing affordable.

Randal, thank you so much for your thoughts today. Appreciate your hard work on behalf of the citizens of Hawaii. Look forward to chatting with you again.

O’Toole: All right. Well, thank you very much. And I look forward to seeing you again sometime soon. 

Akina: Yes. And to my viewers, thank you for being here. You’ve been listening to Randal O’Toole, the president of the Thoreau Foundation, as well as a scholar at the Grassroot Institute. 

I hope you’ve enjoyed today’s program. Until next time, I’m Keli‘i Akina with the Grassroot Institute. You’re watching “Hawaii Together” on ThinkTech Hawaii. Aloha.