For-sale affordable housing: who does it benefit?

People are constantly advising me to buy a home. They tell me that as a renter, I am simply throwing my money away every month. When I point out that between condo fees and property taxes, even a modest condo in Oakland that I owned outright with no mortgage payment would cost me more per month than I currently pay in rent, they say I am missing the point. The main reason to buy a home, I am repeatedly told by well meaning relatives and wealthy friends, is to build equity.

Okay. If they say so. I’m personally not entirely convinced of all the wonderful benefits of home ownership that seem to be widely accepted conventional wisdom in this country, but that’s really an issue for another day.

I’ve already discussed one of my big problems with for-sale affordable units (for those who missed it: The units can do more harm than good, since many who qualify for below market rate units may not have the financial capacity to deal with the many “hidden” costs of home ownership). Today, I want to talk about another: resale. BMR housing units (including those created through “inclusionary zoning” programs) are usually required to remain “affordable” for a period of anywhere from 40 to 70 years, depending on the specific requirements of the municipality in which they’re created.

From the inclusionary zoning ordinance (PDF!) considered by the City Council last October:

Ownership units:

Inclusionary units required by this chapter that are ownership units must:

(1) in accordance with the schedule below, be sold only to moderate income households, with further maximum household income restrictions that restrict ownership inclusionary units produced as a result of a covered development project to a mean average of 100 percent of AMI adjusted for family size appropriate to the unit, averaged across all of the ownership inclusionary units produced as a result of the covered evelopment project;

(2) in accordance with the schedule below, be sold at an affordable sales prices for a household at the maximum household income level for the housing unit; and

(3) be subject to these restrictions on affordable sales prices and buyer incomes for a period of at least 45 years from the date of initial sale.

So what does this mean? Well, if you win a lottery for a BMR ownership unit, you do own it, but if and when you decide to sell, you cannot sell it for market value. You have to sell it to someone meeting the same income requirements you did, and for a price determined by a formula based on that income. The ordinance, by the way, includes no mechanism for monitoring the sales of these units (just one more example of the way IZ pushers ignore all practicalities of implementation).

On the one hand, this makes sense. The point of IZ is (allegedly) to provide workforce housing. If people could buy subsidized condos and then just re-sell them at market rate, then it would sort of defeat the point. You might as well just write a check to the lottery winners instead.

On the other hand, equity and resale restrictions sort of eliminate all the benefits of home ownership. What’s the point of buying a home if you have no chance to profit on it when you’re ready to move on? You get all of the burdens and none of the benefits.

I’d really like to see how IZ advocates answer that question.

5 thoughts on “For-sale affordable housing: who does it benefit?

  1. m

    I’ve wondered the same thing. The only real advantage I can see is for those who intend on staying in the unit forever. Perhaps there’s the tax advantage too, but I can’t imagine that is reason enough to become a homeowner, without being able to benefit from the equity as well.

    I very much want to buy, and can’t think of a lot of reasons why I do think it’s the better option, for our family at least, but unless I can figure out a benefit to these below market rate programs that I’m currently not seeing, it won’t be through one of those programs, if it does in fact happen at all (which I hope it will).

  2. Steve R

    I think the goal of BMR is to build up enough equity over time with the mortgage payments and some (restricted) profit when selling to move into market-rate housing, but there are still a lot of flaws with IZ. Like rent control, it often benefits people who don’t need it, and by discouraging construction of more housing it ultimately makes housing more expensive. Buying as a long-term investment usually makes sense economically, and there are the “psychic” rewards of owning, but there is certainly good arguments for taking advantage of rent control if you can. I did–until my building was sold and I got the boot.

  3. dto510

    I was just discussing this with a relative who is at the top of a BMR list in Silicon Valley. To qualify for the unit, which is now under construction, she has had to move to that city, which has few rentals (and they’re very expensive). She complains that there’s nothing nearby she can buy on her income, which is near the maximum of the income formula for the area (higher than the East Bay). Yet she’s thrilled to get a condo at a reduced price, and she can use the mortgage-interest tax deduction. Her main argument is that the unit cannot possibly lose value, since it’s so far below market-rate, and that she’s building equity with every payment (except for the condo fees, which are likely to be high). She also will receive down-payment and other cash assistance from the city.

    She moved farther away from where she works, to a city much more expensive than the one in which she works, just because that city has a big IZ program. I see why she wants the unit despite the lack of meaningful appreciation, and how people want the stability of homeownership, but I don’t see how this program is overall a success, for my relative’s family or for the region.

  4. Deckin

    I think Smoothe is exactly right. All the throw off benefits of homeownership accrue to the idea of building personal capital and wealth. The reason homeowners take care of neighborhoods, watch out for each other, etc., cannot be totally divorced from their pecuniary interest in their own home. I’m not saying those are the only reasons for personal investment in a community (God knows socialists would find any monetary interest rationale immoral), but it’s no small part either. So anything that diminishes that interest (by capping the payout) would stand to diminish the personal investment too. What you get is leasing plus, or ownership lite. Whether this is enough to satisfy the other societal goals thought to result from homeownership is anyone’s guess. The time I was thinking about buying a BMR that was for sale by owner, I backed out because of the incredible hassle and the restriction on resale.But who knows, maybe like dto510′s relative, even the diminished ownership is good enough for some. I think the bigger problem is on the supply side, as Smoothe and others argue. Consumers can talk themselves into believing that lots of things really make them materially better off than they do, but people in business rarely have that luxury. Raise the cost of building and you reduce building. It’s just that simple.