Making housing more affordable in Wauwatosa

Ald. Meindl proposes a Community Land Trust, but are there are more effective options?

At last week’s Common Council meeting, prior to the approval of the final plans for the Harlow and Hem multi-family residential apartment building, District 1 Alder Andrew Meindl gave a bit of a speech on the state of housing and homeownership in America:

Robert Deets, the Chief Economist for the National Association of Homebuilders, stated that 96% of multi-family construction in the United States is for rent. Let me repeat: in 2022, 96% of multi-family construction is for rent.

I was at a policy forum last week and during the discussions by a panel of developers and city staff for the region, someone in the audience asked, and I'll paraphrase, What are you doing for those of us under 40 to have home ownership options besides paying rent?

The panel's message was essentially, as I took it, you are SOL.

He then recounts how some family friends got pre-approved for a mortgage and put in an offer for $20,000 over asking on a home in Sheboygan only to be outbid by an all-cash offer $50,000 over asking. He continues:

Sadly, this scenario is playing out every day. According to Pew, 1 in 3 adults is living in doubled up housing, i.e., with roommates. How did this come to be? I saw a Facebook post from one my friends that had clipped an ad for a home from a newspaper in Chicagoland from arond 1965. The ad was for a 2-bed, 1-bath home—with a garage even—for $7,000 and a downpayment of $125. If we adjusted for inflation in today's dollars, this 2-bed, 1-bath home would be $80,000 dollars with a downpayment of $1,000.

Why is this so cheap? This is because, until the 1980s, housing was viewed as a commodity. Today, real estate is viewed as an investment due to scarcity and uncertain market conditions.

He then mentions a few other facts which I didn’t really try to verify or anything but which are probably right enough:

• Those above 50 have over 15 trillion in real estate wealth while those under 40 have 1 trillion.

• In 1980, those age 25-35 had a home ownership rate of 44% compared to 35% today.

• While presumably some of this wealth in the over-50 crowd will get passed on to those under-40 once they kick the bucket, the bucket is rather defiantly remaining upright for longer and longer periods of time due to increases in life expectancy. When the younger generation finally gets an inheritance, they’ll be too old to do anything useful with it.

• The number of renters in the U.S. increased by 23 million from 2006 to 2016, but the number of homeowners only increased by 700,000.

• Average rent in Wauwatosa is $1,299 while the median income in the Milwaukee Metro area is around $65,000 with a poverty rate of over 10%.

He concludes:

So let's summarize this dystopian nighhtmare we are facing. Those under 40 have little real estate wealth. Nobody is building condos, and most townhome developments are rentals. Wealth transfers will be occurring in retirement years across generations. The conversion of real estate from a commodity to an investment has dramatically increased costs. Hedge funds, banks, multinational corporations and those over 50 have the resources to outbid workers under 40. The proportion of the population under 40 who rent is increasing year over year across the US. Workers are not making enough money due to debt loads and wages to compete in the real estate market. These housing statistics are exponentially worse for communities of color.

Why am I spending so much time on this? We need to improve by providing more options for homeownership in Wauwatosa. A few weeks ago I introduced a memo, very early on, to begin discussion to form a Community Land Trust in Wauwatosa. Again, it's very early. While it may take some time for this to come to fruition, the mechansim can provide affordable housing in perpetuity in Wauwatosa. In the meantime we need to push for more ownership opportunities to allow working families to begin building their wealth portfolio and have the security of their own homes. Everyone deserves the right to housing and living in this great City of Wauwatosa.

Overall, I think he identifies a problem that probably aligns pretty well with many people’s own experiences. For instance, when discussing the Drew Tower development several months ago, I quoted a homeowner who colorfully expressed his opposition to the project in this way:

I was born and raised in Wauwatosa. I loved it so much I literally came back here to be a STEM teacher for the Wauwatosa School District. I used virtually my entire first year’s salary as a down payment on a home […] for my wife and I. It took us a long time to find the perfect place [….] and our hard work and dedication to this community is being spit on when we may literally have to live in a shadow of a tower rising out of a quiet community of single-family homes.

During this Covid-19 pandemic period, my wife and I have done our part to be safe and still support local businesses. We’ve ordered from many local restaurants including Mo’s Irish Pub, and I’m revolted to know that my hard earned money is being used to finance this abomination to our neighborhood.

As a young person who has literally invested all of my savings and my life into this neighborhood, I feel like I’m being disenfranchised by Johnny V. And if this council agrees, I feel like they’re taking money over the well-being of the residents that have built our lives around here.

And you could probably find a bunch of other statistics that get at the same problem, but I’ll just mention two that illustrate the extreme under provision of housing in the United States:

1. According to this article, the U.S. Census found that “12.3 million American households were formed from January 2012 to June 2021, but just 7 million new single-family homes were built during that time.”

2. Similarly, Freddie Mac says that “Between 1976 and 1979, the construction of new entry-level single-family homes averaged 418,000 units per year or 34% of all new homes completed,” but “During the 2010s, new entry-level housing supply decreased […] to an average of 55,000 units per year,”

Source: Freddie Mac Research Note | May 7, 2021 Housing Supply: A Growing Deficit

Community Land Trusts

Ald. Meindl describes this “dystopian nightmare” as a lead-in to his proposal for a Community Land Trust (CLT).

I don’t know. I feel like this is akin to invoking the Four Horsemen of the Apocolypse to introduce a proposal for discounted bus fares—somewhat inadequate to the scale of the problem as it’s being described.

And their names were Death, Famine, War, and Conquest. Don’t worry, we’re partnering with Grey Hound to offer 10% off inter-city bus tickets so you can escape the terror.

It’s hard to critique something that doesn’t exist yet, and I’m curious what the exact proposal will be, but I’ll briefly describe the general idea and suggest some potential downsides.

The idea is that a non-profit or, in this case, a city gets some money. The money might come from the taxpayers, it might come from the federal government via Community Development Block Grants (CDBG) or HOME Funds, or it might come from private charities.

The city then buys some land that either has a house already on it, or they build one. Then they sell the house¹ to someone but they don’t sell the underlying land. Instead, kind of like a trailer park, the homeowner pays some type of ground rent on the land underneath their house. The City then uses that ground rent to pay people to submit grant applications for more money, collect rent, screen potential buyers, and generally administer the Land Trust.

The benefit to the homeowner is that buying a home is cheaper than buying home+land. And unlike renting a home, when the individual wants to leave, they can sell it to the next person and keep some of the upside appreciation. They can’t keep all of it, because some will also go to the CLT to fund more purchases and maintain the program, but they can keep some.

Does it work?

Maybe. One reason home prices rise is because of excess demand. But I would also expect there to be less demand in general for a house alone compared to house+land.

So, even ignoring the fact that the seller doesn’t capture all of the price-appreciation when they sell their home, would we expect the price of the home to even appreciate that much? The reason homeowners treat houses like investments and not like consumable goods is partly because housing appreciates faster than the rate of inflation. Additionally, what often gets more valuable is the land itself. The structure on top of the land depreciates in value unless you spend money repairing it.

Land Trusts aren’t exactly a new idea, so I assume someone has looked at this. Maybe it all works out, but there seem like good reasons to think the market for homes in a land trust would behave differently than homes that aren’t and in ways that diminish some of the benefits to homeowners.

Secondly, how much do we expect this to put a dent in housing prices? When the CLT idea was floated during Common Council discussions on where to allocate ARPA funds, the amount being discussed was in the $1.5-5M dollar range. The average price of a home in Wauwatosa is about $350,000. The City could purchase somewhere between 4 and 14 homes. Housing will definitely become more affordable for those 4 to 14 families, but what about everyone else?

Finally, you might say it’s at least a start, and the goal would be to expand the program and buy more homes with the income generated by future sales. But even Jacobin Magazine who, given their masthead I would expect to be at least predisposed to liking the idea, doesn’t think they’re typically financially self-sustaining.

An alternative

I had a number of suggestions written up before I realized that most of them had already been proposed last year as part of a study that the City of Wauwatosa commissioned to identify potential changes to its zoning ordinances that:

• Support and encourage local business growth

• Create policies that allow for a range of housing options and ensure discrimination is not a barrier

• Ensure all residents have equal access to housing, parks, and transportation

• Increase accessibility for people with disabilities

• Create a structure to review zoning and land use decisions through an equity framework

The report, Zone Tosa For All, suggested things like:

• Lowering the minimum lot size for duplexes so that they were the same as the minimum lot size for single-family homes.

• Removing density limits on certain residential zoning categories that only allow a maximum of 4 or 8-unit apartment buildings. Instead, they could control the size and scale of the building through a maximum height limit.

• Eliminating density limits in commercial districts that allow mixed-use residential and commercial buildings.

• Allowing homeowners to build larger Accessory Dwelling Units (ADUs), and

• Reducing minimum parking requirements to decrease constructions costs and encourage fewer car trips.

When the report was presented in October, 2021, there was talk among some of the Common Council members of having “more discussion,” but I couldn’t find evidence that these discussions ever occurred. And as far as I can tell, none of the proposed modifications have been implemented. Duplexes still require a larger lot size than a single-family home, parking minimums haven't been reduced, ADUs are limited to 650ft or <49% of the floor area of the original house, and density limits still exist for residential and mixed-use buildings.²

Lots of Cities, states, and countries do different things

In addition to the relatively minor changes recommended in the Zone Tosa For All report, there are other cities, states, and countries you could look to for additional ideas.

→ The City of Houston is the largest city in the country without zoning. While there are still some zoning-like constraints on lot size and parking minimums, most nuisance problems are handled at the neighborhood or subdivision level through voluntary deed restrictions and covenants. And while it creates some weird results, working-class voters have rejected proposals to institute zoning laws multiple times.

A weird result. House next to parking garage. No, I wouldn’t want to live here. Someone does though. Source

→ Japan. Most zoning in America places functional restrictions on the type of buildings you can have on a piece of land. Some land is zoned for single-family homes, and other land is zoned for small commercial stores. In Japan, zoning is based on a maximum nuisance level. So while a zoning category might not allow anything that creates a nuisance greater than that produced by a short office building, you are also free to build an elementary school or a mid-rise residential apartment building if you choose to. Rather than zoning a parcel exclusively for one type of structure, almost all zoning categories allow for mixed use. This requires less micromanagement by city planners and allows for different parts of the city to grow, decline, and change composition based on market demands and the changing tastes of residents and workers.

→ California, facing skyrocketing home prices and huge shortage of new homes, recently passed SB 8, 9, and 10. Together, these make it easier for homeowners to build a duplex or split their current residential lot, for local governments to access a streamlined zoning process for new multi-unit housing near transit or in urban infill areas, and for developers to accelerate the approval process for housing projects. Finally, it curtails local governments’ ability to downzone and increase fees for housing applications.

→ More recently, Oregon and Minneapolis have eliminated single family zoning. Anywhere you can build a single-family home you can build a duplex.

So, what should Wauwatosa Do?

I find it helpful to think of potential policies likes these in terms of feedback.

One kind of negative feedback loop in the housing market is the one that exists between supply, price, and demand. Price is a source of information, and as demand increases, prices rise, scaring off potential buyers but encouraging developers to build more housing. As the supply increases, prices fall, encouraging more people to buy homes and developers to build fewer until the system reaches some kind of equilibrium that balances the construction of new homes with the demand from potential homeowners. The process is self-regulating. We’ll just call this supply and demand.

A positive feedback loop in the housing market is the one that exists between price and regulation. Over decades, as housing becomes more expensive, it constitutes a larger portion of its owners’ wealth and they become more worried about anything that might cause that wealth to diminish. One way to protect their increasingly large investment is to lobby and advocate for the government to add regulations that prevent people from building things next to their homes that could reduce its value. This additional regulation makes building homes more time consuming and costly, fewer homes get built as a result, houses become even more expensive, and the cycle continues making things worse and worse until something breaks. We’ll call this the regulation-price spiral.

If we apply this idea to the idea of a Community Land Trust it seems clear that while such a thing might blunt the effect of the regulation-price spiral it doesn’t really change anything about its underlying dynamic. People buying houses+land are still paying a lot, and they’re still motivated to prevent other people from building anything that might effect its value. Instead, it just creates a separate market for houses without land that has its own supply and demand dynamics.

If we apply this idea to things like housing subsidies, affordable housing, and rent control, we can see that this does affect underlying supply and demand but in a way that can actually make the problem worse. If higher prices are a signal to developers to build more and for people to think twice about moving there, subsidized prices make homes look less costly to provide than they actually are, increasing the demand for housing even as developers have less incentive to build them.

Finally, easing zoning constraints as proposed in the Zone Tosa For All report helps supply and demand work more quickly. If there’s a lot of demand for housing but regulation makes it much more expensive than it otherwise would be due to minimum parking requirements that require buying more land, or maximum density requirements that prevent them from putting more apartments in the same space, or various board and committee approvals that make the project more tenuous and uncertain, then it will take longer to increase supply. If the process for building is cheaper, smoother, and more predictable, developers can more quickly respond to changing demand.

Of course, you have to convince existing residents that you won’t destroy the value of their homes and make the city completely unrecognizable.

Yeah, But

When the Zone Tosa for All recommendations were presented to the Common Council, there were a few criticisms along these lines:

Former Ald. Alison Byrne worried that it would put too much power back in the hands of developers. Former Ald. Nancy Welch worried that removing density limits would lead to the creation of puny, substandard apartments like she saw in Minneapolis while visiting colleges with her daughter. Did we really want to see or live next to a big Victorian home subdivided into 12 apartments? she mused aloud.

I don’t remember what the presenter said in response, but I think if we’re actually concerned about drawing in less affluent residents, the person of limited means should be able to make the choice to live in a puny apartment if he or she wants to. Forcing all apartments to be larger doesn’t raise their standard of living, it just makes the apartment too expensive for them to live there at all.

Also, forcing developers to jump through a lot of bureaucratic hoops gives an advantage to incumbents who have large staffs and experience navigating the process. It encourages larger developments because if you have to go through a 1- or 2-year approval process before you can build something, it’s more cost effective to make it as large as possible. Conversely, fewer administrative hurdles might encourage smaller projects (like townhomes or condos) from a wider range of developers.

Additionally, turning a single-family home into a duplex, subdividing an old Victorian into multiple apartments, or building an ADU for your grandmother or AirBnB guests isn’t something a big developer does but something people who would like to earn more money and reduce their housing costs do. Allowing them to do so with a minimum of approvals, applications, and costs can encourage more people like that to try as well as draw in less-wealthy homeowners who might need such an option to live there at all.

I also think one of the benefits of allowing duplexes to be built anywhere a single-family home exists is that the rate of change should be relatively slow. Every single-family home will not turn into a duplex over night, because the families living in those homes before the zoning change obviously did not purchase them with that intention, and few will be persuaded to do so if the law changes. Instead, you’ll get slowly increasing density as new residents cycle into the neighborhood over multiple years.

Another common worry is that reducing these restrictions on developers will just lead to more luxury or high-end units that don’t do anything for the poor who can’t afford them. The mechanism that is usually offered to rebut this is that as more market-rate units become available, those who can afford them will move from their lower quality apartments into these higher-end units, opening up space for lower-income people to move into the less-fancy apartments they’ve vacated.

And I think there is an increasing amount of research that demonstrates that this is indeed what happens.

• This paper by Bratu, Hajunen, and Saarimaa in Finland finds that new market-rate housing causes the wealthier to move out of older homes and into the fancier ones which are then filled, on a relatively short timeline, by lower- and middle-income residents.

• Mast (2021) finds in a model based on the moving patterns of 52,000 households across major cities in the United States that “Constructing a new market-rate building that houses 100 people ultimately leads 45 to 70 people to move out of below-median income neighborhoods, with most of the effect occurring within three years.”

• Pennington (2021) finds using rent data from San Francisco that “rents and displacement fall differentially near new market rate projects, while gentrification increases. In contrast, affordable housing does not have spillover effects.”

• I’m pulling all these examples from this article which also cites additional papers by Asquith et al. (2019), Li (2019) that demonstrate similar effects.

More market-rate housing does lower prices.

Conclusion

The point is not that we should avoid establishing a Community Land Trust or never provide incentives to developers who include affordable housing units within larger residential projects. These can provide some benefit in the short-run. However, I do think eliminating some zoning restrictions and simplifying the approval process for new development projects more directly addresses the underlying problem and will have a larger effect in the medium- and long-term.

1. Technically I don’t think the home is usually sold but leased for 99 years.

2. For instance, residential zoning classification R4 limits an apartment building to 4 units. There is also an R8 classification although I did not see anything language that specifically limited those buildings to a maximum of 8 units.