Master Builders Association Housing Summit is on October 17

The annual Housing Summit convened by the Master Builders Association (MBA) is next week, October 17th. Here are the details:

Tuesday, October 17, 2017 – 7:30 AM to 11:30 AM
Meydenbauer Center,Bellevue
Your Price: $0.00

For more information on the agenda you can find more and register at attend at the MBA website. Here is a commercial highlighting the event as well.

Built Green 2017: Panel Highlights Mayor, Council Races

A little less than a month ago I caught part of a panel discussion between candidates for Mayor of Seattle and for the seat on the City Council formerly held by interim Mayor Tim Burgess. There wasn’t anything shocking in the exchanges I saw and I didn’t hear much about housing economics that corresponded with what I know is true: we need more housing in Seattle. I’ve heard a lot of local political debate over the years. Candidates nervously, sometimes, try to deal with issues they know are big with their audience. Other times they go for applause lines. My overall impression is that both candidates weren’t in their element. At one point Jenny Durkan, the supposedly pro-businees candidate talked about condominium development and said the problem with condo liability laws was shoddy builders, or words to that effect. There was no audible gasp, but I shook my head. Neither candidate for Mayor seems to understand the difficult job of getting housing to the market place efficiently. I’m posting panel for your consideration. The election is just about a month away.

FRONTLINE Documentary is an Important Warning

The PBS investigative program FRONTLINE has an important film about the runaway prosecution of a Chinese family bank that is worth your time to watch. The reason I suggest it, is that it presages what might happen in Seattle if the obsession about foreign investor being behind rising housing prices. I’ve written about this before here and at Forbes. It is truly bizarre to see Seattle liberals who bash President Trump’s immigration policies indulging in paranoid speculation about Chinese money being “parked” in Seattle. The notion that foreign investors are buying up housing, taking it off the market, then leaving it empty is absurd; in order for it to account for a small up tick in price would require thousands of units being bought this way. If we’re not careful, we could end up seeing immigrant communities targeted unfairly. It’s yet another example of the lengths some people will go deny the basic fact of supply and demand; want prices to go down, just let us build more!

The film is the featured video above the headline and you can also watch it here:

The Disconnect: Will Lowering Costs of Housing Production Mean Lower Prices?

It’s obvious to most people that when there is scarcity of something its price goes up. When there is an abundance of a product it goes down. But when it comes to housing, the disconnect between what’s obvious and deep bias against new development and change was brought home to me. In a meeting last week about housing costs and how they contribute to slow down supply, I made the case, enthusiastically, that regulatory burdens slow production, create uncertainty, and incentivize larger, bigger housing units. This, I said, is true of all housing whether for profit or non-profit housing; the difference with market rate housing is that the price goes up, while non-profit housing burns more dollars and thus makes fewer units. Either way, regulation has got the housing supply chain in a choke hold. But why do people resist the notion that reducing costs will result in lower housing prices? Because: “If costs go down, developers won’t lower prices, they’ll just get more profit and housing prices will stay the same.”

This is nothing shocking. Most people, I think, believe this to be true. If a water main extension is required by regulators, for example, and that extension adds costs, then, presumably, those costs will end up in the price. If that doesn’t happen, and the builder can avoid the water main extension with fewer, larger units, then the price of those units will be higher. The point is that costs have a big impact on price because they impact how much housing can be produced. But what difference does cost make if supply and demand are the twin ruler of price? It’s called competition.

If 1000 people appear on the scene to buy 100 units of housing, we know that they will bid up the price. Those with more money will offer more to the seller and those with less will end up “priced out.” But what if we produce 900 units? And what if those units are built with extremely expensive materials. Would it matter? Wouldn’t there be an equilibrium in supply and demand? That is, even if the 900 units were made of solid gold, wouldn’t they drop in price because supply matched demand?

The problem is the nature of how housing is built and financed. I had to bring up the term “invisible hand” and I acknowledged that it’s something that progressives and liberals don’t just bristle at but reject with the conviction of Jesuit priest. Housing builders don’t build housing first, then determine what the price per unit will be. They have to take into account costs and what they and their lender think would be acceptable to buyers in terms of price. If the 900 units were so expensive to build that no lender believed they could get their money back, then the 900 units wouldn’t get built. The demand is there, but producing the units needed just doesn’t make sense. Nobody wants to go broke making them and lenders don’t want the risk of building units that just won’t sell or rent.

This is how higher costs reduces supply and thus keeps supply in this oversimplified version. In this case think of the units not as made out of gold but simply regulated to a point at which the price in fees, fines, taxes, design review and other impositions and exactions means that recovering the costs pushes the price way up. Then, while the units might not be made out of gold, they will be expensive and thus have a higher price. They might even sell as “luxury units;” and there would be fewer of them, say 450.

Now, let’s take our example one step further. Let’s say that a local official and his government saw what regulation was doing to supply and thus to price. In spite of other efforts, there are still 1000 people looking for 1000 units, but there are only 550, and the price is high enough that there is lots of pain in the economy, included “rent burden;” people paying a big percentage of their income in rent.

So this leader decides to back off a bunch of rules, regulations, and fees. Suddenly the costs go down. More players enter the market. They’ve seen the high prices of rents and housing and they figure they’ll get a piece of those high prices in the form of profit. Lenders know, however, that when more supply gets on the market, maybe even excess supply, that rents could drop, so they’re more conservative. Still, they lend and building ensues. On an individual project level, builders get their financing and get started. A project here and there start construction, and often the work is right across the street from some of the 550 units.

When the supply of housing hits 1000 units, suddenly everyone has a shot at housing. About 300 of the remaining 450 get into a unit. But the price is still too high for 150 people. They just can’t afford it. Now some of the builders are losing money; they have vacancies. There are people who need the unit. They offer less than the rent. The builder lowers his asking price. Other people hear about this and lower their offer. Throughout this silly simple and unrealistic market, suddenly those demanding housing have an advantage. And, since the costs is lower, another player comes on the scene and builds 50 units of housing and she prices them even lower. Her vacancy is zero and she’s still paying what she owes and has money left over. Meanwhile, the other guys are hearing from their renters that they’re not happy.

I know, I know. That’s too simple, and maybe I lost track of my math. But the point of the simple example is that when costs are lowered, a barrier is dropped to enter the market. Individual builders don’t look at the whole picture and neither do lenders. They look at what’s in front of them: will this project work given what we think people can and will pay and are we asking too much or too little. This process works it’s way through the economy every day, slowly, surely, and yes, mostly invisibly until overall prices adjust. What regulation does is impose a limit to what can be financed and produced. When we think of prices we of course know that is a quantitative indicator of how much supply there is relative to demand; but we also have to consider the factors that limit production.

I’ve said it before, but it is worth repeating: greed is a character trait, not a business model. Price is a guessing game and a negotiation. Sure, someone out there might produce the same units as they did before a program of regulatory relief, lower their costs, and then charge the same amount. But as production goes up and competition ensues, that person will find themselves with increased vacancies.

Again, even with numbers and data, most progressives and liberals in Seattle will scoff at this. “Yeah, right. We’ll let them get away with lower costs and they’ll just laugh all the way to the bank.” However, we know that doing what we’re doing isn’t working. And if we keep the barrier high, we do add costs that have to be absorbed somewhere, and that means higher prices and consuming more subsidies. It’s why Mayor Ed Lee of San Francisco has said, “The time for excuses, delays and bureaucracy is over” and issued the Executive Order embedded below. Are we going to wait until we’re another San Francisco? Or can we get this order issued here  in Seattle soon?

 

On the Radio: Weld, Spontaneous Order, Growth, and Journalism

Years ago, when I was running a City Council campaign, I arrived to the campaign headquarters to find the candidate with a draft letter to the editor. Some story in the paper was not to his liking, and he felt he needed to set the record straight. I told him that I was pleased he’d gotten his thoughts and emotions on paper. “Now,” I said, “You can crumple it up and throw it away.” After some back and forth he did. What I knew early on, almost by instinct, is the best way to keep a bad story going is to talk about it, and the worst way to get a good story is to argue with reporters. For the most part, the press really is trying to get the facts right and tell a story that is interesting to its audience. But the press, like the Mayor or City Council, is a powerful institution and can profoundly shape the public discourse on an issue. A recent story on KUOW was an example of reporting on growth that is factual, compelling, and helpful of the discourse.

I like Joshua McNichol’s story, The Man Who Steals Houses in Seattle, because it got the facts right about that challenge builders face with vacant buildings. It’s a subtle point, but one that, I think, comes through in the story: builders would rather have housing occupied than vacant. What makes this difficult is the regulatory regime at the City that drags out the permitting process and ties demolition to getting a building permit. When getting that permit is uncertain, demolition is uncertain too. Add to this the City’s unhelpful Tenant Relocation Assistance Ordinance (TRAO) which creates more hassle, paperwork, and uncertainty when notifying a tenant that their current residence is going to be demolished. The TRAO problem isn’t paying assistance to qualified tenants, it’s the chance that some hiccup in the process or an overzealous regulator will hang things up right at the time the bulldozers are ready to move.

Second, I appreciated the interesting confirmation of the beauty of market forces in the story. I’ve written about Friedrich Hayek before, and the story about Greg and his efforts to take advantage of vacant buildings for shelter is a classic example of what Hayek called “spontaneous order” and economist Adam Smith called the “invisible hand;” the tendency for people to spontaneously solve problems on their own without mandates or fiats from government. Greg even talks about what he’s doing, improving properties and keeping them organized and clean, as a kind of “invisible hand.” What Greg is doing is illegal, but he’s found the animating principle behind Weld Seattle, which is taking the notion of improvisational shelter legitimate. Weld is creating a housing option for people coming out of jail, setting the up with employment, and offering building owners waiting for demolition a solution for the hazards of having a building sit empty.

Finally, the story isn’t yet another “greedy developers empty housing that could be used by the homeless” story. In contrast, the story shows the complexity of the issue, with builders and developers wanting people in their buildings, people in the community jumping in on their own to repurpose buildings, the legal complexity of both, and the potential of a solution that is both legal and beneficial. This just hasn’t been the norm in reporting of growth in Seattle. Usually, the story is confirmatory about new housing to respond to growth being “a problem” or “an impact.” It’s not, it’s a benefit. However, there will be discomfort associated with it. Empty houses sitting that way for months or even years is one of them. It’s something we can solve together if everyone just stops and thinks for a while. If it Weld had not appeared as a solution when it did, I’m almost sure we would have had some legislation proposed by Council to force builders to house people in their vacant buildings.

When we talk about “the news,” we’re really talking about narrative, a story. Today, in our region and especially in Seattle, the story that is told is about someone making lots of money at our expense; building lots of new things to create jobs and housing for people not like us and coming from far away. Our lives, the story goes, is being made worse by all this turmoil and someone else needs to pay for it and it should slow down and stop. The press reenforces this story every single day in big and small ways. True, an old lady might lose the loading zone in front of her apartment building to a bike lane, but that’s part of bigger, positive shift toward supporting people who want to stop driving. But when the Seattle Times reported that story it focused on a sad picture of the lady and how she might be killed walking to the end of the block to get picked up by her family.

It takes a lot of work to change this mindset. Yes, being a boom town comes with some inconvenience and discomfort. Telling that story in a sympathetic way requires solutions like Weld so there is a story to tell, but it also means doing what I told my candidate years ago never to do: complain when stories are bad. But we also should heap praise when the press gets it right. We’re all in this together and there is a big difference between seeing the press as an enemy and seeing them as an important part of the solution. But if they don’t hear other voices how will they know when we think they’re doing a good job or a bad job? If they were going to tell the story differently we have to criticize when they get it wrong, offer alternative and factual story lines, and then be appreciative when they tell a better story.