Introduction Household Affordability Prescription Comments My comments on this prescription are divided into two sections things that are talked about and things that are not talked about. My general impression is that this is not a topic that should be considered a top issue for CodeNEXT. I fear that the emphasis is placing an expectation on CodeNEXT that it cannot fulfill. Land development code can only have a minor impact on household affordability. The real issue is socioeconomic. And, that leads to affordability problems. Oversimplified, Austin has a situation where 50% of its population cannot afford to buy a home in Austin. Over the years, we've created though our policies and actions a great divide that separates the city economically, socially geographically and racially into two regions. This is resulting in a forced migration and diversion of people with less than the median income away from Austin and out into other cities in Travis County and other counties. This results in increased traffic, and difficulty in providing services, especially medical care and education. Changing this will require more policies, tools and actions than CodeNEXT can supply. Talked About Subsidies There are varies types of incentives and subsidies that are being considered. These do not address the fundamental underlying issue and only act as band aids affecting few people. And, the money from these programs has to come from either tax payers, redirection of tax revenue or contribution. None of these methods create new wealth. Large scale application of this type of policy is unacceptable in today's political environment. Density or Diversity (missing middle) of Housing Increased density or diversity of housing does not automatically result in affordability. An analysis 1 of the sales of housing in ZIP 78704 indicates that size and age are the two major factors. This is shown in Illustrations 1 and 2. For comparison, the approximate affordable housing price for median income in Austin is about $200,000. In Illustration 1, it is shown that for recent sales of all types of housing in ZIP 78704 that this is achieved at a size of zero square feet. There are a few examples around $200,000. By analyzing the data for housing less than $400,000, the effect of age (when the house was built) can tell us the type and age of housing that achieves that low price. This is shown in Illustration 2. Only condos built in 1972 or earlier are $200,000 or less. Also note that the trend is for condos, townhouses and single family forms of housing to be priced very close to one another. Illustration 3 shows the distribution of housing by type and price. The numbers at the peaks indicate the average size of the housing. This demonstrates again the effect of form and size of housing on 1 This analysis was made of data provided by Ed Wendler of sales data in ZIP 78704. The complete analysis is available at https://drive.google.com/open?id=0b2_qs8rhvynsmzrrmejhz0zprke June 24, 2016 Paul Schumann 1
price. The analysis considered: Form (Condo, Single Family, Duplex, Townhouse) Address MLS# Price Square Feet Price per Square Foot Year Built My overall conclusion was that at least in ZIP 78704 there is no reasonable way given current market conditions and construction technology to achieve a price of $200,000, a price still not affordable by 50% of Austin. Supply I don't think it is possible to lower the price sufficiently enough to be affordable through increased supply of homes. According to an article in the National Bureau of Economic Research, typical housing prices exceed housing cost by about 20% in the U.S. If this is true for Austin, then the only way to achieve lower prices is to reduce the construction cost. Even lowering the profit margin to zero would not achieve true affordability. Preservation Preservation is great for many reasons, but does nothing for affordability. It usually raises the price, as a restored historic home is more desirable. Reduced size This is not practical. At current price/sq ft of $350, a 429 sq ft residence would cost $150,000 and be affordable at an income level of $46,000. Reduced parking Very minor impact and increased inconvenience Less regulation Dangerous and I doubt that the trade off between construction costs and safety or durability would be acceptable. June 24, 2016 Paul Schumann 2
Not Talked About Renovation As age of the residence is an important factor, minimum renovation of the old stock of residences might possible produce lower priced homes, but still not affordable. Innovation & Technology Residence construction technology has changed little over recent times. This should be explored and if there is potential to significantly lower production costs while maintaining other factors, incentives could be provided to builders to use these new technologies and innovate. Paradigm Shift Perhaps it's time to rethink what we define as a residence. For example clusters of smaller residences could be designed in a way to share some services. For example on Jekyll Island, the homes were built there with no kitchens and the residents all went to a common club with dining and recreation. Mini homes and even micro homes (tiny home movement 2 ) are being constructed that can be transported complete and placed on a site. And, we always have the prefabricated homes (single and double wide) that could be permanently placed on designed land. For an extreme version of a new paradigm for housing with shared services, look at Community First 3 in Austin. Higher Income In order to affect his factor, I think we have to look beyond jobs and careers. Many people see the future as job less, and work becoming a series of gigs, a concept borrowed from the music industry. 4 And, I think we have to always keep in mind that we designing solutions to enhance the lives of people who now reside in the bottom 50% of Austin's citizens, almost 1 million folks who can't afford to buy a home in the city. We should reintroduce vocational education back into the public schools. It is also important to educate people in civics and how civic engagement can change their world. We should introduce programs at the middle school level to teach the fundamentals of modern economics such as Exchange City 5. And, introduce creativity and innovation in various forms and places from K to12. As a requirement for thriving in a job less economy, learning how to learn throughout a life will be essential. I think we should look to some of the extremely poor areas of the world and how they have had success in economic bootstrapping. Micro loans 6 and replacement of money with digital cash comes to mind, 2 http://www.npr.org/2015/02/26/389263274/living-small-in-the-city-with-more-singles-micro-housing-gets-big 3 http://mlf.org/community-first/ 4 Gig is slang for a musical engagement hired. Originally coined in the 1920s by jazz musicians, the term, short for the word "engagement", now refers to any aspect of performing such as assisting with performance and attending musical performance. 5 Exchange City is the largest hands-on education program in the world with more than 1,000,000 students participating to date. Created by the Learning Exchange of Kansas City, there are six Exchange City centers in the United States. 6 Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment and a verifiable credit history. June 24, 2016 Paul Schumann 3
for example M-Pesa 7. Innovation creates wealth. We should encourage and facilitate innovation that uses local resources and returns new or improved resources back into the local area. Resources includes people, capital, knowledge,natural, facilities, and partners. Methods to establishing community funding, and business collaboration would be highly desirable. Don't bring in companies from the outside. Build endeavors from the grass roots and keep the benefits within the community. Contact Paul Schumann Lost Creek Civic Organization, Inc. info@lostcreekcivicorganization.org 512.632.6586 www.lostcreekcivicorganization.org 7 M-Pesa (M for mobile, pesa is Swahili for money) is a mobile phone-based money transfer, financing and microfinancing service, launched in 2007 by Vodafone for Safaricom and Vodacom, the largest mobile network operators in Kenya and Tanzania. It has since expanded to Afghanistan, South Africa, India and in 2014 to Romania and in 2015 to Albania. M-Pesa allows users to deposit, withdraw, transfer money and pay for goods and services (Lipa na M-Pesa) easily with a mobile device. June 24, 2016 Paul Schumann 4
78704 $2,000,000 $1,800,000 f(x) = 216954.09 exp( 0 x ) $1,600,000 $1,400,000 $1,200,000 Price $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 Square Feet Illustration 1: Price as a Function of Size of House Illustration 2: Price vs Time by Form June 24, 2016 Paul Schumann 5
Illustration 3: Frequency Distribution of Housing Price by Different Form and Price June 24, 2016 Paul Schumann 6
Appendix Summary Data provided by Ed Wendler Jr. Analysis by Paul Schumann using: Watson Analytics 8 Open Calc Price is a function of year built. Average price for condos, duplexes and townhouses are almost the same, and lower than single family. However, averages are misleading. Price is a function of year built, but also a function of size of the residence. Price is exponentially related to size of residence for all forms, with a lower limit of ~$200K. Price is increasing for all forms built after 1960. Size of residence is increasing with year built and there is little differentiation in size by form for modern construction. Price per square foot is also and function of time built, form and size of residence. Average price per square foot is essentially the same for condos, duplexes and townhouses and higher for single family residences. However, averages are misleading because of the dependence on size of residence. For residences priced lower than $400K: Price and price per square foot are strongly related to year built and size of residence. Condos built in the 1960s and 1970s are now selling for less (and less per square foot) than townhouses and duplexes, modern condos, duplexes and townhouses are all selling for nearly the same price and price per square foot. Conclusions Given the existing market conditions in 78704 together with contextual factors such as transportation and prevailing construction costs, standards and technology, affordability cannot be practically achieved through density or diversity increases using newly constructed condos, duplexes and townhouses (without financial incentives). 8 www.ibm.com/analytics/watson-analytics/us-en/ June 24, 2016 Paul Schumann 7
* Based on average price per square foot currently ($350) for residences less than $400,000 ** Calculator.net, using approximately payments equal to 30% of income, 2.4% IR, 30 year, 10% down payment, no other debt *** Using median income of $64,000 Note: Price per square foot is probably not a constant over this range of sizes. It will probably increase for smaller sizes. Reference: http://www.calculator.net/house-affordability-calculator.html Supply and Demand of Residences Prices have escalated relative to production costs in various markets over time, with the temporal and spatial patterns roughly as follows: In 1970, there was no metropolitan area (including New York City and San Francisco) in the United States in which average house prices exceeded fundamental production costs by more than 20 percent. Fundamental production costs are defined as the sum of the physical costs of construction for a basic, modest quality home, plus a 20 percent land share, plus a 17 percent gross profit margin on structure and land costs for the builder (which is typical over the cycle). By the 1980 census, mean house prices had become much higher than production costs in the major metropolitan areas along the coast of California. A similar phenomenon occurred during the 1980s in many east coast markets running from Washington, D.C. to Boston. The 1990s saw the expansion of this pattern to a very few interior markets, such as Austin and Denver. Even so, average house prices are still quite close to fundamental production costs in most metropolitan areas. http://www.nber.org/reporter/2009number2/gyourko.html June 24, 2016 Paul Schumann 8