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Sounding Board: Affordable Housing IV

Daily Transcript Question: What specific steps must be taken by government and community leaders to assure there is an adequate supply of affordable housing throughout San Diego County?

The rapidly rising price of homes, which has made the median priced home unaffordable to more than 90 percent of the region's households, is a supply problem. Not enough units are being built to accommodate the demand. In the San Diego region current estimates place the housing shortage at about 70,000 units and growing, mostly for units priced at or below $300,000. As a starting point, to achieve a sustained and adequate increase in the supply of housing we need to better align our public policies with our public goals and objectives.

One reason often mentioned for the lack of units is the lack of land. There are about 29,000 vacant gross acres of residential land in the 18 cities, excluding the county's unincorporated communities. Although the problem may not be gross vacant acres, it is not clear how many of these acres are "readily" available; that is, could be brought to market within one year. A shortage of readily available vacant residential acres is likely an important contributing cause to making housing units unaffordable.

A second problem holding up an increase in the supply of readily available vacant residential acres, may be that the jurisdictions in the region with control over land use decisions (cities and the county of San Diego) are not encouraged to rapidly increase the supply (of readily available vacant residential land). This problem is referred to as the "fiscalization of land use" -- basing land use decisions on their revenue-generating potential. Although complicated, two points should help clarify this issue. First, jurisdictions do not receive enough money back in the form of taxes and fees from the construction of a new unit to pay for providing the necessary public facilities and services required by that unit (this is especially true for units affordable to medium income households and below). And jurisdictions receive up to 10 times more tax revenue per square foot if the jurisdiction approves a retail use versus a residential use. Jurisdictions are encouraged to approve as much retail space as the market requires (not more than the market will support), and discouraged from providing as much housing as the market requires. In fact, some jurisdictions openly and aggressively compete for retail uses, offering, at times, incentives to the retail developers to choose their city over another. When was the last time we had jurisdictions competing over a proposed residential development?

This analysis does not mean we in the San Diego region need to raise fees and taxes on housing units so cities will be encouraged to participate in making more housing units available; it does mean we need to change the way we currently allocate tax revenue so the emphasis is on increasing the supply of housing units, accommodating the market demand and helping stabilize the rise in prices.

A third problem holding up an increase in the supply of housing units is the hesitancy to intensity of use of the land; also know as density. The reluctance to increase density is associated with communities expecting to experience a decline in their quality of life with rising density.

In the past, the decline in the quality of life in these communities was a direct result of inadequate public facilities and services to accommodate the increase in people allowed by the rising density. Higher densities do not, however, seem to cause a decline in the quality of life in all communities. The greatest successes for increasing density and maintaining and/or improving a community's quality of life come from "redevelopment."

A primary reason for the success in redevelopment areas is the ability of jurisdictions (redevelopment agencies) to fund needed public facility improvements using "tax increment financing." This program allows jurisdictions to keep more tax (property) revenue, which is used to pay for the needed facilities to adequately accommodate higher densities. This funding program has been a key to the revitalization efforts under way in many of the region's downtowns, where our highest residential densities are located.

So, higher density combined with a funding program to pay for the public facilities and services that improve a community's quality of life are possible and are part of the solution to increasing the supply of housing.

-- Marney Cox

Chief economist for SANDAG

Is the city's recently passed gas gouging bill responsible public policy?

Many states and cities have passed similar ordinances generally referred to as "price gouging laws."

While it may seem appealing to some motorists at first glance, the price gouging law is not a responsible policy and not helpful to consumers in the long run.

First, some old economics that remain true. In gasoline markets, as in other competitive markets, prices are determined by the laws of supply and demand. Demand-supply imbalances or the possibility of future demand-supply imbalances impact prices.

Although California and the Gulf Coast are typically separate markets due to geography and the type of refined gasoline produced, concern about future supply diversions may have a played an important role here. Competitive forces in San Diego keep prices here at competitive levels and these competitive levels change as the underlying economics evolves. Many of us get emotional when higher prices cut into our pocketbooks, but as a matter of economics there is no evidence that do not remain competitive even today.

Price fixing amongst firms is not the issue here. Many laws on the books going back 115 years prevent that and countless investigations into that routinely turn up nothing. The issue here is whether an individual station is able to independently choose their price in the open market according to the economics of the marketplace.

"Gouging laws" as they are called are designed to deter an individual station from raising its price by more than we would like or think is fair or justifiable, somehow defined. In effect what the city is doing with such a law is imposing a type of regulated price cap (more accurately, a regulated maximum price increase) on individual gasoline stations in certain situations. The cap typically does not reflect the underlying economics of the situation and can thus have negative impacts on supply, as explained below.

It is also vague. The city is unclear about exactly in which situations and at what times the regulation goes into and out of effect and when the de facto price regulation is applicable (except that right now is one.) The city also decides what is "justifiable" after the fact, based on an assessment it does using some unknown criterion it has not specified. It is of concern that solid economics may not be one.

For example, Councilman Jim Madaffer said there is no reason why station owners should raise the price of gasoline when they haven't received new shipments. This statement does not make economic sense. Imagine you have a couple of old coins that you paid $10 for and have been worth that much since. Then there is a surge in demand by new coin collectors, and the new market price is $20. If you sell the coins, you sell them for $20, not the $10 it cost when you bought it. That's a good day for you, but the next time you buy coins for $20 and the market value drops to $10, you won't be able to sell your coins for $20 anymore even though you paid that for them. Gasoline is a commodity like any other. The value of the gasoline underground changes and so reasonably should the price, whether any new shipment has come in or not. It is not clear that the councilman would object to the second situation in which the market value falls from $20 to $10 and the coins are at a loss. But losses and gains balance themselves other time. The price gouging law, if enforced under this reasoning, would break that balance.

City Attorney Michael Aguirre has also said the law will prevent firms from manipulating prices. To be clear, an individual station owner does not only manipulate his own price, he fully sets it in the free market. If he sets it too high, consumers simply choose not to purchase from that station and the station is forced to lower its price back to competitive levels. No social harm is done in this case because competition is working. If all prices move upward together -- and price fixing is not suspected as it not here -- then we find the answer in the basic economics of supply and demand, current and future expectations.

A price gouging law, while appealing on its face to drivers in the current climate, is not good policy. Provided that competition is strong, as it is in San Diego, market prices are determined by general market forces. A price gouging law, invoked often enough, that forces stations away from adapting to market conditions when prices rise will have a negative long term impact on local supply. (Recall the coin example -- if you could never increase your price to market prices when they rise, but must always lower them when market prices fall -- there will fewer stations and therefore higher prices down the road).

In the event that a single station owner raised prices above competitive levels, then market competition and lost sales would force that price back down. In this case, a price gouging law in this case is unnecessary. Although it may sound good to weary motorists, under no circumstance is it beneficial in the short run. In the long run, it is potentially harmful.

-- Michael Noel

Assistant professor, Department of Economics, University of California, San Diego

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