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housing matters
A Tax on Social Mobility

Municipal governments across the country are paying for increasingly expensive social services by jacking up building fees, cutting off the supply of entry-level homes and forcing upwardly-mobile working families to pay more to enter market. The Wall Street Journal reports:

The housing market has recovered, but sluggish entry-level construction is putting a squeeze on families that would like to buy their first home. A new report pins the blame on City Hall.

The culprit: Impact fees that builders have to pay municipalities when they get permits for new construction, says the report from Zelman & Associates, a housing research firm. These fees fund the local infrastructure needed to support a growing population—schools, transportation, environmental mitigation and utilities. […]

It’s a bigger issue at the entry level because builders face tighter margins to begin with. It is easier for them to pass along these fees on luxury homes that have fatter margins because the fees represent a smaller share of the sales price, and builders have focused heavily on the luxury market in recent years.

Impact fees are just one of the ways that local government regulations have artificially raised the cost of housing in recent years. Such restrictions have benefitted the wealthy—suppressing new construction enhances the property value of people who already own real estate—while making it harder for young people and working families to start building home equity. They have also probably dulled the (sluggish) economic recovery by swallowing up a big chunk of wage growth that has taken place since the Great Recession.

It’s becoming increasingly clear that ill-advised housing policies are a serious impediment not only to economic growth but to social mobility. Progressive policy is to try to make housing affordable by subsidizing it, instead of addressing the tax and regulatory burden that drives up prices for low-income people in the first place. And while Republicans have very little power in big cities, few GOP mayors have shown much interest in tackling housing costs, either.

Unlike many other public policy areas, our failed housing policy doesn’t reflect what we have called the “drought of ideas.” It represents the triumph of bad ideas over good ones. Politicians in both parties need to urgently address the overregulation of home building to sustain the health of our economy and the promise of upward mobility in America.

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  • Andrew Allison

    You failed to make the connection between out-of-control pension costs and municipalities’ desperate search for revenue. We ain’t see nonthin’ yet.

    • Jim__L

      The appalling thing is, imposing more fees and permits will require more state employees who will in their turn require greater pension expenditures.

      The lack of foresight here could be fodder for very, very dark comedy.

      • Andrew Allison

        Not comedy, however dark, but tragedy. Government spending at every level is completely out of control. This will not end well.

        • Jim__L

          The ability to mock absurd situations can have power. Remember the old joke, “We’re losing money on every order, so we have to make it up in volume. To increase our volume, we need to put everything on sale!”

          Sometimes you have to laugh, and get others to laugh too. Otherwise, you’re being “judgy” or stodgy, and the message doesn’t get through the noise of all the PC virtue-signalling.

          It’s certainly worth a try.

  • Dale Fayda

    Every time the government twitches its horny tail, a financial disaster ensues. Every time…

  • FriendlyGoat

    Any chance you fellows at TAI have recently purchased and lived in an entry-level subdivision neighborhood?

    • f1b0nacc1

      I have not, but I have several co-workers and former students who have in several cities. What is your point?

      • FriendlyGoat

        The idea that developers’ new houses and their inhabitants do not have any cost impacts on political subdivisions is kind of one-sided and not quite accurate. The fees can be either put on those houses as they are built or spread over other already-existing residents.

        • Angel Martin

          like what ? what costs are carried by cities like Oakland and not assigned to the developer ?

          In Oakland, they are adding new development fees which will rise to an additional $24,000 per unit ! Those fees will pay for “affordable housing”.

          http://www.eastbaytimes.com/breaking-news/ci_29497173/oakland-city-could-consider-higher-development-fees-pay

          which raises the max development fee to $71K per unit in highrises, and $110K for a single family house.
          http://www.bizjournals.com/sanfrancisco/blog/real-estate/2015/11/new-oakland-housing-fees-housing-development.html

          • FriendlyGoat

            Parks, schools, roads, sewer, water treatment, utilities, libraries, and public safety buildings.

          • Angel Martin

            in high tax jurisdictions like Oakland, parks, roads, sewers etc are mandated on the developer.

            In addition to the 24K for “affordable housing” there is another $85K for the capital costs of schools water treatment, libraries etc many times over !

          • FriendlyGoat

            I don’t know what might be “wrong with” Oakland. I imagine the national builders want to build wherever there is demand, and I imagine the cities and counties have learned how not to be overwhelmed by the developments of the builders. I just know we should not pretend that there are no new public investments needed when the subdivisions spring up. Before the bust in 2008, two thousand houses per month were being built in the Las Vegas area. I was there for a while and it was something to watch.

        • f1b0nacc1

          I believe that Angel (below) says it as well as I can. The impact fees that are assessed often have more to do with the social engineering priorities of the local governments in question than any real incremental impacts created by the new construction. These fees are often quite excessive (30%+ of the cost of the home!), and act as little more than an additional barrier to entry for new homeowners.
          As a side point, just how do we assess those real costs? If I am building a new subdivision in ‘terra incognito’ then my marginal costs are rather high, but if I am adding a new subdivision to an area already heavily settled, my marginal costs may be quite low indeed. Just how do we handle that?

          • FriendlyGoat

            Parks, schools, roads, sewer, water treatment, utilities, libraries, and public safety buildings..

          • f1b0nacc1

            Most of these are significantly overbuilt, or rather built to capacity far beyond the original population levels. Hence is it fair to make the 10,000+1th person pay the entire cost of expanding the system? What about an elderly individual who sells his home to a family? Population is still going up, but in the latter case, the ‘new’ family is paying while the existing one isn’t.

            If you want to spread out the costs of maintaining public facilities among the population, there is an existing way of handling that…it is called taxes. The problem here is that the politicians are simply imposing the costs on people who aren’t currently in the community while sparing those already there (who, by a staggering coincidence, are the ones who can vote them out of office) and real confrontation of the costs.

          • FriendlyGoat

            I guess as a practical matter that it is easier to bury these fees in the financed price of a new house than it is to raise taxes on old people or impose fees on them for raising the population by selling their houses to more occupants. Sometimes, as your know, we get what is possible to pass in some deliberative body.

          • f1b0nacc1

            So ‘fairness’ has nothing to do with it? You are in fact making the exact argument that TAI is making here….that politicians are forcing the costs of local government onto new home buyers, and thus pricing many of them out of the market.
            You are learning….who would have guessed?

          • FriendlyGoat

            TAI is not suggesting property tax increases across the board or fees on elderly people for selling their homes to younger people. When or if they do, they will be roundly disregarded by your side—-if not by everyone. There are practical realities.

          • f1b0nacc1

            Actually they are saying that there are real costs imposed by these policies on people just entering the home market, and that these costs are being borne disproprotionately by those people….I thought ‘your’ side had the hard-on about inequality?

            Like it or not, if you want services and don’t want to cut somewhere, you have to find a way to get the money. You can tax and spend, or collect fees and spend, but ultimately if you want to spend you have to get the money from somewhere. You just don’t care for being called on it.

          • FriendlyGoat

            I twice bought into brand-new subdivisions as they were being built some years ago. Certainly not all the people going in were even young, let alone first-time buyers. So, we paid the fees—-nicely buried in the prices. Not saying I “liked” it, but I do understand it.

            As for the hard-on (about inequality), I’ve heard that expression before and always thought it just a manifestation of men who are confused about what is a good thing and what is a bad thing.

          • f1b0nacc1

            This isn’t about ‘liking’ it, the TAI comment was that those at the bottom of the existing economic ladder (young, first time buyers, who by the way make up a disproportionate percentage of those buying in new subdivisions) are being hit harder by impact fees that you yourself admit are being imposed because taxes to pay for the goodies provided by local government are politically ‘difficult’. Note, I applaud your honesty about this, it is something that few on the Left are willing to embrace.
            To return to my point… We are imposing an extra burden on one group because of a political choice, while exempting another engaged in behavior that has absolutely no link to that choice. This is what TAI said, and this is what you objected to….yet it is utterly consistent with what you yourself have acknowledged to be the case. If you ‘understand it’ that is nice for you, but it does absolutely nothing for the young family that is priced out of the market because of this cynical political manipulation.

  • Wayne Lusvardi

    Based on my experience as a real estate appraiser, the social mobility issue is compounded by more than the municipal greed of impact and permit fees. There is a concept in real estate economics called “neighborhood filtering”, also related to what is called the real estate escalator. Filtering means that as new housing stock ages it “filters” down to those who can afford it. Conversely, when one owns an older home in a rising market they can ride the price escalator up and sell the home and move up to a better or new home.

    By definition affordable housing is depreciated, obsolescent and located in declining neighborhoods. New housing is not depreciated, has up to date design and fixtures, and is located in new tracts or planned communities.

    For first time homebuyers to get into the housing market they have to get on the price escalator at the bottom and ride it higher. However, social engineering and the defining of deviance downward has resulted in immigrants taking over the older, cheaper housing neighborhoods in the first concentric ring surrounding big city job centers by graffiti, crime, politically orchestrated urban riots, use of free legal services to sue landlords, etc.

    This drives the non-immigrant homebuyer out to the suburbs to find housing typically in brand new subdivisions where all the impact fees, hookup fees, and infrastructure bonds added to property taxes drive the prices beyond affordability. Older housing has no impact fees or infrastructure bonds.

    I was surprised that housing planners working for builders have a concept for this. It is called “push down – pop up”. When demand of first time buyers is pushed down in the cities that demand pops up in the suburbs.

    The people who created this social engineering and the anti-social norms that go with it are then the same who advocate “affordable housing” and blame Capitalism or gentrification when it is really dentrification (the intentional loss or removal of affordability).

    • f1b0nacc1

      A fascinating and well-reasoned analysis. Thank you

    • Nevis07

      Wayne, good comment. I happen to work in affordable housing (on the developer side) in the northeast. I can concur with your statements regarding immigration and older housing stocks. An interesting aspect of a trend I’ve seen is the willingness of states to be happy to see their soon to retire residents move south (especially to FL), where costs of living are much lower. In doing so, the expensive states in the N.E. are able to get cheap labor from immigrant populations moving into those older houses formerly owned by retirees. The net effect meaning that even older housing stocks cannot be affordably bought by the native populations. I can also say that I agree with TAI on it’s initial point of more expensive permitting costs.

      • Wayne Lusvardi

        Thank you for the field report from the northeast and how housing markets are distorted there as well. It is difficult to explain to outsiders and ideologues that there is cheap housing available in some of the most expensive areas of California but it is only unofficially reserved for migrants who will drive out native first time homebuyers by doubling and tripling up in housing thus driving up rents, by graffiti, gangs, and crime, and by overwhelming the public schools with belligerent and bullying students that drive the native families out to the suburbs to find new housing loaded with 40% fees and extraneous costs and hopefully better schools. California has a relatively high proportion of residents on welfare and in poverty living right in the most unaffordable housing areas. How can this be? The “push out-pop up” model I described is the only explanation of how this came to be. It might also be called the “Insurgent Model” or “Re-Occupation Model”. Without animosity toward migrants who didn’t create this system, they are handed cheap, older housing, more welfare benefits than natives, soon free health care and at least free emergency medical treatment, etc.

        A “free market” in housing is still operating in the Inland counties in California which is still very inclusionary to immigrants. Go to the most expensive area of Palm Springs, California where Bob Hope’s former home sits on a hill overlooking the city and at the base of that hill is a mobile home park. There is ample affordable housing in the Red inland counties and no “racism”, unless you want to define “racism” as the lack of an affordable, brand new house for those living at subsistence levels.

        California has also defined affordable housing as the lack of brand new housing for low income residents. How long before mink coats or Mercedes Benz’s must also be made affordable? What California has done is redefine a right to affordable housing as a right to luxury housing. So what results is a system where migrants have first dibs on cheap, older housing and first dibs on brand new housing by inclusionary housing laws paid for by higher prices, fees, and excise taxes on other new housing units.

  • Greg Olsen

    Impact fees are not part of the drought of ideas. Somebody needs to pay for the expansion of public goods into a new development. Those could be socialized into the rest of the existing property base through higher property taxes–i.e., subsidize the homeowner who buys into the development, or the cost could be borne by the buyer. Which is more equitable? The fees!

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