Final thoughts on this topic. I swear.

If you’ve been reading along, in Part 1 I explained why people are so concerned about housing affordability and why the City thinks an IHO is a way to address that, and in Part 2 I questioned whether “successful” inclusionary housing ordinances were actually, well, successful. In Part 3, I dug into a little housing economics and concluded that the “housing market” was really the entire labor market, which is much bigger than any one city, and in Part 4, I unpacked what looking at housing as a labor market meant for Costa Mesa’s proposed ordinance.

So what does all of this mean for inclusionary housing policies, in general? Well, sadly, nothing good. In my view, inclusionary housing should be renamed “illusory housing“, because it gives the illusion of inclusiveness without accomplishing it. Worse, it may even undermine it in the long run.

Inclusionary rental housing creates two housing markets, one “affordable” and one market-rate, with the former behaving like government welfare and the latter suffering supply constraints.

Inclusionary zoning is trying to solve for “exclusionary zoning,” which some view as the original sin of US housing policy. Exclusionary zoning’s implied intent was to create two housing markets: one made up of desirable, low-density neighborhoods that would would be intrinsically costly and available only to the better-off, and another consisting of lower quality multifamily buildings where the poorer residents could be crowded together and kept out of nicer areas. Sometimes the racial segregation implied by these policies was explicit (in the form of racial covenants or, more indirectly but just as effective, redlining for mortgages), but just as often, prices were expected to do the work of keeping ethnic groups apart.

Though exclusionary zoning is roundly considered unjust, it turns out, it’s really, really popular, especially amongst those for whom it works best. Single family zoning, for example, is intrinsically exclusionary: by limiting building to detached homes for one household and requiring those homes to consume a significant amount of land (enforced through setback requirements, FAR, parking requirements, etc.), cities ensure that, as land values rise, single family homes will become relatively expensive. Zoning also protects those neighborhoods from competition from multifamily buildings, further securing a long term run-up in value. In California, single family homeowners are, quite literally, paid to support exclusionary zoning, as Proposition 13 prevents long term owners from having to proportionally pay for their equity earnings in the form of property taxes, so exclusionary zoning is all give and little take.

This has political implications. Single family homeowners not only make up a good chunk of most CA cities (including this one), they also tend to be over-represented among likely voters compared to the overall population. To make your neighborhood actually accessible to the lower and middle classes, you would have to accept that the neighborhood would demand lower and middle class prices. The threat to one’s home equity is simply too much for most residents to bear, even in the name of righting historical wrongs.

Inclusionary zoning, therefore, is touted as a political as much as an economic solution: it’s a way to address exclusionary zoning without undoing exclusionary zoning, which, if done in earnest, would cause politicians to be run out on rails.

But it doesn’t really work. In fact, it falls prey to the same problem of exclusionary zoning: it bifurcates the housing market, creating distortions and, ironically, higher prices for everyone.

By definition, inclusionary units are required to be offered at below-market rate prices. Therefore, if the demand for any housing unit in the market is high, the demand for the inclusionary unit will be even higher. Add to the fact that inclusionary housing policies can only ever produce a fraction of the units needed to meet demand among lower income households (recall Part 2‘s discussion of this), and you will have many qualified households competing to occupy the same inclusionary unit. So how do we decide who gets it?

Often the answer is long waiting lists, sometimes with some kind of “plus” factor that moves you to the front of the line. Age is a very common “plus” factor, as many inclusionary units are exclusively for seniors. Another “plus” factor might be veteran status. Our Planning Commissioners on Tuesday night expressed interest in either current residency or current employment in Costa Mesa as “plus” factors that would get you moved up the list. But no matter what you do, you’ll be rationing units among households that otherwise qualify. And these waitlists can be several years long. If you think about it, even two or three years is a long time to wait for housing: your job may have changed, your family situation may have changed, and your kids are growing up. And in any event you still have to live somewhere in the mean time.

And even if you get a unit, you still have to maintain compliance with the “low income” requirements. This creates a perverse incentive to avoid making more money if the benefits you lose outweigh the income you gain (especially after taxes), which really isn’t the result we want as a city. There are some nifty tricks cities employ to try to avoid this but, ultimately, you can’t really get around the fact that you are either subsidizing someone to work below her ability indefinitely OR punishing her for her success by taking away her housing. And worse, in any event you are encouraging folks that receive these units to hold onto them as long as possible, which means that this “submarket” of inclusionary units has reduced turnover. Lower turnover means that fewer units are available at any one time for new households to enter the program.

Long waiting lists and perverse incentives plague many of our welfare programs, including housing policy alternatives such as Section 8 housing vouchers. So even if inclusionary housing is dressed up in market terms, it really functions like a government welfare program.

On the flip side, the folks that are not lucky enough to either move to the top of a waitlist are stuck in the rest of the housing market, where prices float with demand. Because IHOs inherently tax development, you will by definition get less housing in this side of the market than you would have otherwise. No one development will change the overall market (remember, that market’s really big) but, over time, the drag on building new units will show up as a long-run shortage so long as the labor market continues to add well paying jobs. This of course means that market-rate housing prices will continue to climb faster than the rate of inflation.

Tolerating rapid rent inflation in our market-rate units is exactly what is landing us with the thorny problems we face today, such as our eviction crisis and the need for paid parking permits in our residential neighborhoods. No matter how successful an inclusionary housing ordinance may be, the vast majority of low and very low income people will continue to live in market-rate housing. And by carving out parts of that market for inclusionary housing, we’re almost certainly setting up long-term rent inflation in those market-rate units to be worse.

Inclusionary housing for homeownership produces all of the costs of homeownership and none of the benefits, either for the recipient or the community.

I haven’t written too much about the ownership side of inclusionary housing, where units are produced and then sold for below-market prices. The lucky owner gets to buy an affordable home, but there is a catch: they have to in turn sell it for an affordable price, meaning the upside of owning that home is severely limited.

Which is kind a shame given that primary benefit of home ownership, and the source of all of its social benefits, is that upside. From the homeowner’s perspective, the equity built into owning a home is a huge financial advantage; the home’s value is likely to rise, allowing you to either sell at a profit or borrow against that equity and get cash whenever you need it. And from the neighborhood’s perspective, this ensures that homeowners are motivated to keep their properties looking nice and to work to improve conditions for everyone, as property values will fall if the neighborhood looks shabby or becomes unsafe. But inclusionary ownership units have limited or no upside, so they function more like rentals. It undermines the motivation to maintain or improve units. Further, there is a strong financial incentive to sublet these units to tenants paying market rate rents, as the owner can then pocket the difference. Once again, perverse incentives create the need for constant maintenance and monitoring, driving up the administrative cost-per-unit.

On the supply side, the ownership construction market is likely to be even more sensitive than the rental construction market at this moment and in this area. Even without additional development drag, the ownership model is functionally dead in California thanks to skyrocketing insurance and construction costs and the ever-present influence of federal taxes. Just to take one of these factors, insuring a for-ownership construction project is extremely difficult thanks to California’s ownerous construction defect rules. Since builders face mortal liability if a unit they sell has a construction defect, it is much safer to simply maintain ownership and rent the units (on the logic the builder won’t sue itself). Insurance companies understand this, too, so insuring a rental building against construction liability is much cheaper than an ownership one.

So the bottom line for ownership inclusionary housing is: it’s a huge pain to administer, it creates twisted incentives for recipients, and we probably aren’t going to get many ownership units at any price point in this environment. Sounds great.

Exclusionary zoning depends on complicated and onerous rules. True inclusiveness means fewer rules, not even more of them.

And this gets us back why inclusionary housing is really illusory housing: it tries to solve exclusionary zoning without actually solving it, and instead layers on more rules and development extractions in exchange for a thin veneer of “inclusiveness”. Yes, the recipients of inclusionary units will be, all things being equal, better off. Yes, inclusionary units can, where they exist, create mixed income communities, but again those benefits only accrue to a few recipients and buildings. The vast sea of people who do not receive the units will be marginally worse off, paying marginally higher rents and still living in income-segregated housing, with no end in sight.

Remember, as Costa Mesa’s staff has previously emphasized, over 170 California jurisdictions have some kind of inclusionary housing program. And I would bet every single one of them are suffering from a housing affordability crisis. And that’s because, at the end of the day, “inclusionary” housing is a welfare program supported on the back of market rate development. It is not, and never will be, a comprehensive housing policy that addresses overall housing affordability. Period.

Housing affordability — or to put a finer point on it, long-run matching of housing price inflation to wage inflation — is a generational task at this point. California, and Costa Mesa in particular, is suffering an acute housing shortage not because we failed to build housing last year or in the last decade, but failed to build housing year after year for probably thirty or forty years. In other words, Costa Mesa has a structural deficit in housing production.

The only real way to fix that is to undo that structural deficit through liberalizing zoning and housing constraints and to incentivize housing production. Or, to coin a phrase, the only way to end exclusionary zoning is to end exclusionary zoning. But those benefits will only accrue decades from now, just as decades of underbuilding have caused our present crisis. But it is really the only way, as simply adding more regulations, limitations and extractions will create new distortions, not undo old ones.

Or we can just settle for short-term benefits with long-term costs, and repeat the mistakes of the past.