DAPHNE T. GREENWOOD, PH.D.
In the debate surrounding growth and housing affordability, some frequently made statements come to be viewed as truth. Analyzing each of these myths carefully helps us move closer to real solutions.
The first myth is that lower cost housing is always more affordable housing. The ability of the average earner to buy a typically priced home reveals more about housing affordability than do changes in housing costs. Opponents of growth management often cite cases where housing costs have risen. But denser development as a result of growth boundaries lowers public infrastructure costs and private transportation costs. Less is spent on second cars, gasoline, maintenance and auto insurance. Lower transportation costs, coupled with lower local taxes to support infrastructure and the income tax deductibility of mortgage interest and property, may make a higher priced house a very affordable bargain. Affordability is a matter of income relative to the total cost of living. Housing is one of many factors.
The second myth is that economic growth raises incomes and helps housing become more affordable for everyone. A rising tide doesn't always lift all boats. We have seen sharply increased earnings for the top 20% of the U.S. income distribution, while the bottom 60% actually lost buying power and the middle 20% stayed even. There was some narrowing of the gap in the late 1990's, but not enough to reverse the last twenty-five years. With sharply rising incomes only at the top, high-end homes are so profitable for builders that it is difficult to entice them to build basic housing where profit margins are low. That's just simple economics.
The third myth is that impact fees make housing unaffordable. When new housing is priced to reflect full cost it gives the right market signals to prospective buyers. If infrastructure costs (including police, fire, and schools) are high in a new area this signals the cost effectiveness of renovating homes in older neighborhoods. We now rely on renters and existing homeowners to pay for a large part of the infrastructure costs of new housing, keeping prices artificially low and blurring appropriate market signals.
The fourth myth is that current patterns of development simply reflect individual consumer preferences. A house is more than a home. It is still the major wealth builder for most American families. Since resale value is important, buyers consider not only their own individual preferences, but what they think future buyers will want. Tax and development policies influence consumer choices.
A couple in central Colorado Springs is pushed closer to selling their home every time there is talk of closing their neighborhood school. On the edge of town, where they may buy, schools are being built with their property tax dollars. The commute to work from the edge of the city will become easier once a new high-speed thruway is built from the new neighborhood (and perhaps through the old one). General tax dollars are being used to provide more amenities to new developments, making them more attractive at the same time that expenditures are directed away from older neighborhoods.
The fifth myth is that density reduces home values. There is high quality density in many booming urban areas, such as San Francisco, Seattle and Denver? LoDo. In contrast, a trailer in the middle of several acres may bring adjoining property values down. High quality density generally raises housing prices, but it also rewards property improvements and lowers transportation and infrastructure costs.
The last myth is that keeping new housing affordable is good for homeowners. New homes and existing homes are substitutes. Where new home prices reflect full costs, more people will decide to renovate existing homes. According to the November 2000 issue of REALTOR, this area is consistently below average in what sellers recover. An additional bathroom brings only 45% of what it cost the homeowner, relative to 81% in Portland (just below the national average) and 132% in Seattle. An exterior paint job yields 38% of cost to the seller relative to 76% nationwide, 67% in Portland and 162% in San Francisco. Higher returns give incentives to homeowners to maintain, rather than abandon, older neighborhoods. While home prices overall will be higher, transportation costs (a rapidly rising share of consumer budgets) and tax funded infrastructure costs will be lower.
What can we learn from these six myths? Our current model for handling growth encourages people to move where new infrastructure -- roads, fire stations, schools -- is needed. In the end, the bill must be paid by consumers and taxpayers. It may not be all that affordable.
Daphne Greenwood is Professor of Economics and Director of the Center for Colorado Policy Studies at CU-Colorado Springs. Policy papers further exploring the interrelationships between housing prices, growth, and transportation may be found at http://www.uccs.edu/ccps.