Housing Doesn’t Filter, Neighborhoods Do

Posted by Rick Jacobus on November 4, 2016

There has been a renewed interest in the role that the real estate market can play in solving our growing affordable housing crisis. For decades "affordable housing" has been the near exclusive domain of the public sector, but the crisis has reached the point where we are now calling for all hands on deck. Can private capital, private development companies, and market-rate housing developments help make housing affordable for everyone?

This is a controversial topic. Here on Rooflines and elsewhere, housing advocates fall into two competing camps: one argues that we need market-rate development (even luxury development) to bring housing costs down, and the other asserts that building more high-end housing makes things worse for low-income people. 

I think my post published earlier this year, “Why We Must Build,” put me firmly in the pro-development camp—with reservations—but I worry about the increasingly pervasive assumption that the market can only build housing for the very rich.

Housing advocates tend to agree that we need to supplement market-rate luxury development with subsidized affordable housing, but rarely do we ask the market to provide housing for people further down the income ladder. This dichotomy of new market-rate housing only for the rich and new affordable housing only for the poor has become the de facto housing strategy in most American cities. We can do better.

The market is not going to provide for the housing needs of the poor—we need publicly subsidized social housing—but we can’t give up on the market providing new housing for middle- and working-class people.

In a follow-up post I will outline what I think it would look like if we were to encourage (and frankly just allow) the market to build housing for middle-income and working-class people, but in this post I want to point to a different way of thinking about why building only for the rich is bad policy. 

The idea that building high-cost housing will eventually help everyone by freeing up lower-cost units elsewhere in the market is known as "filtering." Peter Cohen recently posted a broad critique of this approach, which boiled down to "filtering works too slowly." I agree, though I don’t see that as a reason to block new development (better to address a problem slowly than not at all). I think there is a much bigger problem with filtering as a housing strategy.

The Other Problem with Filtering
If we're sitting in an undergraduate economics class, it sounds reasonable to suggest that, like any product, as housing ages it loses value and becomes more affordable. In this context, a housing policy that promotes building new homes for the rich would seem to offer more, older homes for the poor. Housing may be a “right” but brand-new housing certainly isn’t.

But sitting in econ class, it is easy to overlook all of the ways that housing is not like other products. First, is older housing really less valuable? Our cities are full of very old housing that is still quite expensive. One reason is maintenance. With ongoing regular investment in maintenance and renovation, older housing can hold its value over the long term. In order for filtering to generate really affordable housing, we need older homes that are also poorly maintained.

But there’s an even bigger problem. Housing is different because you can't move it. When you buy a home, you are buying a product, but you are also buying a location. You might pay somewhat more for a “new” product but mostly what you are buying (or renting) is the location.

When we hear about filtering we are supposed to imagine a single building floating in space, becoming more affordable as it ages. Maybe if that property were well maintained it would lose value more slowly, but what happens in real cities is that sometimes buildings increase in value dramatically, even as they age. Other times even well-maintained buildings lose value quickly. This happens because it is the value of the neighborhood that really drives the price of a property.

When we look at filtering as a policy option for neighborhoods, things look very different. Clearly some kind of filtering does happen, but it is not often filtering by the age of the home. People move up and out of less desirable neighborhoods to “better” neighborhoods until at the end of the process filtering creates new vacancies in the least desirable locations in the region.  

Today, advocates for the poor are rightly focused on displacement, as whole neighborhoods are consumed by higher-income housing demand, but it seems like just the other day we worried mostly about disinvestment. It is easy to think that these are two different problems, but they aren't. Displacement and disinvestment are simply two faces of the same underlying market dynamic—one where we invest only at the high end of the housing market.

Filtering is sometimes described as a version of “trickle down” economics for housing, but it is not housing that trickles down, it’s neighborhoods. A policy of only (or mostly) building housing for the wealthy is essentially a policy of only investing in wealthy neighborhoods—those that are already wealthy and those that are on their way to becoming wealthy. The remaining neighborhoods are allowed to deteriorate until they reach the point where they are politically and economically weak enough for the market to reclaim and reposition them as wealthy neighborhoods again.

The alternative to disinvestment is investment. Just as a home can maintain its value over time with regular maintenance, a neighborhood needs regular reinvestment in order to remain a place were people want to live. One piece of the regular maintenance of a healthy neighborhood is new housing. If we could manage to build housing for middle-income and working-class people, we could maintain middle-income and working-class neighborhoods instead of waiting for those neighborhoods to fall into disrepair and then be “rediscovered.”

This cycle of disinvestment and displacement is economically inefficient in many ways, but worse, it imposes a very high human cost on poor and working-class people who suffer blight, crime, and decay only to later be priced out or evicted when the cycle finally brings new investment into their neighborhoods. Perhaps most importantly, this cycle is the single most important driver of continuing racial segregation. Both owners and renters are constantly seeking to avoid the concentrated distress that comes when the filtering process generates neighborhoods where continued investment is not economically rational. A generation after white flight, the mere presence of low-income people and people of color in a neighborhood continues to signal lower property values.

This happens in part because people have internalized the idea that stable neighborhoods aren’t possible and that every neighborhood is either declining or being gentrified, so everyone is on the lookout for signs that tell us which way an area is heading. The process forces people to move strategically in anticipation of the next wave of change—either you try to move in before prices take off, or you try to move out before the crime gets too bad, etc. And all that strategic moving drives the process, possibly more than the natural aging of the housing stock.

I find it ironic that when people want to argue that filtering in housing is natural and appropriate, they tend to refer to used cars as an analogy. It is true that many low-income people drive used cars, but the car market succeeds in exactly the way that the housing market fails. Where the housing market provides supply from the top down the car market operates from the middle out. 

Our auto industry offers an impressively wide range of products with a wide range of prices and features precisely because they want to provide options that are affordable for buyers at different income levels. If cars worked like housing, low-income people would be driving 60-year-old BMWs instead of 10-year-old Ford Focuses. The existence of new, relatively affordable Honda Civics makes it possible for the used car market to provide safer, cleaner, and more fuel-efficient options to families who could never afford a new car.

In part 2 of this post, I’ll talk about whose “fault” it is that we aren’t building Ford Focus housing developments (spoiler: there is no simple answer) but the first step is admitting that we have a problem. It is probably too much to expect the private market to produce truly low-income housing, but the current situation where most new housing serves only the highest income people is a choice that we have made. Again, we have other options. 

It would be possible for us to direct investment not only to the top of the market but to the middle as well. We do this in most other parts of our economy. Achieving this goal in housing will require understanding and accepting the ways in which housing is not a normal product, but we could do it. And investing in middle-income and working-class housing is the only way to get our neighborhoods off of the merry-go-round cycle of disinvestment and displacement—it is the only way to sustain stable, healthy neighborhoods for most people.

(Image credit: James Petts, via flickr, CC BY-SA 2.0)

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COMMENTS

Irene Nagle
4 Nov 16, 4:17 pm

I look forward to your next post, and learning how to encourage developers to build “Ford Focus” housing in places where such housing is needed, but offers a low profit margin.

ML
8 Nov 16, 10:21 am

Its not complicated.  Where regulation is low, Ford Focus housing is more common.  But expensive cities are stuck in a vicious circle: regulation makes Ford Focus housing impossible, which means the only developers who will build stuff are the ones who are ready to build Lexus housing, causing NIMBYs to use unffordability as a reason to support more regulation, causing the whole circle to begin again.

Charlie Wilkins
11 Nov 16, 12:07 pm

I’ve started to do some work on the potential that it’s possible to create market rate housing at rents much lower than “everyone” thinks is possible. https://www.aei.org/publication/economical-rental-housing-by-design-for-com mmunities-that-work/

M1EK
17 Nov 16, 3:56 pm

This claim that neighborhoods filter all at once is hogwash. My first owned home in Austin was a condominium unit in Old West Austin, just about the most expensive urban neighborhood in the city. The single-family houses there were going for four or five times as much per square foot then as my condominium unit did when I bought it in 1996 (same neighborhood, same amenities). The disparity has grown, if anything, in the years since.

David Nelson
21 Nov 16, 5:37 pm

I read the article which Wilkins links to above. The main example he uses is Manatee County where efficiencies by a certain developer go for $625 including utilities (newer ones go for $750 including water). The target renters mentioned make $26,000/year on average. With a net income of just over $21,000 (based on 28% tax bracket), let’s assume these workers can “afford” a place that takes 30% of that after tax income. 30% of $21,784/ 12 months ≈ $544 rent per month. How is $625 to $750 per month affordable (perhaps with additional utilities cost)?

This Wilkins example seems to advocate relaxing regulation, so that single, lower middle income workers can live in cramped quarters and have very little left over after all necessities.

The logic in the rest of the paper is often repetitious, tortuous and circular. One example is that a low income person should pay more than 30% of their income to live, because that is what they already do. Using that logic, people who scrounge successfully for food from restaurant dumpsters have solved their nutritional needs.

I’ve lived at several levels of income from almost nothing to my current decent middle income. I know what it is to struggle and what it is like to follow a budget to avoid future problems. This AEI paper is a thinly veiled attempt to undermine the sound reasoning of affordable housing advocates. Solving the problem of housing affordability is difficult, and Real Estate Pro Forma calculations surely belong in the calculations. However, there is little offered by Wilkins et al. which promotes actual affordability.

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