All this talk of street food has me thinking about incentive zoning. I think the regulatory and economic issues around operating a hot dog cart are a good analogy. Stick with me for a minute.
You decide you want to get into some street food action with a hot dog cart. But the City has rules about the kind of equipment you can use in your cart to carry hot dogs, and that limit means each of your carts can only carry 50 hot dogs.
That’s fine on some days when demand for hot dogs at your cart is low, in fact you might only carry 25 dogs on those days, and have some left over. On other days though, the City’s limit on how many tasty sausages, frankfurters, or tofu dogs you can carry really is a hassle. Game days at the stadium are really tough because demand is high for the magic in a bun you produce, but you just can’t meet the demand. But the price for the hot dogs goes way up. Because the line is around the truck and down the street you can charge as much as $8.00 for a simple hot dog and more with toppings.
Along comes the City Council to the rescue. After convening a series of Council briefings for a few years one of the Councilmembers finally comes up with an idea: hot dogs are too expensive! “We need a plan for affordable hot dogs,” the councilmember says with a serious tone. “And these hot dog vendors are making a killing with these high prices,” he continues. “A working man can hardly afford a hot dog anymore, so I have a plan,” he says. “My workforce hot dog plan will create an incentive program for hot dog vendors who produce more affordable hot dogs!” The crowd goes wild.
You’re perplexed. You’re not an economist, you sell hot dogs. In fact, your free range hot dogs are the talk of town. And you’re the first to admit that the price has gone way up. The price of dog has almost doubled and is now approaching $9. But you can’t sell more dogs because of the City’s limit on your equipment. If you could meet the demand by expanding the number of dogs you can carry to 100 rather than 50, you might be in good shape. And you could lower your prices a bit.
But the Council’s proposal strikes you as bizarre. You can get a permit to carry up to 75 hot dogs, 25 more than you can now, but you have to charge only $4.50 for 8 of those hot dogs. You do some back of the hot dog package calculations and you figure that because demand is really high, you can still make a profit even after buying the new equipment. But the City requires a bunch of forms, fees, and this “incentive hot dog program” requires that you make some long term commitments on the price you charge for hot dogs. Why won’t the city just let you make as many hot dogs as you can? The price for the dogs would certainly fall and you could still be making enough money to cover the cost of the new equipment and make a profit.
Here’s one final strange Seattle twist. Some of your competitors get subsidies for their hot dogs. The non-profit hot dog stands get all kinds of tax credits and outright grants for producing work-force hot dogs. These dogs are pretty spare, just wonder bread buns and plain old dog. The non-profit hot dog folks are big time supporters of the Incentive Hot Dog plan. After all, the fewer dogs you make and the bigger the demand the higher the price you can charge, which means some hot dog eaters are going to the other affordable stands.
You keep thinking, why don’t they just let us have the equipment we need to meet the demand that’s out there? And wouldn’t it make sense to focus less on the number of hot dogs and loosen up restrictions on the equipment to carry the dogs? You figure that demand being what it is, if you were allowed to carry as many hot dogs as possible you’d sell a lot of hot dogs. If you carried too many, toward the end of the day you’d drop your price. Can the world have too many hot dogs, you wonder? And if the Council is worried about affordable hot dogs why not increase supply. After all it’s your problem if you goof up and carry too many hot dogs.
This silly little story is also a little crazy. But Seattle’s Incentive Zoning Program is similar. A developer has limits on how much housing she can produce because of the land use code. What’s true of one developer is true for all developers combined. The Council, through the code, essentially controls housing supply. When you ask a City Councilmember “what’s the biggest challenge in housing today?” they won’t answer “we don’t have enough housing,” but “housing is too expensive” or “it isn’t affordable.”
The Incentive Zoning Program creates a chance for a developer to create more housing–and possibly more profit–in exchange for lowering the price for some of the new housing being created. The argument is that the price for the new units will be too expensive for regular people to afford.
But with hot dogs and housing some things are always going to be true. Adding costs to housing or limiting profits simply isn’t an incentive if those additional costs are too high or the profits are too low. And simple logic tells us that if we limit supply while demand is increasing we get higher prices. What’s strange about Seattle’s incentive zoning program is that it tries to do two things that are in complete contradiction with one another: reduce supply and price at the same time. That’s actually a good recipe for higher monthly housing costs.
Another thing that is true of housing is that people don’t really make housing choices based only on monthly housing costs. That’s especially true of people who are the target of so called “work force housing.” People that earn 80 percent of Area Median Income, (AMI) about $40,000 per year, can choose to pay more for housing because they want a yard for example, while poor people, earning say only $18,000 per year, have to live wherever they can make a rent payment.
That isn’t to say that life is easy at 80 percent of AMI. But often people with two incomes and the determination will choose to live in a suburb and pay more for housing and other costs because housing isn’t “affordable” in Seattle. That means their voting with their money for what they think other communities have over Seattle, like better schools for example. Plus, they want a yard which they can get at a lower price in an outlying community.
One last point about housing choice. If we’re thinking of single family homes as work force housing, keep dreaming. We’re not making any new single family housing in Seattle. That’s why, I would argue, a price for a three bed room craftsman anywhere in Seattle is still relatively expensive. If I was a conspiracy theorist I would say that Seattle’s housing policy is a single family plot to keep supply low which keeps the asking price of single family houses in Seattle high whether people can pay for them or not.
If we’re suggesting condos or apartments for work force housing, then that housing product has to compete with housing in outlying communities that is further away, priced a little higher, but offers the benefit of being in a single family neighborhood. Given today’s social norms, a condo in the city is going to seem more expensive than a house in the outlying areas even though we know, generally, it isn’t. And human nature being what it is, who wouldn’t think they’re getting a better deal buying a house in Maple Valley for 10 percent more than they could get a two bedroom condo in Seattle, even if it means adding expenses of transportation.
One big problem with incentive zoning in Seattle is the way we talk about affordability. Are we talking about price or affordability? Affordability is a qualitative measure and price is a quantitative measure. All housing is affordable to someone somewhere, even if it is Bill Gates. But price is simply a function of supply and demand. More demand and less supply means higher prices.
Lastly, an important note on land, other costs, and the effect of “bidding up.” Of course, if buying land can be expensive and those costs get passed on. Some colleagues have argued that high land costs are the reason for high housing prices. That is certainly part of the issue. But then why add more costs into the mix with “incentives” that are actually additional costs and that don’t produce additional supply. I would also argue that isn’t land prices or materials but process that adds to monthly housing prices. Issue permits faster and price might come down.
Others have argued that there is a “bidding up” effect. Joe and John both have money for housing (or hot dogs), but Joe has a lot more money. So when it comes time to buy Joe can keep pushing the price up. But while this is true it is especially true in a tight market with small supply. Joe’s bidding up of the price of 50 hot dogs, for example, really only has an effect when other people trying to buy a hot dog have limited money and their demand is elastic, that is, they can go to another hot dog stand. Increasing supply reduces Joe’s ability to drive up price by overpaying for his hot dog or his house.
One other word on costs and incentives. If the Council wants to reduce price, then it would make sense to help reduce costs. A real incentive would be to subsidize all housing production. I know that hurts the brain, but think about it for a minute. If we isolate the costs that are driving up housing price that are unique to Seattle then the City Council could offer to reduce those costs provided the savings gets passed on. Now that’s an incentive! My guess is that one of the biggest costs, is time wasting process.
The nagging question in much of this is who decides who gets help. That’s why policy makers and elected officials get the big bucks. Someone needs to sit down and figure out, using the best science we have, what accounts for housing price in Seattle. It is a knowable thing. Second, we need to figure out what is the most sensitive part of that price and then we need to decide if there is a market failure in Seattle’s housing market. My guess is that there might be, but it isn’t over priced housing being built by greedy developers. The source of any market failure is a perverse regulatory system that, by design apparently, limits supply then tries to charge for creating more supply all in the name of reducing price.
I’m a philosophy major with another degree in religious studies, so I understand parables better than economics (and maybe I’m not so hot at parables either). So maybe I’m just dense. When the Council drags out rezones for years, squishes down densities around transit stations, and puts lots of performance requirements on additional housing they are increasing costs and reducing supply of housing. Today, that probably doesn’t matter as much. The housing market isn’t as hot as it once was.
But housing, like hot dogs, is a product. The Council obsesses with price when it should be obsessing about getting land use right. Somehow there is a fear that if the Council rezoned Roosevelt, for example, for 10,000 feet and an FAR of 1 million, that developers would build Tower of Babel buildings rising into outer space. That wouldn’t happen anymore than allowing the hot dog vendor to carry 10,000 hot dogs would mean that he would do it. Private developers and investors have to figure out how much housing to build, and if they build too much then prices will come down.
Limiting housing supply using land use, then complaining about price is as silly as limiting the supply of hot dogs then saying the biggest problem facing street food is high hot dog prices. And we’ve already learned that more people is a good thing. Density is sustainable. We simply can’t go wrong by zoning up, even if it means we over build housing. That means it’s cheap. If we build a lot and it fills up, we get density. We should be shooting for both.
The last thing I would want is for anyone to come away from reading this (you’re still reading this, right?) thinking I don’t care about housing affordability or that I am callous towards those who are trying to find housing they can pay reasonably pay for. I know people that have struggled with this. It’s annoying and it feels really unfair to be trying to live in this city but having to make choices around housing that are financially or otherwise burdensome. Lots of people in this town have to choose between living with parents or room mates or living alone, but having to stretch their financial limits. I’ll write another post about this.
I actually like the idea of incentive zoning. But the program should actually offer an incentive–which for developers is most usually more profit–and not an additional regulatory burden. There’s always going to be debate about whether there is enough housing supply. But isn’t that the property owner and developers problem.
Next up on my trip through the code is chapter 23.58A Incentive Provisions. We’ll run through more of the specifics of how the program is set up.