Why I Quit the Democratic Party — Housing and Homelessness
Kamala Harris, California’s newest Senator, just introduced a bill called the Rental Relief Act. It is short-sighted, ineffective, and emblematic of the hypocrisy that has driven me from the Democratic Party.
For the last 10 years I have been living and working in perhaps the most “Democratic” part of the most “Democratic” state in the country — the San Francisco Bay Area. If you don’t live in the Bay Area, you probably assume that this overwhelming “liberalism” must result in equally overwhelming political / social / financial support for issues like homelessness and affordable housing, right?
It doesn’t.
Housing affordability and homelessness are at crisis levels in California, particularly in coastal areas like the Bay Area, Los Angeles, Orange County, and San Diego. Los Angeles County alone has a staggering 60,000+ people living on its streets everyday. There are another 20,000+ who are homeless in the Bay Area. Despite being 12% of the nation’s population, California has approximately 25% of the country’s homeless population.
Beyond the innumerable indignities of potentially experiencing homelessness, the failure to provide sufficient affordable housing near economic activity undermines almost every traditionally “liberal” cause you can think of:
While this list is frustrating enough, housing impacts one more marquee Democratic issue in an incredibly significant way — wealth inequality. Failed housing policy is one of its leading causes.
The Mechanics of Inequality
According to urban evangelist Richard Florida, urbanization can create a powerful reinforcing feedback loop for economic prosperity. In his book The New Urban Crisis, Florida says America’s most prosperous, growing cities rely on three Ts — technology, talent, and tolerance. Whether it’s entertainment (LA), high tech (San Francisco), finance (NYC), or government (DC), cities with a specialized industry/technology attract the most talented people in those fields. Florida calls the professional / white collar workers gravitating to these sectors the “creative class.” His research finds that the “creative class” generally desires more tolerant and diverse communities. This tolerance and openness, in turn, attracts more people and produces more cultural assets (e.g. art, entrepreneurship, entertainment), and the cycle continues.
This feedback loop is incredibly vital to America’s economic health. Cities generate the vast majority of our country’s economic output. If Chicago was a state, its GDP would be the 7th largest in the country.
Tragically, The New Urban Crisis is Florida’s exploration of a countervailing trend that is threatening this virtuous cycle — especially in America’s biggest cities and urban regions. Over the last 40 years — and the last decade in particular — there has been a dizzying increase in urban real estate prices. As cities become more desirable, the price to live in them goes up. In New York City, for example, housing prices have gone up 670% since 1980. According to Florida, this appreciation in urban real estate prices is one of the biggest drivers of wealth inequality.
In his book Capital in the 21st Century, Thomas Picketty argues that there are two primary ways in which people grow wealthier. On one hand, the economy grows, and this theoretically leads to higher wages for the average worker (this sadly hasn’t been happening since the 1970s). On the other hand, people can earn a return on capital (e.g. stocks). Picketty’s research has shown that historically the return on capital has grown faster than the economy itself. Only 52% of Americans currently own stock (partly because stagnating wages means there isn’t much leftover to invest). The result is that huge numbers of people are excluded from these more significant gains. This causes increasing wealth inequality.
Picketty’s research essentially confirms the well-known adage — “it takes money to make money.” Wealth generation — like economic growth in big cities — is a type of reinforcing feedback loop. Inequality kicks in when people do not have access to these cycles.
Picketty’s work focuses on stock market returns, but the same cycle is occurring with urban real estate. According to a recent report from the Federal Reserve, Americans’ total wealth increased by $2 trillion in the last quarter of 2017. According to the Wall Street Journal, approximately $1.3 trillion was attributed to increases in the stock market, while another $500 billion came from real estate. That means approximately 90% of Americans’ increasing wealth is the result of stock and real estate appreciation (not wages or savings accounts).
As we already saw, only 52% of Americans own stock. In overwhelmingly liberal San Francisco, where both of California’s Senators once worked in local government, only 43% of residents own homes (the national ownership rate is 63%). As housing prices have doubled in San Francisco over the past 10 years, less than half of the population has benefited. The other half, unfortunately, simply experience appreciating real estate prices as higher rent. The result is startling. The average homeowner now has a net worth of $195,400, 36 times that of the average renter’s net worth of $5,400.
The Fundamental Problem
Scarcity leads to higher prices. Thus, if you were a homeowner in an urban area and wanted to further increase the price of your house, what steps would you take? You could …
- Restrict where new housing can be built
- Create a process where you can easily veto new houses from being built
- Designate parts of your city “historic” to prevent redevelopment
- Deny prospective homeowners access to financing to buy new houses
- Make new homeowners pay more taxes than you do to provide public services
Amazingly, California has managed to do every single one of these things. The modern environmental movement started in California in the 1970s. Today, 75% of the land in the nine Bay Area counties is protected park/open space. The California Environmental Quality Act (CEQA) was passed in 1970 to prevent suburban sprawl in undeveloped areas; however, today a whopping 80% of CEQA lawsuits (which can now be filed anonymously at no cost to contest environmental, noise, traffic, and design “impacts”) are filed to block in-fill development (i.e. re-purposing land that has already been built on). Despite an alleged fear of sprawl, California is dominated by “single family housing” zoning designations, meaning by law property owners and developers cannot build apartment buildings, townhouses, etc. in huge parts of cities.
It keeps going. The National Historic Preservation Act was passed in 1966, granting broad power to jurisdictions to protect areas of “historic significance.” California’s Proposition 13, passed in 1978, sets property tax rates (the main source of city and county revenue) at 1% of the purchase price of a home. If I paid $500,000 for my house in 2018, my annual tax bill would be $5,000 a year. If my neighbor paid $50,000 for their house in 1970, in 2018 they would still pay $500 a year. And throughout this entire period, discriminatory and predatory lending practices have blocked people, especially African Americans, from ownership opportunities.
You literally could not design a worse housing system if you tried, and the results are exactly what you would expect. Less restrictive markets are more affordable, and with more restrictive land use policies, housing prices in California are significantly higher than the rest of the country.
Rent Relief Act
Within this context, Senator Harris introduced the Rent Relief Act. You can read the official press release here and watch her describe it here.
The bill is designed to give a tax credit to any renter who spends more than 30% of his or her income on housing costs (rent, utilities). According to the Department of Housing and Urban Development, people (poor, rich, middle class) have “affordable housing” if they are spending less than 30% of their income on housing costs. In California, 1/3 of renters are paying more than 30% of their income on rent. 1/6 are paying more than 50%. A report by the National Low Income Housing Coalition found that there is currently a shortage of 7.4 million affordable rental units for America’s 11.4 million extremely low-income families.
Presently, our country’s most significant (and most notorious) low-income housing support is the Section 8 Voucher (technically the “Housing Choice Voucher”). The Section 8 Voucher was designed as an alternative to public housing. Rather than people having to live in government built and operated housing, Section 8 allows people to rent “anywhere” in the community.
People often think Section 8 means free housing. It absolutely doesn’t. When someone receives a Section 8 voucher it means that they pay 30% of their income towards rent, and the government pays for the rest. However, there are upper limits to what HUD will pay for a unit. This makes it difficult for people to actually move out of impoverished communities, and with increasingly higher rents, many voucher holders simply can’t find opportunities in hot rental markets. In Dallas, about 60% of the people who get vouchers are unable to use them.
Unlike other needs-based safety net programs (i.e. you meet the qualifications, you get the resource), there are a limited number of Section 8 vouchers. Only 11% of low income households actually receive housing assistance.
Many people object to “government handouts” like Section 8, and with a cost of approximately $30 billion a year, it’s a significant investment. However, Section 8 isn’t the biggest “government handout” for housing. In 2015 the federal government spent a staggering $70 billion on the Mortgage Interest Deduction (MID). The MID allows homeowners to write-off the interest they pay on their mortgage when filing taxes. Interestingly, because the vast majority of middle class taxpayers simply use the standard deduction when filing taxes, households earning more than $100,000 receive almost 90% of the benefits. “ Since the value of the deduction rises as the cost of one’s mortgage increases, the policy essentially pays upper-middle-class and rich households to buy larger and more expensive homes.” Laughably, 60 percent of these wealthy people who claim the MID then turn around and say, “ they have never used any government program, ever.”
Why the Opposition
For the last 8 years that I’ve been working in this space, I’ve seen the Section 8 program be hugely beneficial for people. For many, it truly is a golden ticket. And that’s why it’s extremely difficult to vocally oppose the Rent Relief Act.
If you’ve been paying close attention, you will have noticed a key similarity between Section 8 and the Rent Relief Act. Section 8 requires voucher holders to pay 30% of their income in rent, and the government picks up the tab on the rest. The Rent Relief Act stipulates that the government will reimburse people when they spend more than 30% of their income on housing. In essence, Senator Harris has proposed a needs-based Section 8 program under a different name. That’s great news, right?
There are two major problems with both the Rent Relief Act and Section 8 — one practical, one ethical. First and foremost, from a systems perspective, they do absolutely nothing to solve the underlying affordability of housing. This is one of the most classic dysfunctions in broken systems — treating the symptoms and not the root causes.
And that leads to my second objection. Think about it — what is the cost of treating the symptoms? At an enormous expense to taxpayers, these tools end up subsidizing high rents. They literally support unaffordability. Because the government is willing to step in, property owners can continue to charge astronomical prices. Section 8 or the tax refunds proposed by this bill don’t go into the pockets of low-income, working class people; instead, that money is directly transferred to wealthier Americans who own property (or, by definition, multiple properties because they’re able to rent some out). This is like adding fuel to the fire of wealthy inequality.
In his book Evicted, Matthew Desmond describes how this process already happens with the Earned Income Tax Credit, a federal tax refund for working people living in poverty. Desmond found that when people receive their refund check, many end up literally handing it over to their landlord to catch up on past-due rent. This doesn’t increase the disposable income of low-income Americans. This is a government transfer payment to the wealthy. Senator Harris’s bill would create a vicious new cycle.
The Real Solution
At the end of the day, the only way to increase affordability is to increase the number of housing units, and yes, that is going to require sacrifice. As Homa Mojtobai jests in her article I Will Do Anything to End Homelessness except Build More Homes, “ Ending homelessness doesn’t mean building more homes because this town is full of homes already, especially mine, which is a single-family mini-mansion on an acre lot that I inherited from my parents and/or managed to purchase with the kind of job and bank terms and economic equality that don’t exist anymore for anyone and only ever really existed for well-educated white Americans. Either that or it’s a magnificent luxury condo with expansive views that I don’t want marred by more luxury condos or — god forbid — affordable housing.”
The first “sacrifice” should be the immediate elimination of the Mortgage Interest Deduction (MID), which is expected to cost almost $100 billion in 2019 (three times the cost of the Section 8 program). As we’ve seen, this is primarily a tax benefit for the rich, so it’s not really a personal sacrifice for most Americans, especially the vast majority of average homeowners. A widely cited 1996 study estimated that simply eliminating the MID and other property-tax deductions could result in a 13 to 17 percent reduction in housing prices nationwide. That’s huge. But we shouldn’t stop there.
All of that money should then be immediately re-invested in urban development. While I certainly wouldn’t oppose this money going directly to housing, earlier we saw that the biggest obstacle to affordable development isn’t actually money, it’s regulation. To that end, every year $100 billion should be budgeted for much-needed urban infrastructure projects — transit, renewable energy, broadband internet, smart technologies, etc. However, in order to access this infrastructure fund, cities should be required to “liberalize” their housing policies (i.e. move closer to a free market).
I know it probably came across otherwise earlier, but I do fully support local oversight of development patterns, environmental protection, and historical preservation. However, there are ways to embrace the spirit of these laws without allowing anti-housing types to exploit the letter of the law to prevent construction. For example:
- The federal government could provide planning grants to allow communities to come together and pre-approve development patterns and concepts that jive with local priorities around housing density, transit patterns, the environment, and cultural assets. Once these plans are adopted, one-off community groups could not come in and vote down specific projects in larger pre-approved areas. (The technical term for this is a Specific Plan)
- Single family home zoning should be “upzoned” to allow multi-unit housing options, especially along transit corridors where new infrastructure will be built
- In-fill projects, especially with affordable housing components, can and should be fast-tracked through planning and approval processes.
These policy changes should make it much easier to build, and that’s critical, but throughout this article I’ve continually referred to the challenge of building wealth. When communities are forced to create more affordable housing, they often look to add more units in already “affordable” neighborhoods (i.e. low-income neighborhoods). This often leads to gentrification and the eventual displacement of low-income residents.
To make sure this doesn’t happen, infrastructure funding should be contingent on city-wide re-zoning. Moreover, the federal government should require the implementation of inclusionary housing policies. With inclusionary housing, some % of affordable units are required in every market-rate project (i.e. 10–30%). This policy creates geographically and economically diverse ownership opportunities, giving low-income people the chance to seek out neighborhoods with better employment, social, environmental, and educational prospects. It also allows an existing low-income area to be redeveloped without necessarily displacing current residents (current residents could get preference for local inclusionary units).
This set of policies creates a new reinforcing cycle for prosperity and inclusion. New infrastructure and amenities (e.g. transit, bike lanes, parks) increase property values, and by requiring inclusionary units in these high-growth areas, everyone benefits.
Yes, this is a much bigger lift than a rental assistance program, but it’s the necessary lift.
