by Mark Dempsey
The Davis Vanguard’s editor, David Greenwald, recently wrote about The Left’s Dissonance on Housing, pointing out correctly that liberals are among the first to raise those Not-In-My-Back-Yard (NIMBY) objections to developers building more housing–particularly affordable housing.
The problem of affordable housing is not new, nor is it unique to California. For example, using Australia as an example, the website RealEstate4Ransom.com reminds us that speculation in real estate makes prices rise until they reach the maximum lenders will lend.
Since ~90 percent of home purchases are typically financing, and since lenders make more money the bigger the loan, 
banks do everything they can to promote price rises.
Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane echoes this point and adds that studies show 80 percent of the price rises in real estate come from increases in the price of land–and land prices rise with land speculation.
Higher real estate taxes prevent land speculators from holding their land off the market to await the maximum price, so ironically, such taxes can make land cheaper.
If, for one example, real estate taxes were to rise, and what’s paid in tax cannot service a loan, tax rises would make such lending and speculation less profitable. If we quell speculation, then prices might actually retreat. Yes, Proposition 13 made real estate more expensive, never mind the $12 billion in annual property tax revenue California loses because of Prop 13’s commercial property loophole.
What loophole? If you buy a new house, its property tax comes from a revised assessment based on the sale price. If people buy less than 50 percent of commercial real estate, though, its taxes don’t change, no matter what the sale price.
Michael Dell (of Dell computer) bought a Santa Monica hotel, splitting title between himself, his wife and a corporation he controls. The property remained taxed at, in effect, its 1978 value. (Prop 13 passed in 1978).
That’s true throughout the state, and the loophole is unevenly applied–not every buyer takes advantage of it–so its impact on business is also uneven. In fact, the loophole actually discourages new businesses from building their own buildings–they would be assessed at current prices, and higher costs make them less competitive.
In other words, it’s nuts, and the California electorate is so anti-tax that it refused to pass a recent proposition (Prop 15) that would have closed that loophole.
Land speculation
If you doubt land speculation–an activity that increases prices–is big business in our region, take a look at North Natomas, just north of Downtown Sacramento. This is thousands of acres of 20-foot-underwater floodplain, surrounded by weak levees. It was so unsuited for development that a federal grant to increase the regional sewer plant’s capacity included a $6 million penalty if that capacity served North Natomas.
The speculators who controlled that land were undaunted. They went to then-vice-president G.H.W. Bush to get that penalty payable in installments, rather than the prohibitive up-front payment.
As part of this negotiation, the speculators also got $43 million in federal levee improvement grants to bring the levees surrounding North Natomas up to pre-Katrina standards. North Natomas’ levees need millions more to reach post-Katrina standards, but the speculators are long gone and won’t be paying for that.
So…a pretty good deal! Pay $6,000,000 in installments and get $43,000,000! But wait, there’s more! The speculators bought that land for ~$2,000 an acre. After they got the entitlements to develop, they sold it to builders for ~$200,000 an acre. If your calculator isn’t handy, that’s a 10,000 percent gross profit.
North Natomas is nearly built out and…Surprise!…the speculators are proposing even more outlying development.
With that kind of incentive, roaches will scuttle out from under the baseboards to do land speculation. The “unearned increment”–that outrageous profit and a component of the 80 percent rise in real estate prices–goes into land speculators’ pockets.
In Germany, the developers have to sell the land to the local government at the agricultural land price, then buy it back at the development land price if they want to build on outlying land. The public retains all of the profit–called the “unearned increment.”
And German infrastructure is first rate–not, as in the U.S., rated C minus by its engineers. German universities offer classes with free tuition, even for foreigners, and the arts budget of the City of Berlin exceeds the National Endowment for the Arts for the U.S. of A. Meanwhile we’re begging for crumbs from the speculators’ feast.
Zoning Obstacles
Beside what amounts to covert subsidies offered for the land speculators, the obstacles presented by the planning bureaucracy prevent several good solutions for any housing shortage.
For example, single-family zoning prevents mixing multi-unit apartments among the McMansions. What’s often cited is that mixing poor folks among the rich will somehow devalue the neighborhood.
But that’s simply untrue. The most valuable real estate in the Sacramento region is the neighborhood around McKinley Park. There, you can find multi-unit apartments, granny flats, and small, separate multiple cottages among the mansions.
McKinley park’s charm–besides the park itself, and some beautiful older homes–is that it offers amenities like offices, restaurants and transit within a comfortable and dignified walk of its residences.
At an average of nine units to the acre, the neighborhood itself is slightly lower than the ideal density that Berkeley planner Robert Cervero observed in the East Bay: 11 units per acre. Higher densities support transit and commerce because they generate enough pedestrian traffic to patronize these things.
Density and the Public Realm
Increasing typical neighborhood density makes for viable neighborhood commerce and transit, yet suburbanites (who live in 5-7 units per acre) typically greet any proposal for denser development with howls of derision.
Yet buyers pay premiums to live in McKinley Park, never mind far denser, more valuable New York City. Again: McKinley Park is the most valuable real estate in the Sacramento region.
Compact development itself is not enough to warrant the protests, but are there legitimate objections to density?
Certainly dropping a bunch of strangers who are likely to be poorer into any neighborhood is hardly a recipe for enthusiastic acceptance, but one genuine problem is that under current law, residential property taxes don’t pay their own way for needed public services.
Since Prop 13, funding for infrastructure, schools, fire protection, etc. requires more than the property tax revenue residences produce. If some multi-family housing lands in a neighborhood, odds are it will make the amenities worse, increasing demands on them without providing funding to match.
Second, the U.S. has embarked on a multi-generational public policy project to de-fund the public realm. The public realm is everything from sidewalks to parks to public buildings from libraries to museums. Britain’s National Museum is free. Locally, the Crocker has a fee for admission.
The public realm is everything accessible even to poor people. Like those German universities, the public realm is available to the entire population, without charge. A robust public realm is absolutely required for acceptable denser housing.
I was going to say “so neighbors would feel secure,” but ultra-dense New York City has lower per-capita crime than sprawling Phoenix, AZ.
Anyway….government used to build, or fund, low-income housing. The Nixon administration put a moratorium on such federal building. The Reagan administration cut taxes on the wealthy roughly in half, even as Reagan and his successor raised payroll taxes eightfold. They also cut HUD’s affordable housing budget 75 percent.
As governor of California, Reagan also closed the asylums, evicting the mental patients to wander the streets. Gosh, I wonder why the mentally ill homeless and income inequality are such problems now?
Anyway, defunding the public realm means making society a dog-eat-dog battle for access to the best schools, to the streets leading to employment, and to housing itself. This makes housing into a scarce commodity, raising its prices to the delight of lenders, and ignoring the fact that people need housing as surely as they need food.
Do we really want to motivate workers with the whip of starvation? How about homelessness? (Answer: sadly, yes.)
So yes, liberals have been conned into believing multi-family housing is always a burden. Yet California won’t handle the current crisis in affordable housing without denser development.
The Good News
Besides California’s recent mandate that all new streets provide pedestrian access, one proposal that is actually getting traction now is redeveloping commercial corridors and malls to include housing.
This could rescue the brick-and-mortar retail suffering from online competition and provide attractive, low-cost residences for the aging population whose fastest growing demographic is those over 85.
The city of Citrus Heights has such a plan now for Sunrise Mall. Evidence is that such “lifestyle centers” can offer housing in addition to retail, and build for customers who can walk to the food court, etc. They are not just financially viable, such centers are apparently even more profitable than the single-use retail of sprawl.
So yes, liberals have been conned into opposing affordable housing, but it needn’t continue to be that way.
The author was in the real estate business for nearly two decades, and spent half that time sitting on a Sacramento County Planning Advisory Council, hearing development proposals.
“Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane echoes this point and adds that studies show 80 percent of the price rises in real estate come from increases in the price of land–and land prices rise with land speculation.”
With Measure D the price of land inside Davis’ limit line is now around 100 times the price of land outside the limit.
And that is the reason they’re wealthy. Ask local congressional and senate representatives if they went-along with this.
Federal public housing was, and is an unmitigated disaster.
There’s another factor regarding this as well, regarding redevelopment agencies (and the damage that they did to existing neighborhoods, in prior decades). Including Sacramento (though I personally like its replacement – the Capitol Mall).
In Los Angeles, they not only displaced people – they leveled a hillside and destroyed historic mansions (that were, by that time housing low-income people. Some of them elderly.) That neighborhood (and its historic “Angel’s Flight”) lives on in some movies. (Angel’s Flight was relocated nearby, after several decades. But no longer serves the same purpose.)
https://en.wikipedia.org/wiki/Bunker_Hill,_Los_Angeles
Here’s another example:
https://en.wikipedia.org/wiki/Battle_of_Chavez_Ravine
We could also discuss what occurred in the Western Addition of San Francisco.
https://www.sfpublicpress.org/fillmore-revisited-how-redevelopment-tore-through-the-western-addition/
Much of this article wasn’t about affordable housing.
OKAY…..TIME FOR LAND DEVELOPMENT 101
Or land “speculation” as it’s called here. Say it with me class! Repeat it 3 times! Unentitled land is an extremely risky investment! Raw land has no water, sewer, electrical or police and fire services. It doesn’t even have the rights to those services much less the actual physical infrastructure. If it’s outside a city limits or services district it’s one more step away from those services.
Raw land is such a risky investment that while buildable land is a precious resource, homebuilders generally do not keep it in their inventory. They may by tentative maps when they’re eager to enter a market. Generally they buy properties with final maps (legally subdivided property) or ready to build finished lots. So there’s a range between tentative maps to finished lots in which a homebuilder will have in their inventory. What they won’t have (yes there may be exceptions) is raw land.
I’ve always made the comparison to land development to venture capital. In venture capital you expect that 9 out of 10 of your investments are going to go bust. You hope for that one that doesn’t goes big. It’s like modern baseball…all strike outs and homeruns. Land development is much the same thing. That riskiness is why homebuilders will pay a premium for entitled property to build on…because you’ve removed much of the risk (much of which is political but also…sometimes there’s just no services to be had).
If you did what Germany does, you’d get much less housing built. A builder isn’t going to buy a bunch of Ag land and hope that the local jurisdictions will entitle it (and then there are possible physical issues with the land that have to be figured out as well as other local issues…like neighbors) and then buy it back from the government at entitled prices. Large homebuilders generally aren’t interested in land development (smaller ones do both…they build but with the intention of selling off the bulk of their lots to larger homebuilders).
But here’s the thing; it’s not land development process that is driving up home prices. Land development was around when prices were lower and affordable….they’re around now that prices are expensive and prohibitive. I’ve spent time on the Vanguard saying that supply and demand isn’t the only factor in determining housing prices. That building new homes will drive up prices if it only incrementally increases supply because of new home price bumps and gentrification effects. But here’s the thing….the foundation of what determines home prices is still supply and demand. It will determine if raw land in the sphere of influence goes for $1,000 an acre or $10,000 an acre. It will determine if an acre with 5 final mapped lots on it will go for $25K per acre or $250K. The risk is the risk….it’s there if land is cheap or expensive. What primarily determines the price is market demand.
The author is sort of missing out on a basic tenant of real estate. Location, location, location. Yes McKinley Park is able to mix higher density housing with bigger single family homes….because that specific area is desirable enough that homebuyers accept the trade off of smaller units for the location. The same can be said for most dense urban areas like New York and San Francisco. The same can not be said for most other areas in the Sacramento region.
THIS IS SPOT ON! I made this claim about government defunding public housing a week or so ago in the comment section of some article. This is how public housing became “the projects”, “ghetto” or “slums”.
I agree. This is why I advocate for more affordable housing and more specifically public housing. I do not believe the answers can be found in for profit housing. But funding for such things can only come from economic expansion.
I haven’t looked into this in any depth, but how do you know whether or not it works? Have you looked into it?
Builders already buy land at vastly “entitled” prices – from land speculators (as noted in the article). With government (taxpayers) picking up the tab for things like levee improvements, as a result of outright corruption. Leading to a situation in which housing is built where it shouldn’t be, in the first place. Causing more problems down the road, for both the new homeowners AND the government.
In contrast, if a government agency owned land and decided to sell it for development (for a “fiscal profit”), what makes you believe that the government would then turn-around and discourage development on that same land?
Who would you rather see get the “profit” in the first place?
You’re missing the point. It’s not the entitled land that is driving the prices. Sure the government could stockpile land and sell it to builders. That would mean the land would have to be held by the government until the builders feel like they’re ready to build. Do you think Davis can just go out and buy all of the surrounding land and stockpile it? Most land is privately owned so the risk of the entitlement process still exists. But even then…so lots come online. The market for new home prices are still $800K. Those homes are still going for $800K. All you’ve done is made the city take on the risk of raw land, absorb the cost and reap the benefit. That’s fine but now you’ve made the city into a land developer which means spending money on raw land and having it at risk of not being able to built upon (just because the city owns doesn’t mean it will be entitled. Plus there are other physical and socio-political issues…like neighbors…to mitigate).
While that kind of thing exists. It’s not the norm for 95% of land deals.
There’s not much risk, if a government agency is purchasing land at its non-speculative (farmland) value.
And if they’re holding all the cards regarding approvals, it seems to me that they may not approve development on land unless it’s sold to them at a non-speculative price.
But again, I’d say that a series of articles would be needed to explore exactly how the German system works.
It’s not likely that landowners here (and their political allies – the same ones approving massive public expenditures so that developers can build in ill-advised locations while reaping enormous profits) would willingly go-along with this. Let’s just say that I can envision some “controversy” regarding that.
And it’s not just floodzones, but sprawl itself.
America, Land of the Free (and Home of the Government Subsidy for political allies).
Otherwise known as you wash my hands, and I’ll wash yours. (Something like that.)
The entire system should be recalled.
There’s not much risk,
Really? So you think city governments all get along? That they agree with everything their predecessors did and their successors will do? You’re missing what I’m saying that there’s more than just the entitlements by the government. There’s also the logistical and physical issues with the land itself. There are socio-political….so the neighbors are cool with the property being owned and entitled by the city. But then the same neighbors or new neighbors rise up to oppose the development and oust their CC representative….etc….No land development would be far, far, far from a “not much risk” venture….even for a local municipality.
Again, a series of articles would probably be needed to see exactly how the German system works.
But if you’re buying land at its non-speculative value (e.g., farmland), it has value as it is, not what it “could” be. And there’s much-less risk in purchasing it at that (current) value.
And again, I can envision a scenario in which approvals for development would not be forthcoming, if a private landowner was not willing to part with land at its current (or near-current) value.
Just on principle alone, I’d rather see government reap the profits, rather than private speculators.
But again, I’d have some concerns regarding government agencies being both the beneficiary and approver, unless there’s some other checks-and-balances in place (e.g., Measure D-type processes).
From my general impression of modern Germany, I suspect that this system works better for the public interest than the U.S. system does. As part of that, I suspect that it also constrains sprawl more effectively, to some degree.
@Ron
You’re missing the point. You’re assuming land deals are like buying a house. You get what you get. A good number of land deals don’t happen. It’s money wasted. You’re stuck holding the bag. The city would have to spend a considerable amount of money tying up land and there’s no guarantee that it will be entitled (even if it’s the city that entitles it) or that it can be developed (because of the land itself). The city as a land developer is just a bad idea. It’s best to let those with the means and appetite for risk.
Truth be told, I’d be somewhat concerned that the German model could lead to more sprawl, since government would be (both) the beneficiary AND the approver.
But I suspect that it (somehow) does not work that way in Germany. Perhaps it’s a land full of Measure Ds?
Don’t think you intended to say that… am thinking you meant,
The rest of your post is basically true. But even rural properties have water (for their purposes) and fire and police, but those are from the County, and response times and resources can be ‘spotty’. Using your theme, there is ‘risk’. One has to assume they figured out the risk/benefit before acquiring the property.
My understanding from talking to developers over the years, is they don’t necessarily “buy” the properties outright, unless the rents from the tenant pretty much offset the acquisition/carrying costs… less risk…
More common is buying an exclusive option, where the future price can be negotiated, set, for a certain length of time. More like a ~5-10%, non-refundable, down-payment… again, the here and now financial risk is “do-able”.
Rare is a sale @, or anywhere near, ‘development entitled’ rates, without the approvals in place. That would be a recipe for financial ruin.
Not a “risk”, but rather, a “stupid”.
But your comment, quoted, as I suggest was your intent, is precisely correct. As written, originally, not so much.
Bill,
You’re describing a land option agreement. But those options come do and the property has to be bought eventually. If you time it right…yeah you can simply pay the option, entitle the property and then buy the property. If you time it perfectly, the only risk will be your option payments. But it often land development doesn’t go that smoothly. Often you have to have bridge loans that cover the gap between the end of the option term and the end of entitlement and development phase. I’ve only seen a few land deals go off smoothly. All the rest had some issues the work through that ended up cost more and more money.
It depends on where along the chain of development we’re talking about. You’re right (and I said it as well), most major homebuilders do not buy (option/buy) unentitled land. Land developers (or “speculators”) do. Small builders who are also land developers buy unentitled property with the intention of building out some of it but making the majority of their money selling lots to bigger builders. Medium to large builders will buy t-map lots when they’re hungry in a hot market but most will want to buy fully subdivided lots. But yes buying unentitled land is often a recipe for financial ruin. That’s why there’s such a jacked up return for when it does work out. Again, I use the venture capital model. Lots of strike outs and a few home runs.
The JeRkeD measures, are, in essence, ‘inverse condemnation’ of properties… with a “Mother may I?” ‘out’, if approved by voters/CC after getting their multiple kgs of flesh. It is wrapped in the cape of ‘local control’, ‘democracy’, ‘sensible growth’, ‘economic justice’, etc. But look under the cape.
It means the rights to use/develop property are governed not by the property owner, but by others (including the electorate ‘mob’, who are not compelled to judge things on the merits… they are empowered to be capricious and/or arbitrary)… in that way, it really isn’t much different than the ‘German model’… just parsed differently.
Nobody owns their land! Everyone does! So ‘everyone’ gets to judge how property is used. A basic tenet of the Constitution and Declaration of Independence! Yeah, right(s)… or lack thereof.
All changes to property use, development, and zoning is subject to approvals by “others” – including property which already has a house on it.
It’s called living in a society.
As to use, within the other parameters, untrue. Best rest assured those who would demand for me to seek permission, from a City commission, to remove a dead tree from my property, that poses a potential hazard to my house and a neighbor’s… an example of when ‘society’ is not ‘social’…
As for the rest, ‘society’ provides for changes, development, and zoning according to approvals, UNDER RULES that follow constitutional principles… “capricious and arbitrary” are not among those rules of law… yet that is exactly what the JeRkeD measures are all about…
You conflate “due process” with “will of the people”… they are not (or shouldn’t be) one and the same. I’m all for due process… it was my profession for 35+ years… the JeRkeD measures are like an alternative to that… like ‘lynch mobs’ were to ‘trials and due process’ ~ 150 years ago. Someone could be found ‘not guilty’ (or ‘no charges proven’) and still executed by the mob.
The City staff, Commissions, CC are charged with ‘due process’… the electorate is NOT!
[edited]
Try to run a hotel out of a single-family residence, and see what happens (as one example – without even changing the structure itself). In fact, try to do this via AIRBnB, and see what happens if you don’t follow local regulations.
Try to raise rent in San Francisco, beyond what’s allowed.
Two examples right-off the top of my head.
I don’t view conversion of farmland for sprawl (and incorporation into city limits – with all of the subsequent city responsibilities that entails) as “capricious” or “arbitrary”.
Thank you for your 11:41 post. Noted.
Five comment per person per day rule is now in effect on this thread.
Measure J doesn’t interfere with a land owner’s development rights, period. The owner is free to develop in the property’s jurisdiction according to that jurisdiction’s laws and regulations.
A Measure J vote is the owner saying, “I want my property to be in the City of Davis.” The decision to annex property is a discretionary act on the part of any city, and in Davis that decision is delegated to the electorate. There’s nothing nefarious about the process.
“Measure J doesn’t interfere with a land owner’s development rights, period. The owner is free to develop in the property’s jurisdiction according to that jurisdiction’s laws and regulations.”
Point out that has never been tested in court.
There is interesting case law that suggests that Measure J could be vulnerable: Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302 (2002)
At that time on a 6-3 ruling, the court overturned a lower court that a 32 month moratorium on development “constituted a taking of their property without just compensation.” But the dissenters were the three right winger justices – Rehnquist, Thomas and Scalia. A new court which orients closer to where those three were, might very well take a different finding. But it would take someone to challenge it and go through a decade in court (that’s how long the Tahoe case took).
A development moratorium has nothing to do with an annexation decision. I’m not seeing the nexus in the cited case.
It’s not just an annexation decision, it’s a decision that precludes development on the site – indefinitely.
The assumption being that a council would necessarily annex peripheral sites and change the zoning? And that they’re “required” to do so?
It’s purely an annexation decision. That the decision is conditioned on certain commitments from the applicant doesn’t alter that fact. The owner is free to seek development approval in his current jurisdiction, so development isn’t precluded. No “takings,” no “denial of rights.”
Frank Ramos did exactly that in 1986. Filed his request with the county after the city rejected it.
I still wonder what would have happened had the CC not caved in. The cost of building an independent wastewater treatment plant and an independent water system would have markedly increased the cost of construction.
Interesting if rambling . . .
ANYWAY,
Regan did that in the 1990’s, and the current wave of homeless hit the streets of California in the mid-2000’s. So while it may be that the safety net wasn’t there for the mentally ill, the actions of 45 years ago don’t explain what has caused the more recent explosion of mentally ill street persons.
“Measure J doesn’t interfere with a land owner’s development rights, period. The owner is free to develop in the property’s jurisdiction according to that jurisdiction’s laws and regulations.”
This is true in a vacuum but Yolo County policy is to not develop on the periphery of the cities without deferring to the desires of the cities. This means that a land owner doesn’t have the option of developing property beyond the city limit under County jurisdiction.
“Raw land is such a risky investment that while buildable land is a precious resource, homebuilders generally do not keep it in their inventory.”
Actually, around Davis, there is a lot of land being held by local families holding land in inventory waiting for Davis to decide to grow. These are people dedicated to Davis who don’t mind waiting even if it means their kids or grand kids will someday be the people able to develop the land.
Farmers are some of the most savvy business people I’ve ever met. They tend to know the value of their property. Yes, often the “land speculators” are the original land owners or will enter into joint agreements with land developers with the ultimate plan for selling the entitled land to home builders.
Yeah… like North Davis Meadows, Old Willowbank, Royal Oaks, El Macero are not tied to the City’s WWTP. That wouldn’t happen.
And Old Willowbank, Royal Oaks, and El Macero have completely independent water and drainage systems.
Yeah, right.
And the WWTP wasn’t sized, currently, to handle potential development @ Covell Village, the area under the Mace curve, the Taormino project west of SR 113, Nishi. All currently or recently outside City of Davis corporate boundaries…
Those will all have to “buy in” to the existing systems, on a fair share basis, but they were/are not required to have ‘stand alone’ systems.
Good points, Jim.
From article:
This is another scam that obviously needs to be fixed. I’m pretty sure that those who would benefit from fixing it will try again. It came pretty close, last time.
It is fundamentally different than taxing people out of their own homes.