I keep hearing from folks who want to argue that Davis doesn’t need more “unaffordable housing” —but for the most part they are neither presenting data nor studies to back up these assertions.
For what it’s worth, I completely agree that Davis needs more affordable housing. As I pointed out last week, that’s one of the reasons the state is mandating around 40 percent of the total housing units built be “affordable.
However, as I have argued many times, Davis doesn’t just need “affordable” housing—it needs housing of all kinds.
One of my goals in all of these columns is to introduce new ideas into the Davis ecosystem.
This week, I read in the National Multifamily Housing Council Newsletter a pretty interest report, “How New Supply Impacts Affordability Across the Board,” authored by Chris Bruen, NMHC Economist and Senior Director of Research.
Bruen writes that in 2024, nearly 500 thousand multifamily units were built in the US—more than in 2023, which itself saw the highest number since the late 1980s. That figure was reached before data for November and December has become available.
(As a note, I’m going to greatly simplify the findings here in hopes of engaging the average reader, but hit the link if you want to read the more complex data analysis).
It turns out that most of the new rental units consist of higher-end apartments. For example, he notes, “Approximately 77% of 2024 apartment deliveries were assigned 4- or 5-Star ratings by CoStar (a 5-Star rating indicating the absolute highest quality in design and construction); 22.4% were rated as 3 stars.”
The key point here: “While the U.S. currently has a shortage of millions of homes, many have questioned whether this higher-end development has had a positive impact on affordability…”
Sounds familiar?
Their answer: “We find that between 2015 and 2024, markets with higher levels of supply tended to record lower rates of rent growth among 1- and 2-Star apartments, even after controlling for various measures of demand and metro-level differences.”
There is a trend of increased high-end development and also rising rents even among the more affordable units.
Bruen argues that this leads many to assume that there is a “causal relationship” here, “that new, higher-end development is, in fact, a driving force behind worsening affordability.”
The problem, however, is that “demand is often outstripping supply, causing rents to increase.”
Here he cites previous work, by Myers and Park. They found that “from 2000 to 2018, rents in lower classes increased due to demand outstripping supply overall.”
What many do not understand is that higher-end development tends to relieve pressure from other segments of the market—experts call this “filtering.”
For instance, Bruen cites that the development of these high level apartments absorbed nearly 400,000 thousand new households over the last year and over 1.6 million over the last few years. Without this supply, it would have forced the high end households to dip into 1-, 2-, and 3-star spaces, that would have driven up those prices.
Are you following the logic here? Constraining the supply of higher end housing means that people normally who would be in the market for and able to afford this higher end housing, would suddenly be competing with people for lower end supply, driving up the cost of that supply. Basically you are increasing the demand for lower-end supply because you lack sufficient upper-end and overall supply. That drives up the cost of housing for all.
Here is the conclusion:
“Our analysis provides strong evidence that the development of new, high-end apartments results in lower rent growth among all apartments, even more affordable 1- and 2-Star units. More broadly, our results suggest that what happens at the higher-end of the market influences lower-end apartments as well: higher demand for 4- and 5-Star apartments leads to higher rent growth among 1- and 2-Star units, and higher vacancy in the 4- and 5-Star space leads to lower rent growth among 1- and 2-Star units.
“While the most direct way to preserve affordability at the lower-end of the apartment market would be to simply build more lower-end, 1- and 2-Star apartment units, these types of projects rarely pencil out in the absence of some sort of subsidy due to significant development costs. Our analysis shows, however, that even higher-end development should help to relieve rent pressures among more affordable class types, albeit to a lesser degree.”
Their analysis basically confirms what we have been arguing for some time.
First of all, I have argued we need more supply in Davis. High end supply alleviates pent up demand, which results in less upward pressure for lower end, more affordable units.
Second, yes, we need more affordable housing. There is no disagreement on this point.
Third, building more affordable housing is necessary and a more direct way to increase affordability among lower end units. However, that approach runs into market forces.
Developers need to be able to actually build the housing and, given development and construction costs, that is tricky, especially in a market like Davis.
We clearly need to figure out better ways to subsidize housing and support low- and moderate-income families looking to get into the local market.
But at the end of the day, we need more housing of all kinds.
Finally while this report looked at rent, I have seen similar analyses for ownership housing.
If you have seen similar studies for ownership housing, why did you use the rental housing study?
With that asked, how strong do you see the demand for high end rental housing to be in Davis?
We know where the demand for high end ownership housing in Davis is coming from. Where is the demand for high end rental housing in Davis coming from?
“If you have seen similar studies for ownership housing, why did you use the rental housing study?”
Because this is the study that just came out.
But here’s one from a few years ago:
https://davisvanguard.org/2022/11/commentary-does-market-rate-housing-help-with-affordability/
David, did you take the time to read that UCLA study? Page One is explicit when it says … Taking advantage of improved data sources and methods, researchers in the past two years have released six working papers on the impact of new market-rate development on neighborhood rents.
Five find that market-rate housing makes nearby housing more affordable across the income distribution of rental units, and one finds mixed results.
Rents being the key word.
I will now take time to read the whole report to see if it says anything about the impact of market-rate (in Davis prices over $850,000) housing additions on below market rate housing resale prices.
From the UCLA paper … “To be clear, this debate is not about whether new housing can reduce housing prices overall. At this point, that idea isn’t really in doubt.”
Now here is a really good study concept/design that I believe would be very illuminating of what is going on in Davis. There would be two flavors of the study … one for the rental market and the second for the ownership market.
Here is the description from the study … ““THE EFFECT OF NEW MARKET-RATE HOUSING CONSTRUCTION ON THE LOW-INCOME
HOUSING MARKET”
EVAN MAST (2019)
In this paper, Mast identifies nearly 700 market-rate multifamily developments in central cities,
and then tracks 52,000 of their current residents to their previous address. He then identifies the
current residents of those buildings, and traces them back to where they used to live. He repeats
this cycle for six rounds and establishes a “migration chain”: a series of household moves that can
be attributed to the new development. A new market-rate project is completed and residents
leave their previous address to move in, opening up their old home for someone else to move into;
someone else moves into that unit, opening up their previous address for new occupants; and so
on.”
One additional piece of information to think about comes from Calculator.net
Specifically, the purchase of an $850,000 home with 20% down, a 6.699% 30-year mortgage rate, 2% closing costs, and a 1.5% per year property tax rate, costs the buyer just over $10,000 a month if the house is held for only a year. How many three or four bedroom apartments in Davis have a monthly rental fee of $10,000?
Looking at a longer term than one year, if you start out with a monthly rental of $4,000 per month, with a very modest annual increase of 3%, in year 10 the monthly rent would be $5,592 and the monthly ownership cost would have come down to $5,552. That prompts two questions, (1) How many three or four bedroom apartments in Davis have a monthly rental fee of $4,000? and (2) what proportion of Davis apartment rentals last for 10 years?
I get $4500/month for the mortgage and taxes with those parameters, which isn’t too far off from the rental cost, and most of that cost is fixed for 30 years without inflation.
You aren’t including the closing costs, brokers commission for selling the house at the end of the period of time, etc. which amortize/spread less and less to each month as the years add up Calculator.net shows the following calculations:
Year 1 $10,243
Year 2 $7,159
Year 3 $6,202
Year 4 $5,781
Year 5 $5,575
Year 6 $5,478
Year 7 $5,446
Year 8 $5,455
Year 9 $5,493
Their comparable numbers for a $4,000 per month rental
Year 1 $4,157
Year 2 $4,292
Year 3 $4,435
Year 4 $4,584
Year 5 $4,738
Year 6 $4,898
Year 7 $5,063
Year 8 $5,233
Year 9 $5,410
I will e-mail you the screen shots
Adding supply moderates prices. Wow, who would have thought so?
I’ve been writing that here for at least a decade.
The housing debate has many facets to it but lets be clear because there is crossover on some of the value statements that get made.
When people object to unaffordable homes, they are usually talking about single family homes, which by definition in the modern market WILL be unaffordable. Despite financing gimmicks. There is really no way around it.
But affordability is only one axis of the housing debate. Other factors such as: Carbon Footprint / Traffic Impacts / Impact on City finances etc are also in play here and are equally important
Even the word “affordable” is fraught because we need both Capital-A Affordable ( which requires subsidy) and market-rate “lower-case-a” affordable, which simply means: multi-family development.
The better way to slice the housing debate is the divide over whether any single family housing is warranted, because single family housing is the worst performing property type on ALL of these metrics, and at this point, people who think that single family housing is a responsible choice have just about as much evidence for their position as those people advocating for a flat earth.
Yes single family is unaffordable, but it ALSO is the worst for traffic, and carbon impacts, and city finances etc etc etc.
But that doesn’t mean that we shouldn’t build anything, which is of course the unspoken opinion of some participants in this debate, and If Im picking up correctly on what David is trying to say, then I might agree: We cant expect ALL housing to be low-cost. Especially if we say no to single family housing, we should be warmly welcoming attempts to build “luxury condos” and high priced apartments in our developments. These buildings will still be more affordable than the same property might have been if it had been developed as a single family home, and that is really the point.
And more to the point of the piece here, as we build more of these multi-family properties, then the effect of halting increases in the pricing of other housing should follow suit here. As we build more student housing, we can expect single family home “mini’dorms” to be more avaliable on the market, and as we provide condos and more higher-tier apartments for adults, we should similarly see empty-nesters and retirees moving out of single family housing to occupy those as well.
If we want to focus on the affordability axis of the housing debate, then yes, simply invoking the law of supply and demand needs to be part of the solution… LOTS of multi-family housing, at all pricepoints, (with an appropriate amount of land dedication for capital-A Affordable) would be a great thing for to focus on.
My take: the trickle-down housing theory probably works fine in a relatively stable market in which there’s only modest external growth pressure, but the Davis market is significantly distorted by a couple of factors:
1. The community has a well-known reputation as being a safe, compact university town with excellent schools when compared to other markets in the region. That makes it an attractive relocation target for well-heeled young families in the region.
2. The Bay Area is nearby and has an abundance of aging Baby Boomers looking to cash out of their wildly inflated homes and retiring to a safe, compact university town.
Taken together, these factors constitute an unusually large external demand for upscale Davis housing, ready to absorb nearly all of the new high-end housing the city might produce and effectively blunting the trickle-down effect. Producing more high-end housing gets us a bunch of new residents (with their cars), but doesn’t help the bottom end of the market much.
Amen
Jim Frame said … “well-heeled young families in the region.”
I’m not sure that there is much overlap between “well-heeled” families and “young” families. In order for a young family to be well-heeled in most cases that will mean both adults are career professionals, and the likelihood of their family size being any larger than 2 is very very low.
To add some specificity to Jim Frame’s comment above and Alex Archimore’s comment below, the housing shortage in Davis … the existence of more demand for housing than there is supply of housing … is an economic and societal reality that has been and continues to be due to forces from outside the Davis City Limits.
Where is the demand for housing in Davis coming from?
(1) Wealthy investors looking to reap strong profits from the housing rental market. We need look no further than the prevalence of single family residence conversions into UCD student mini-dorms in almost every neighborhood throughout Davis. Price is much less of a concern for those wealthy investors than it is for families, especially families with children.
(2) Current Bay Area homeowners, who are capitalizing on pandemic-accelerated changes in the employment marketplace … they can work remotely from home. Price is much less of a concern for those Bay Area ex-pats than it is for families, especially families with children.
(3) The over 250,000 living UCD alumni who have accumulated enough wealth to be able to afford to move back to Davis because it is emotionally a “return to their roots.” This Demand category often overlaps with (2) and (7).
(4) Some of the 15,115 people that the US Census shows are employed within the city limits of Davis (11,081 of the 15,115 are classified by the Census as “Primary Jobs” with the remaining 4,834 being part-time jobs. Given the job mix in Davis, a huge proportion of the folks in this category are in the “missing middle” demographic.
(5) Some of the 11,000 to 16,000 Davis campus employees of UCD (different UCD employment reports show different numbers in that range). A March 2023 report I received directly from UCD’s Department of Budget and Institutional Analysis is on the low end of that range (approximately 11,000) with only 3,597 of the 11,000+ living in the City of Davis.
(6) Some of the 30,0000 students enrolled at the Davis campus.
(7) Retirees who want to be in Davis to be near their family … or just because Davis is an excellent (and expanding in numbers) retirement community.
There may be other categories, but those are the biggies.
So what you are saying is there is lots of demand for housing in Davis.
Lots of demand for expensive housing from families/individuals without children.
And, that “super bloom” of expensive housing demand means … as Alex Archimore has clearly said multiple times … that housing additions barely dent the pent up demand, so there is no noticeable or meaningful downward pressure impact on housing prices.
And, the high $ per square foot sales prices of new homes … as Keith Echols has clearly said multiple times .., causes real estate agents to use those high $ per square foot prices as comparables for setting the price of resale homes at a higher level. Thus making Davis housing less affordable rather than more affordable.
Further Ron, as reported by the developers of two of the proposed Downtown housing projects along G Street, the demand for rental housing in Davis has softened so much that they can’t find a funding source willing to loan them the money they need to proceed with their proposed project.
Maybe there are not nearly enough people that want to live in Downtown Davis or in high priced rental housing.
I’m not surprised. I wonder if they could get financing if they weren’t multi-use projects.
https://cre.org/wp-content/uploads/2017/04/Mixed-Use_Development.pdf
If they were just housing probably, but they can’t do strictly housing in the downtown.
In other words, our current planning process is inhibiting the development of housing in the downtown.
Downtown was never to be a place with straight housing.
Walter, I suspect both are true, although at the funding stage they don’t have expressions of interest. The funders are looking at broader trends.
One of my suspicions is that over the last two (or more) decades UCD students have pushed so many families and non-student renters out of apartments, that the demand from families and non-students has been permanently depressed/suppressed. In addition the transition from per unit rents to per bed rents has driven families and non-students away.
Don, that is a really good point, one I agree with, now that you have pointed it out.
David Greenwald said … “Downtown was never to be a place with straight housing.”
Given the Downtown vacancy rate is +-12%, why is it a good idea to add more mixed use retail? As you yourself have said about housing … the situation is different now.
The time to debate that would have been when they did the downtown specific plan probably. There is no rule that it has to be mixed use. It could be straight commercial.
BTW, my understanding is that the affordable component was why the Fourth St project couldn’t go forward.
David Greenwald said … “There is no rule that it has to be mixed use. It could be straight commercial.”
“When you find yourself in a hole, stop digging” means when you’re in a difficult situation, you should stop making it worse. Building straight commercial when you already have a +-12% commercial vacancy rate only makes a bad situation worse. Not building affordable housing when you have a housing affordability crisis only makes a bad situation worse.
Here are some tips for getting out of a hole:
— Recognize you’re in a hole: Take a moment to look around and see if you’re in a hole.
— Stop digging: Stop doing whatever is making the situation worse.
— Don’t fall back in: Once you’ve climbed out of the hole, don’t fall back in or dig yourself a new one.
I just want to clarify this.
The Lumberyard (former Hibbert site) at 500 G Street (227 units of housing), and the 240 G Street Mixed Use Development (126 units of housing), are both failing to move forward?
We had this same discussion and disagreement a couple of weeks ago. You are conflating a macro-study with our very hot micro-market. What applies to a statistical base the size of Northern California or even just Yolo County will not apply to the next 2-3,000 units built on our periphery. Again, try to imagine adding that many units priced well above $650,000, the lowest price for a single-family house on Zillow today (a 1,000 square foot detached house built 60 years ago), because that is essentially what Village Farms and Shriners are proposing. Does it make sense that the price of a typical 30-year old house on a larger lot closer to the center of town and surrounded by mature trees would be affected at all? I think someone said it would, but it might be too little to register—isn’t that the point? Yes, there’s supply and demand, and 10,000 new houses landing quickly in Davis would probably affect prices of existing ones, but I’d love to see a study about just a few thousand in our particular situation.
A related point about why we might not want a few thousand new detached houses is that Davis is not growing new jobs with salaries sufficient to pay for them, so it’s likely they would be purchased by folks working elsewhere. In other words, more commute traffic. If we could find a way to build for people who don’t earn enough to live here and commute in every day, we would address two problems together.
“But the market wants single-family houses,” some say. Not quite true. There is a large market for single-family houses in Davis, even above the median price of $800,000, but the micro-market of our very desirable Davis actually means that almost anything will sell, albeit at the highest prices in the region. Indeed, there’s at least as much of a market for unsubsidized duplexes and townhouses, which may cost the same as a detached house in Woodland, but still notably lower than a detached house of any size in Davis. And given the quality of our schools and amenities, they will be very desirable, especially to anyone who works in town and makes, say, a teacher’s salary.
“But developers won’t make enough money to cover the subsidized, restricted affordable housing” you may add. It’s true that lower-priced products like duplexes and townhouses will not yield the same profit margin, but that doesn’t make them money losers. It would be great to have a conversation about exactly where a break point is between a project that isn’t worth doing and one that serves more of Davis’ need to provide housing our general workforce can afford. It would be helpful if our developer friends would weigh in on this directly—we shouldn’t leave it to the poker game we have now.
I’m less worried about this argument that gets raised about whether developers will refuse to build multi family…. There is LOTS of multi family being developed here in town…. We have no reason to think that more sustainable building types won’t get built. They might not be “cheap”, which is potentially David’s point…but they will be cheaper than the single family homes that might otherwise be taking that land, and thre willl be more of them…
I too am of the opinion that Davis is a micro market which by its nature of long term low vacancy rates distorts the reality.
There is huge unmet demand for subsidized low to very low income rentals and for moderate income rentals. As it stands there is never enough upper income homes for sale on the Davis market at any given time to bring down the market prices. It is said that the vacancy rate has to be at 5% to be at a measure of benefit to renters.
I don’t think Davis has see that 5% in the past 30 years so renters are paying more in a continuously uncompetitive market.
None of this market dynamics will change with either Village Farms or Shriners adding up market single family homes.
1. New Market Rate Housing Construction IS NOT A SOLUTION TO AFFORDABILITY
2. New Market Rate Housing Construction IS NECESSARY FOR ECONOMIC DEVELOPMENT.
For the bazlliointh time, Builders build to make money. To make money they don’t do anything that would drive down home sale prices….like building enough that supply would effect pricing. What builders do is target growing markets and try to get them to grow even more so…like throwing gasoline on a campfire. They’re looking at markets were they can attract out of town buyers (places with growing economies and job growth) that have more money to spend on nicer homes. Does that push existing homes down in the hierarchy of desirable homes to buy in a market? Yes. But it doesn’t lower their price. You know what that’s called? GENTRIFICATION. Builders count on gentrification to help offset any impacts their building has on supply and market pricing. They also constrain supply by releasing limited amounts of homes at a time in efforts to mitigate construction and (even more so) market risks.
New market rate housing is necessary for economic development. If you’re trying to attract businesses to a region; you need new market rate housing that targets near the top of the market. Why? Because in growing regions people moving up want a nice home. And let’s be honest, having a bigger nicer home in the Sac region has been supposedly a benefit that somewhat offsets not being able to live in a more desirable place to live in CA. The article is correct that builders build for the higher end of the market but not for the highest end….which is usually reserved for custom and semi-custom built homes on larger lots/estates. But if a region wants to grow economically, it has to offer people moving there something desirable in terms of life style. In a place like San Francisco you can get away with dense urban living because there aren’t any other options and the city life style/culture is desirable enough to make that kind of trade off. In the Greater Sacra-mentucky region and it’s surrounding podunkvilles; you get bigger houses and bigger yards as one of the primary benefits of living here. So if you want to grow economically you’ve got to have the homes and lifestyle where people want to live and work. Smart planning would plan commercial, industrial and residential growth to happen concurrently (because residential growth by itself is a cost burden to the community).
And if you really want more affordable housing; PUBLICLY BUILD MARKET RATE HOUSES to subsidize the construction of affordable housing.
We saw in the 2006-2008 period that builders are far from precise or accurate in targeting their housing to particular price points. The collapse of prices across many markets then illustrates the strong effect of supply and demand in housing prices. Andy Ford at WSU documented that this pattern has held for a long time. There’s no reason to believe that somehow the rules of market forces and supplier myopia have disappeared.
Yes but the 2006 market collapse was fueled by lax mortgage underwriting. Builders were meeting market demand based on sales to unqualified buyers. When the buyers faltered the market was left with excess supply.
Why can’t they find funding for downtown housing. Because in the infinite wisdom of Davis’ penchant for futuristic perfection they didn’t plan to include parking.
The masters of the universe, the people who do loan underwriting, said no to housing with zero parking. All your other arguments are based on fantasy.