Thorny Housing Issues

This article was written by Jim Russell and appeared in Pacific Standard on November 3, 2014.

Does Population Change Drive Demand for Housing?

Most conversations about housing affordability define demand in terms of population change, but income is a far better measure.

Brian Kelsey provides the provocation for this post, “78704 population didn’t change much 2000-2012 but % w/ bachelor’s degree or higher increased 37% to 50%.” Translating character-restricted Twitter lingo, “78704” is an Austin, Texas, zip code. For that part of the metro, residents didn’t become more numerous so much as they became more educated. Brian was discussing housing affordability in Austin (hence the hash tag “#atxaffordability”). Real estate appreciates without population gains or more restrictive regulations on building.

If population growth isn’t driving demand for housing in 78704, then will greater supply drive down prices? That’s not the matter of debate, but it should be. I can subscribe to basic supply and demand theory while questioning the efficacy of increasing housing units as a solution to the affordability crisis. Define demand.

Most conversations about housing affordability define demand in terms of population change. No one defines housing demand in terms of income, save the scholars worried about gentrification. Regarding gentrification, higher incomes displace lower incomes. The population in a neighborhood could go down. Tenured residents are still forced out of their homes. Vacancy rates can increase.

I wouldn’t put much stock in population numbers. I learned my lesson from studying Rust Belt population decline, particularly the recent good fortune of the shrinking city of Pittsburgh. You’ll find a similar story in St. Louis:

“American families have changed dramatically over the past half century. The average household size in St. Louis in 1950 was 3.1 and in 2010, 2.2. With every other factor held constant, the decrease in city population would have been 248K or 29%. This means that with the same number of homes, the same number of apartments, and the same number of families as resided in the city in 1950, the decrease in average household size could account for 46% of the city’s population loss.”

I do notice that a shrinking household does not account for all of the population decline in St. Louis. Still, a drop of almost 250,000 people would constitute a substantial dent in demand. And yet, the same number of houses would be occupied. Population decreased by a quarter of a million residents and demand for housing remained constant. What a lousy way to measure demand.

Instead of population, I recommend using income to measure demand. The income variable has warts, too. It’s still better than using population change. A household earning $60,000/year eyes another household in a different neighborhood making $30,000/year. The wealthier household is currently paying 50 percent of its income on shelter to be near the city center. This household could pay a lot more than the poorer household for the same home a bit further from the city center and still have more disposable income. Demand goes up without any population change.

Just because I have redefined demand in terms of income doesn’t mean that increased housing supply can’t help balance the real estate market. The policy geography for increasing supply is different. Birth of a gentrifier:

“In the opposite scenario where housing and office development remains static, the resulting paucity of workers to meet labour demand leads to an increasingly tighter labour market, sparking a bidding war, which in turn leads to wages spiralling higher, which finally leads to still higher housing costs and eventually an out-migration of precisely the kinds of workers that are needed.”

I don’t expect the feedback loop described would price such highly skilled talent out of the regional labor market. But it could push workers into other parts of the city. Hello gentrification. Instead of building more in the destination neighborhood, the target would be the source (of the gentrifier) neighborhood. Note how greater supply is addressing the upward pressure on wages, not greater numbers of people piling into the same place. This is the Financial Times talking and the prescription for the problem is to liberalize land use and building regulations. The author believes in supply and demand theory while linking higher wages with higher housing prices. Build baby build.

I wish the solution were so simple. Let migration theory explain. Most people, when they move, move short distances. Long-distance relocation is rare. Why? Long-distance relocation is scary. You leave your social network behind. The new place is, well, new. It is filled with known unknowns and unknown unknowns. Thus, the new-to-town cluster in the same neighborhoods where they are less likely to encounter townies who hate them. The new-to-town make more money—much more—than the average household in the area. Gateway neighborhoods for outsiders tend to sport some of the most expensive real estate in the metro. Meanwhile, locals moving around the region (most migration) are seeking some sort of return on their intimacy with place, “Can I have it all at half the price?” Eventually, newcomers transform into tenured residents and join the hunt. And the erstwhile newcomers enjoy a greater return for their labor. They ruin everything. They ruined Austin, Texas.

Places such as Austin are importing higher labor costs which will eventually diffuse. Places such as San Francisco not only import higher labor costs, they also offer attractive investment opportunities for the wealthy living and making money in other countries. Effectively, San Francisco’s real estate market imports higher wages without offering such jobs locally. The price for shelter has long been disconnected from local population change. Increasingly, the price for shelter is disconnected from local wages. Supply-side solutions to the housing affordability problem have a woefully anachronistic definition of demand.

Austin, Texas: A Theory of Everything

There’s a term from physics I’ve always liked: theory of everything. It refers to the holy grail in physics of a unifying theoretical framework that can satisfactorily explain how everything in the universe works. The physicists you can name off the top of your head have all contributed pieces to the puzzle, but nobody has yet discovered the underlying structure that ties everything together convincingly. Many experts would say that no such unifying theory exists, but that doesn’t stop their pursuit of it. Historical consequence, after all, is a mighty large and tasty carrot.

Urban planners and economic geographers are on a similar quest. While the geographic scope–and thankfully the math–may be less ambitious, the search for that single unifying theory that can explain how cities and regions work is no less tempting. Nor is it less consequential, I would argue, at least for people concerned with the future of their communities. Whether it’s concentrated, inter-generational poverty on one end of the spectrum or rising inequality and gentrification on the other, urban and rural planners are analyzing data, building and testing models, and exploring “best practices” that can help make sense of what they see happening on the ground. Jane Jacobs. Richard Florida. Ed Glaeser. Enrico Moretti. Michael Porter. All rock-star thinkers and writers with massive popular appeal because they’ve offered important pieces of the puzzle: clusters, creative class, urban externalities, etc. A theory of everything, for politicians, planners, and pundits.

We’ve reached somewhat of a fever pitch here in Austin lately, even by our own navel-gazing standards. The confluence of housing costs, traffic, property taxes, gentrification, and 78 candidates running for mayor or city council in Austin’s new single-member districts–not to mention a $1.4 billion rail proposal seeking voter approval–has generated a level of awareness about city planning issues that I haven’t seen since moving here in 2002.

It’s exhausting, but important. And, for planners and civic-minded people in general, encouraging.

So, naturally, it’s my turn to take a shot at a theory of everything:

2014-10-16 Austin Theory of Everything Title Slide

Click on the image to download a PDF copy of the presentation. Thanks to the Austin Board of REALTORS for giving me an opportunity to pilot test this presentation at their 2014 Realty Round Up event.

The narrative goes something like this:

While Austin is indeed a special place–ask anybody–we’re not unique in the growth management challenges we’re facing. Fast-growing cities across the developed world have all experienced a version of what we’re experiencing. However, the reason it may “feel” different here is that Austin is experiencing these changes on an accelerated timetable. Rapidly appreciating property values and rents, especially in the urban core. Growing inequality in an environment of significant wealth creation (in the aggregate). Traffic gridlock. Most other cities on this development path experience this process over several decades. Marking the exact start line in Austin is open to debate, but we’re out for a speed record.

Over the next couple of weeks I’ll do a series of posts expanding on several of the points made in the presentation. Topics will include:

  • Why being The Human Capital is, in the immortal words of Homer Simpson, the cause of, and solution to, all of life’s problems
  • Austin’s perceived lack of “middle-wage” jobs–i.e. economic development is ruining the city because it’s all software developers
  • Why we should be organizing civic leadership trips to Raleigh, Charlotte, and Nashville. Not San Francisco.

Debating Austin’s Future

City council races in Austin are heating up, and perceptions of “old” Austin versus “new” Austin seem to be popular firing lines. For the non-Austinites among you, voters in November will be electing representatives for single-member districts for the first time, drawing nearly 80 candidates for ten districts and mayor. It’s a historic turning point in local governance, as well as another milestone for the timeline marking Austin’s evolution from college town to big city. It’s been more of a sprint than a march down that timeline lately–the Austin region is adding approximately 50,000 per year–and the pace of change has elicited many competing viewpoints about the best ways to manage Austin’s growth and development.

I’m a fan, generally, of “new” Austin. Admittedly, my historical perspective is limited–Austin has been home base since 2002–but I enjoy the opportunities and amenities that come along with a thriving economy. However, through luck and good fortune of timing, I’m also in a position to take advantage of opportunities in “new” Austin. We purchased our home in 2005 and don’t have to face the skyrocketing housing costs in Austin. I have an advanced degree. I’m self-employed and not competing with the thousands of well-educated people moving here and looking for jobs.

I don’t know most of the 78 candidates running for city council or mayor. Most of them appear to be thoughtful, well-intentioned people concerned with the future of Austin. So in the spirit of contributing to what I’m sure will be a rich debate between now and November about affordability, equity, and what life is like for most Austinites, here are some points to ponder:

  • Austin is adding an average of 16,000 people with a bachelor’s degree or better every year, most of them moving here from other places. In “boom” years with the strongest job growth–we’re on pace to add about 37,000 jobs in 2014–only 8,000 new jobs are created in occupations that typically require a bachelor’s or advanced degree. In “normal” years, or at least what’s normal for Austin, that figure is more like 4,000. Now, not all the well-educated people moving here are active job seekers in the labor force (Austin is one of the most popular destinations for relocating Boomers and retirees), and there is turnover in existing jobs that need to be filled. But if you are one of the many people in Austin with a bachelor’s degree or better and you are surprised at how difficult it can be to find a well-paying job, you’re not imagining it.
  • 70% of projected job growth this year in Austin will be in occupations that typically require no postsecondary education. For those jobs typically requiring just a high school degree, the average wage is approximately $40,000 (across all levels of experience, not entry-level positions which are usually much lower paying). Housing researchers say that affordability means paying no more than 30% of income on housing costs. So $40,000 per year works out to about $1,000 per month in terms of what workers with a high school diploma, on average, can afford for housing. For workers in jobs requiring less than a high school diploma, affordability means paying no more than about $560 per month for housing.
  • According to the latest rental data available on Zillow*, there are only six neighborhoods in Austin where the median rent is less than $1,000: Highland, St. Johns, Heritage Hills, Pleasant Valley, Parker Lane, and North University. Workers with no postsecondary education make up about 368,000 people in the labor force, and 70% of job growth is occurring in jobs that pay, on average, enough to afford a maximum of $1,000 per month for housing. Six neighborhoods is a pretty limited offering for a city with aspirations of dense, centrally-located, mixed-income neighborhoods.
  • 60% of Hispanics and 40% of African Americans in Austin age 25+ have no postsecondary education. Hispanic and African American workers make up about 310,000 people in the labor force. The average wage for African American workers is about $39,000 per year, and for Hispanic workers is about $38,000 per year. Affordable housing at those wage levels means paying no more than about $975 per month. That, according to Zillow*, reduces your options to four neighborhoods in Austin: Highland, St. Johns, Heritage Hills, and Pleasant Valley. White and Asian workers, by contrast, earn average wages that can support monthly housing costs in the range of $1,500 to $1,700.

If we’re going to debate affordability and equity in Austin, let’s at least start with an understanding of the scope of the issue, and not limit the conversation to the skyrocketing list prices of owner-occupied housing in central Austin. Homeownership is, of course, an important part of the debate about affordability in Austin, but we are a renter-dominated market with a significant portion of the workforce, largely Hispanic and African American, increasingly unable to afford housing in Austin. If diversity is a goal, then we need a better understanding and greater appreciation for the connections between workforce preparation, wages, and housing affordability. I’d throw public transportation in, as well, but that’s a topic for another day.

“New” Austin is great, as long as you can afford to enjoy it.

We’ll be discussing these topics at the next UT Opportunity Forum event on September 12.

*Source: Zillow, median rent price, June 2014. Data is the median of the rental price for homes listed for rent on Zillow. Not representative of the universe of rental stock because not all residential rental properties are listed on Zillow.

Stealth Dorms Invade Fort Worth

This story was written by Caty Hirst and appeared in the Star-Telegram on June 20, 2014.

Residents hope overlay will preserve TCU-area neighborhoods

FORT WORTH — Tim Latta’s once quiet, family-oriented Frisco Heights neighborhood of circa 1920s to 1950s homes is all but disappearing, being swallowed up one home at a time to make room for parking lots and housing developments geared toward Texas Christian University students.

Latta, who lives in a Mad Men-reminiscent, 1950’s home — complete with a series of floor-to-ceiling windows and low-pitched roofs — is watching the development creep onto her block, which was listed on the Most Endangered Places of 2014 list by Historic Fort Worth because of the buildup.

Even though the 2700 block of Sandage Avenue is zoned single-family, developers are taking advantage of a city ordinance that allows up to five unrelated people to live in a home, creating what some call “stealth dormitories.”

The result is often historic, single-story homes being knocked down to make way for multi-storied homes, 5-bedroom houses that look out-of-place in the older neighborhoods.

“The man next door to us built two structures, and we call them dormitories. They are five bedroom, five bath houses, with a small living room and kitchen. That is not really a single-family house — that is a dormitory,” Latta said.

Further down Latta’s block, two similar, five-bedroom homes have replaced a sprawling, ranch-style 1950s house.

“I can’t believe the city allowed that,” she said.

But the city is taking steps to curb this trend, as it considers implementing an overlay for the TCU-area neighborhoods to limit the number of unrelated adults who can live in a single-family home to three.

Coupled with it is a citywide effort to control parking at single-family homes by requiring an additional parking space when there are more than three bedrooms. Currently only two parking spaces are required regardless how many bedrooms there may be.

It is not a problem that is unique to Fort Worth or other towns with a major university as a neighbor. Austin, for example, recently limited the number of unrelated people living under one roof from six to four in the central city.

Mayor Pro Tem W.B. “Zim” Zimmerman, who represents part of the TCU-area, said the issue is the influx of students into TCU-area residential neighborhoods, which creates tensions with parking, noise complaints and partying.

“The other thing is try and maintain the integrity of our single-family areas . … There is a whole lot of single-family areas that are now being built specifically as a target for students, taking over the area,” Zimmerman said.

“We have got to try and do something — whether we can do it or not would be a different problem. We have to try and see if there is a solution,” Zimmerman said.

The proposed changes

The proposed overlay would encompass neighborhoods surrounding TCU, including Frisco Heights, University Place, Paschal, Bluebonnet Place, Bluebonnet Hills, Westcliff, Westcliff Village, Colonial Hills, Tanglewood, University West, University Place, Park Hill, Park Hill Place and Berkley Place.

The city will hold several public sessions, including at neighborhood association meetings, to flush out potential problems and hear any suggestions, said Dana Burghdoff, assistant director for the planning and development department.

For example, she said, the city is considering whether to allow neighborhood associations to opt in to the restriction or apply it throughout the district and whether to grandfather properties with more than three bedrooms and a history of leases to more than three unrelated persons.

Burghdoff said she has had some push-back from developers, but several TCU-area developers who have actually built the mini-dorms did not return requests for interviews by the Star-Telegram.

Dak Hatfield, a developer in the near-southside, said he would expect developers in the area to protest the change or request to be grandfathered in.

“They are going to want to make sure their investment is protected,” Hatfield said, though he added he understands why the neighborhoods are pushing for the change.

“You are seeing student housing continuing to creep into a lot of these areas that have been there for a long time and historically have had families live there,” he said.

There have been 111 new single-family construction permits issued in the proposed overlay area since July 2001, according to city data.

Property values in the area are also increasing.

Latta’s home, valued at $397,000 for 2014, according to the Tarrant Appraisal District, has seen a 172 percent increase in land value alone since 2009, going from $66,000 in 2009 to $180,000 in 2014. One of the new homes next door is valued at $457,100, including $180,000 for the lot.

Though none of the developers were contacted, residents in the area say students are paying around $1,000 per bedroom in the houses. The total cost to live on campus is about $5,500 per semester.

Concerns about enforcement

Zimmerman said he is leaning toward supporting the overlay, but said the public input sessions will be vital in learning how to implement the overlay.

With many city ordinances, Zimmerman said, he is concerned about enforcement of the restriction, which would probably be incumbent on neighbors to report if they see violations.

Bethanne Chimbel, a resident of Frisco Heights, said she is also concerned about how the city would enforce the overlay, saying it is already hard for them to enforce the 5-unrelated persons rule.

“I think it has potential, but how are they going to regulate it? Are they going to go door to door and ask for birth certificates?” she asked.

“I think it is an interesting idea, but I also wonder if it is too little too late for a lot of the areas that I have seen.”

Chimbel lives in an area of Frisco Heights that is currently zoned to allow duplexes, but she and several other area residents are pushing to get several city blocks in Park Hill Place and Frisco Heights rezoned to single-family to keep dense developments out.

“We moved in the area knowing we would be surrounded by students, that is not really the issue, but the size and the scope of the density has changed so drastically and so quickly,” she said. “We are kind of on the end that hasn’t changed yet, and we are hoping to maintain that.”

A canary in the mine

Paula Deane Traynham, president of the Frisco Heights Neighborhood Association, wants Frisco Heights to be a canary in the mine for the other neighborhoods surrounding TCU.

Traynham has owned her 1939 cottage-style home for 30 years, but said only 60 homeowners are left in an area that has become a “magnet for development,” she said. The city has issued 66 residential demolition permits in Frisco Heights alone since May 2004.

“The closer that this development comes toward my house and the more my peaceful porch is encroached on, the more I think about it [selling],” Traynham said. “But I love my house, I love this neighborhood. I would love to live the rest of my days here, but at the same time, it is not the neighborhood I moved into and it never will be again.”

To her left, right and across the street, Traynham’s home is now surrounded by duplexes, which are allowed to fit up to five people in each unit, and come with a host of parking woes, noise complaints and plenty of red solo cups found in the streets and yards.

Traynham did say some areas of Frisco Heights needed some tender love and care, with some of the older homes falling into disrepair and neglect. But the recent development the neighborhood got was not what they were expecting.

“Don’t let this happen to your neighborhood. Y’all have these cute, classic little neighborhoods,” Traynham said she tells nearby neighborhood associations. “If you want to preserve them, now is the time to do it. Don’t let it sneak up on you, because that’s what it did to us.”

Brent Spear, president of the Bluebonnet Hills Neighborhood Association, said the warnings from Frisco Heights are something they take seriously, especially as Bluebonnet Hills attracts more and more student renters.

“Collectively, what I would say is most people are concerned about something going up that doesn’t fit the character of the neighborhood, and so I think it is a concern that we have and we have seen what is happened to Frisco Heights,” Spear said.

He said the neighborhood association will consider all the options, including pursuing historic designations if it is what the residents want, to protect Bluebonnett Hills, a 1920s-style neighborhood with little bungalows, open front porches and an old-time feel.

Jerre Tracy, executive director of Historic Fort Worth, said all of the neighborhoods surrounding TCU were included in the 2014 Most Endangered Places list because of the rapid development, and all of them could be eligible for a historic overlay or designation.

Still, Tracy said the occupancy overlay is a “step in the right direction.”

“The neighborhoods are changing overnight, and a lot of people don’t realize there is anything they can do,” Tracy said. “It is going to continue on unless the neighborhoods choose options that restrict the ability for those changes to happen.”

“Stealth” dorms popping up in other cities

Austin made an attempt at stopping what they called “stealth dorms” by limiting the number of unrelated persons who can live in a home from six to four in the central city.

The Austin City Council approved the temporary, two-year ordinance in March because of complaints from residents near the University of Texas, who claimed dorm-style homes brought an influx of students to single-family neighborhoods and irreversibly damaged the integrity of the neighborhoods.

Homes that already house more than four people are grandfathered in under the ordinance, as long as they don’t build large additions or make major renovations.

Research presented to the Austin City Council from Civic Analytics, an Austin-based firm, found about 1,800 properties in Austin house five or more unrelated people out of 331,000 households citywide.

Brian Kelsey, principal at Civic Analytics, however, also expressed concern in the study about how reducing the number of unrelated people living in a home in central Austin would affect affordability.

“Much more needs to be understood about why single-family zoned high-occupancy properties are more likely to be found in lower-income areas with increasing rents to avoid unintended consequences of reducing the limit from six to four unrelated people,” he said.

Arlington, Lubbock and San Marcos only allow two unrelated people to live together; College Station, Dallas, Denton and Waco all allow four unrelated people to live together; Byran allows four except in single-family zoning, which is restricted to two people living together and El Paso allows five.

TCU hopes for 100 percent residency on campus

So, if the student’s can’t move into housing near the campus, where would they go?

TCU’s eventual goal is to have 100 percent of undergraduate students live on campus for all four years, but that goal won’t be reached for several years, according to Lisa Albert, spokeswoman for TCU.

The projection with current building plans is to have 64 percent of the undergraduate students living on campus by 2021. Currently, they have 51 percent of undergraduate students living on campus. Albert did say they “will continue to build residence halls until the demand ceases.”

“It is not uncommon for cities to place overlays on neighborhoods surrounding universities to assist in maintaining the characteristics and living environments of established neighborhoods,” she said in an emailed statement.

“TCU regularly communicates its on-campus residential goals with the City and neighborhood associations located near TCU’s campus to help the community understand the University’s on-campus housing development plans.”

Latta and others in the area are also worried about what will happen if and when TCU meets its goal of 100 percent on-campus occupancy for students. They worry the five-bedroom, dorm-style cottages won’t appeal to family homebuyers, so could be left vacant and deteriorate.

“The city may have allowed this under the five unrelated persons rule, but it absolutely flies in the face of the spirit of the law,” said Latta, as she looked up at the two-story brick house neighboring her single-story home and the three-story apartment complexes looming over her backyard.

The modern houses next door and the apartments easily overlook the privacy fence into Latta’s yard, providing an open view of the home and master bedroom.

“It is just massive. It closes us in,” she said.

Experts see signs pointing to strong Austin housing market for years to come

Shonda Novak, Austin American-StatesmanExperts see signs pointing to strong Austin housing market for years to come

April 19, 2014

If you’ve bought or sold a house — or even tried to buy a house — in the past 2 1/2 years in Central Texas, you know the local housing market roared back to life after the recession. Homes in many parts of the Austin area are selling fast, and there’s no shortage of would-be buyers battered by a bidding war.

All indications — job and population growth, housing starts, home sales, price appreciation, and a low supply of homes relative to high demand — “point to a very strong and robust housing market” with no signs of slowing in the near future, said Eldon Rude, a local housing market analyst who is principal of 360 Real Estate Analytics, an Austin-based market research and consulting firm.

“Austin, Texas, has probably the best economy on the planet,” said Mike Castleman Sr., who has been observing housing markets nationally for 40 years as a founder and former CEO of Houston-based Metrostudy, a housing market research and consulting firm that he and co-founder Mike Inselmann sold last year. “Look around. There just aren’t any economies any better.”

But as Castleman and other housing experts know, real estate is cyclical. So those who have ridden the merry-go-round over the decades say the current ride won’t last forever.

So how long can we expect this run last? Depending on which expert you ask, the answer could be another two to four years, or as many as eight years.

Castleman, who lives in Dripping Springs, said every market has its local set of variables that dictate how it behaves. External forces also come into play.

“On the local horizon, there do not seem to be any obvious pitfalls to the economy,” says Castleman, who with Metrostudy co-founder Mike Inselmann sold the firm last year. “So chances are if we are to encounter an interruption to this groundswell of prosperity over the next four or five years, it is most likely to be inflicted from the outside,” that is, originating outside of Austin, and Texas.

Castleman and others say the any number of triggers could precipitate a slowdown. It could come in the form of another financial collapse like in 2008. Or high inflation. Or soaring interest rates. Or what Castleman says is the next shoe to drop: the student-loan crisis, a $1 trillion debt bubble he says will ultimately pop.

Mark Sprague, another housing market analyst based in Austin, said economists can always tell when a market hit bottom and turned. “Unfortunately,”said Sprague, with Independence Title, “they can’t tell you when it’s going to turn.”

But Sprague, a predictably conservative forecaster — he says people tell him they listen to him because “‘if the baby’s ugly, you’ll tell the truth’” — surprised me when he recently said he thinks the Austin metro is 2 1/2 years into a postive run that will last more than 10 — that’s right, 10-plus — years.

“I just don’t see many hiccups, barring a catastrophic event,” that would cause the local housing market to lose its luster, Sprague said.

But Sprague himself pointed out in a recent newsletter that “most positive economic runs, particularly in Texas, last no longer than 6 years.” So where does his optimism come from?

Sprague backs up his forecast with a litany of pluses that Austin, and Texas as a whole, have going for them. Like California in 1950, Texas is a “land of opportunity” where families and corporations are flocking. Job creation. Low tax burden. Business-friendly climate. Housing affordability. And on and on.

“With wages staying stagnant, many consumers are looking to Texas because their paycheck stretches farther,” including their housing dollar, Sprague said.

The throngs moving to the Austin area are being drawn by job growth in a region that added an enviable 32,600 net new jobs in the 12 months through February, and continues to see “very low unemployment,” Rude said.

“The most reliable predictor of the real estate market is population growth, and the most reliable predictor of population growth is job growth, and we have full steam ahead for job growth,” said Steve Crossland, an Austin real estate broker.

Although the Austin area saw prices of existing homes rise 8.5 percent last year, which many locals might consider high, people moving from some other areas, including the West Coast and Northeast, “continue to look at Austin as very affordable,” Rude said.

Brian Kelsey, principal at Civic Analytics, an Austin-based economic research and consulting firm, said he thinks home prices will continue to increase provided that “job growth continues to outpace other regions and home prices are relatively cheaper compared to markets where we are drawing the most number of new residents from.” (He cautioned that “we should keep an eye on other high-performing job markets, such as Nashville, that offer many of the amenities that people report to love about Austin — at about half the cost in terms of housing.”)

Castleman said the local variables are so positive — Austin’s technology sector, the planned new medical school and teaching hospital, the stimulative effect of the oil and gas boom on the overall Texas economy, that “it’s very difficult to see anything locally that would all of a sudden just shut this thing down, or even gradually shut this down.”

Crossland concurs. Because the local housing market is being driven by “honest-to-God, true-blue supply and demand” — that is, loan-qualified buyers who need a place to live vs. speculators betting on some unsustainable bubble — “I think we have three to five years of running room ahead of us,” Crossland says.

“I just don’t see any of the leading indicators doing other than showing green lights,” Crossland said.

Occupancy Limits

The Austin City Council voted last month to lower occupancy limits, the maximum number of unrelated people who can share a home, from six people to four people. The new four-person limit is temporary (two years) and will be applied only to newly permitted single-family and duplex properties in greater central Austin, which is roughly bounded by Highway 183, MoPac, and William Cannon (i.e. McMansion Overlay), while the city works on updating the land development code. The ordinance change was largely a response to central neighborhoods unhappy about the proliferation of stealth dorms, which refer to high-occupancy, single-family zoned properties designed for housing, presumably, more than four unrelated people.

Austin is struggling to come to grips with declining affordability as population growth, increasing wealth, and demand for central-city living put upward pressure on home prices. Austin’s priciest neighborhoods are centrally located, and still a bargain for people of means relocating from places like San Francisco, Los Angeles, and New York–or from Dallas or Houston or other places in Texas, where the majority of transplants to Austin originate. Given no apparent signs of a slowdown yet, the proposed change in occupancy limits sparked a healthy debate about housing affordability–i.e. to what extent would lower occupancy limits aimed at stealth dorms result in the proverbial unintended consequences that could make Austin even less affordable, especially for students and low-income workers.

Council Member Bill Spelman lamented the lack of data that could be consulted on the relationship between occupancy limits and housing affordability during the public hearing. A few central neighborhoods in proximity to UT-Austin contributed inventories of perceived stealth dorms, but that work was limited to only a couple of zip codes, with no independent verification of accuracy. Moreover, no such work was done for other neighborhoods located within the McMansion Overlay that would be impacted by this change. Far be it from me to suggest that central neighborhoods ever drive citywide policy in Austin, Texas, but that was among the concerns from critics of the change. On the other hand, no serious person could drive around the most impacted neighborhoods, such as parts of Hyde Park and the North Loop area, and not recognize that some high-occupancy properties were creating problems that needed to be addressed.

The question, therefore, was how to do it–a targeted policy limited to central neighborhoods reporting the greatest impact, or something more far-reaching that, according to supporters of the change, would “protect” neighborhoods across Austin from ever having to deal with the problem of stealth dorms in the first place.

The Austin Board of REALTORS convened a small group of us to see what we could do in terms of bringing a more data-driven perspective to the debate. We got about four weeks to complete a “study” of the relationship between occupancy limits and housing affordability in Austin. Since four weeks is nowhere close to enough time to finish anything that could remotely qualify as a “study” of such a complex issue, we collected and analyzed whatever data we could before City Council was scheduled to vote on the new occupancy limits on March 20. We waited until Friday, March 14, for the last of the data to come in and then had approximately 72 hours to complete a report in time to be reviewed by City Council in preparation for the March 20 meeting. You can download a copy here:

Affordability Impacts of Proposed Changes to Occupancy Limits in Austin

The report fell short in several areas, for lack of sufficient time, no peer review, and no housing economist to guide the work, for that matter. But I hope the report can serve as a starting point for continuing the effort under CodeNEXT. And in the interest of teeing up that future work, here are a few points that we didn’t have time to fully articulate in the report. They all warrant much more public discussion than they received on March 20.

1. The stealth dorm apocalypse appears to be a ways off, even in the most severely impacted neighborhoods. We identified 1,796 possible single-family zoned high-occupancy properties with five or more unrelated occupants in Austin. These properties represent approximately 0.5% of all households in the city. The most severely impacted area is 78751 (Hyde Park/North Loop), where high-occupancy properties make up 1.6% of total housing units. In other words, a significant change, albeit on a temporary basis (for now), to Austin’s housing policy was just passed based largely on the stated preferences of a few central neighborhoods where high-occupancy properties make up less than one out of every fifty homes. One out of fifty. We’re not exactly entering Walking Dead territory here.

2. Many of the neighborhoods with the greatest number of high-occupancy properties don’t seem to be at the table for this conversation. We identified 100 or more possible single-family zoned high-occupancy properties in 78702, 78751, 78745, and 78723 (78748 is not far behind with 99, but outside the McMansion Overlay).

High-Occ Map Zoomed_Revised2

More time for a real study would have provided useful perspective on how high-occupancy properties are impacting communities in 78723, 78702, and 78745, where, presumably, UT students are not the primary drivers of demand for stealth dorms. At the very least, more time would have allowed for targeted outreach to invite new stakeholders to participate, now that we know where high-occupancy properties are most prevalent.

3. And what about those well-heeled UT students who can afford the reported $1,000 per bedroom rents charged in the stealth dorms taking over neighborhoods near campus? Well it turns out that, with the exception of 78705, very few stealth dorms are inhabited by UT students. According to student address records provided by UT for the study, nearly every high-occupancy property we identified in 78705 is occupied by UT students. In fact, our estimate in the report of 64 possible high-occupancy properties in 78705 appears to be low, after reviewing the student address file that arrived too late to make it into the report.

By contrast, only three high-occupancy properties in 78751 were found in the student addresses, which means that non-UT students occupy 98% of high-occupancy properties, or stealth dorms if you prefer, in the portions of Hyde Park, Northfield, and other neighborhoods in 78751. Further, no high-occupancy properties with five or more UT students living there could be found in the three other 100+ zip codes, 78702, 78745, and 78723.

Now, a major qualifier here is that approximately 50% of students don’t have a local address on file with UT, according to the data we received. In addition, future researchers should request student address records from St. Edward’s, Huston-Tillotson, and other colleges in Austin to complete this picture. However, our preliminary analysis indicates that, outside of 78705, the “stealth dorm issue” is more a question of housing availability for workers and other non-student residents than it is about student housing.

4. Finally, while the grandfathering clause was indeed a necessary provision–the new four-person limit will apply only to new construction–it does nothing to settle many unanswered questions that need to be addressed. We are no closer to understanding the root cause of why the market is responding with high-occupancy properties in the first place. Stealth dorm opponents argue that profit-driven developers are tearing down “affordable” homes that would otherwise be available to families with children. With most central neighborhoods now well north of $200 per sq ft and therefore well out of reach for most families, this argument seems a bit disingenuous when made by serious people. On the other side of the debate, the report doesn’t offer much ammunition for people advocating greater population density in the form of higher occupancy limits in central neighborhoods, either.

As the report indicates, all we can say with a reasonable degree of certainty is that high-occupancy properties appear to be more prevalent in lower-income areas of Austin experiencing rising average rental rates, and that relationship holds even when excluding neighborhoods with the greatest number of students.

And what of the new construction that will fall under the temporary, four-person limit during the next two years? In 2013, 2,573 new single-family homes and 101 new duplexes were permitted in Austin, according to data submitted to the Census Bureau. A large portion of those new housing units are likely to be in the McMansion Overlay and subject to the four-person occupancy limit–that’s more than 5,000 housing units that may not be available to students and low-income workers who need more than three roommates to afford rent, especially in central neighborhoods with convenient access to public transportation.

Seems like that would have generated more discussion, or at least six weeks for something more resembling a proper study, in a city that professes to be so concerned with declining affordability.

Keeping Austin Affordable

An open letter to Brigid Shea (and other aspiring city council members):

Dear Ms. Shea,

I applaud you for focusing your mayoral campaign on affordability. The Austin American-Statesman is right to push you and Mayor Leffingwell for specifics on how you would make Austin more affordable, but I’m hopeful that you are up to the task. I’ve lived in Austin since 2002, and I’ve heard nearly every city council candidate in my ten years here talk about affordability, but I haven’t seen too many serious proposals that cut through the talking points to the core of our affordability challenge. But given the jobless recovery we’ve experienced over the last few years, and the growing income inequality that’s finally gaining traction in the mainstream media, maybe this time will be different.

Ms. Shea, I’m sure you’ve been doing your homework as you prepare to take on Mayor Leffingwell. So none of what I’m about to lay out here is going to surprise you. But here’s the affordability challenge as I see it:

Let’s start with what people are calling the jobs/housing balance. Below is a map comparing home prices to wages in the Austin area. Specifically, it shows the “median multiple,” which in this case is the ratio of the median residential sales price by zip code for the first seven months of 2010 and the median wage for all jobs at businesses located in the same zip code. In other words, can workers afford to live near their jobs? I apologize for not updating the data, but things have been a little crazy since I created this map for a Leadership Austin event way back in October 2010.

Historically, the ratio of home prices to household income has been around three-to-one (e.g., $150K home value to $50K annual income). As the map indicates, there are quite a few areas around Austin where the ratio far exceeds 3:1 and workers would find it very difficult to afford a home anywhere close to their jobs. Most of central Austin is in the 4.8 to 8.9 range and some areas to the west of MoPac can even get up to 14.3. I doubt many people older than high school working in the Hill Country Galleria call Bee Cave home.

So you’ll need to update this map with current home sales and wage data, and I’d also recommend accounting for rental units somehow so you capture both sides of the housing market, but you get the general idea here. Affordability is as much of an economic development issue in terms of where jobs are located as it is a community development issue in terms of where affordable homes are located.

We also need to talk about Austin’s changing demographics.

Austin is getting wealthier, or at least some people are. In 2000, 13.6% of households in Austin had at least $100,000 in annual income. In 2010, it was up to 20.1%. The very top is growing even faster. In 2000, 2.8% of households had at least $200,000 in annual income. In 2010, it was up to 4.9%. I know 4.9% doesn’t sound like much, but it’s about 16,000 households–more than double what we had here in 2000. And while I’m sure many of these highest-income households still prefer Loop 360, a growing number are choosing downtown and other central neighborhoods, and I expect that will continue.

The Statesman is correct in pointing out that real median household income has lost ground over the last ten years, but that’s not the whole story. Total inflation-adjusted household income in Austin grew by approximately 12% between 2000 and 2010. That’s roughly $2.4 billion added to the local economy fueling demand for housing, shopping, and apparently new restaurants and bars. Austin, as a whole, is getting wealthier.

So, Ms. Shea, if you are truly serious about tackling affordability, and you are facing growing demand from very high-income households, I’m afraid the law of supply and demand puts you in a tough spot. Whether it’s through density changes or creative housing forms, any serious proposal to improve affordability in Austin must start with increasing supply. I assume many of your campaign supporters live in central Austin, and have likely been participating in the Imagine Austin process, so I’m sure you’re surrounded by people with ideas for how to make that happen. I look forward to hearing your proposals.

You’ll also need to tackle the jobs issue. While I’d be interested in your views on a living wage policy, my guess is that’s a political non-starter in Austin. So the only other way I know of to increase wages for the 80% of households not making $100,000 or more is to focus on education and workforce training. Here’s what you’re up against: nearly four out of five new high-wage jobs (pay > overall median wage) projected for 2010-2020 will require a postsecondary degree, from a one-year certificate to a Ph.D. Here’s the race/ethnicity breakdown for people age 25+ in Austin who have a postsecondary degree: Asian 71%, White 54%, Black 31%, and Hispanic 21%. Keeping Austin affordable for everybody will require closing these gaps. We need to rethink our education and workforce systems to make sure we are preparing people to succeed in today’s economy, and get serious about the investment required to do it. I’m sure you agree.

We also need to get serious about recognizing what it really costs to get by in Austin. According to the Center for Public Policy Priorities, assuming employer-sponsored health insurance, a family of two parents and one child requires approximately $40,000 in annual income to make ends meet. Now, you’d need to separate out the students from this group, but the Census Bureau estimates that we have about 137,000 households in Austin earning less than $40,000 per year. Put another way, that’s 42% of all households in Austin that can’t afford to sustain a family of two adults and only one child. This is what we’re up against when we’re talking about affordability in Austin.

Ms. Shea, I realize this is a lot, especially for my first letter to you. But I want you to have some data to work with as you roll out your proposals to keep Austin affordable. Hopefully you’ll be able to pin down other people when they offer the usual platitudes without ever taking the time to truly understand the affordability issue here.

Good luck with your campaign.