Thursday, January 17, 2008

Special Report: Why Are We Talking About Rent Control in MoCo?

Last month, the Gazette reported that County Executive Ike Leggett told a meeting of 50 tenants in Silver Spring that he would sign a rent control bill if the County Council passed it. This no doubt pleased fellow attendee and County Council Member Marc Elrich, who was one of the prime supporters of rent control in Takoma Park when he served on its City Council. But other county council members may not be so happy with this hot-potato Christmas present from their executive.

So why are we talking about rent control?

Rent control is one approach to the issue of affordable housing, long one of the most intractable problems in Montgomery County (and the entire Washington region). No one from any side of the debate believes that Montgomery County has enough affordable housing. There is plenty of evidence for that view, including:

1. The Census Bureau reports that 46% of the county’s rental units required rents of 30% or more of the occupants’ income in 2006.

2. In that same report, the Census Bureau finds that 36% of the county’s owner-occupied units with a mortgage required payments of 30% or more of the occupants’ income.

3. Impact Silver Spring found that 47% of renters in Silver Spring were paying rents of 30% or more of their income in 2005. Silver Spring has long been thought to be one of the more affordable areas in Montgomery County.

4. The Montgomery County Planning Department reports that the median price of a new detached single-family home reached $1.1 million in the first quarter of 2007. That means half the new homes were sold above that price.

While the county has acknowledged affordable housing problems since at least the 1970’s, its recent difficulties occur in the context of two market realities: rising prices and slow population growth.

Rising Prices
The Montgomery County Planning Department reported that between 2002 and 2007’s first quarter, prices for new single family homes rose by 138%. Huge price hikes also occurred for new townhouses (91%), existing townhouses (105%) and existing single family homes (69%). These hikes may be tapering off, but no one believes that all the price gains of recent years will disappear.

Slow Growth
Since 1990, the county’s population has grown by a meager annual average 11,873 people, or 1.4% per year. In 2006, the county added only 5,000 people – its slowest population growth since 1983. These numbers mockingly lash the back of every wild-eyed MoCo activist who has ever used the term “hyper-growth.”

In fact, rising prices and slow growth may be related. Montgomery County has long been praised for its excellent schools, attractive parks, nice downtowns and quality government services. It is one of the most desirable places to live in the nation. So why does its population grow so slowly? The county simply does not have enough housing to accommodate everyone who wants to move in. Picture a giant bucket pouring endless numbers of people into a shiny, but small bottle. Not everyone will get in. Increasingly, it seems that those who do get in fall into two groups: those who are wealthy enough to afford high-price housing on their own, and those who are willing to tolerate overcrowded, substandard conditions. (The social tensions between these two groups, who sometimes live on the same block, are rising.)

And so when limited supply meets insatiable demand, home prices and rents rise. This is the experience of Montgomery County, most jurisdictions in the Washington area, and many parts of the country.

The county’s primary tool for encouraging the construction of affordable housing is its Moderately Priced Dwelling Unit (MPDU) program. Created in 1973, the MPDU program is based on a simple trade: developers are ordered to construct below-market-rate units in return for permission to increase housing density. Currently, the law applies to developments of 20 or more units. It mandates that 12.5-15% of the new units be affordable for families earning up to 70% of the area’s median income. In return, the developer may build up to 22% more units than called for in a parcel’s zoning. A new workforce housing program based on similar principles was approved in 2006 but has not yet begun operation.

There are three problems with the MPDU program. First, developers are allowed to “buy out” from the MPDU requirements by paying into the county’s Housing Initiative Fund. Second, the program depends on new construction. When the economy slows down and residential development declines, so does MPDU construction. Finally, the program has actually created very little affordable housing. Since the first MPDU’s were constructed in 1976, only 8,527 owner-occupied units and 3,520 rented units have been built. The county’s total stock of housing units in 2006 consisted of 241,108 owner-occupied units and 100,330 rented units. So after 30 years of the MPDU program, only 3.5% of the county’s owner-occupied and rented units are MPDU’s – a depressingly low total.

In a recent Gazette column, four County Council members claimed that 31,616 housing units were currently approved for development with a projected buildout of 6 years. But how many of those units are MPDU’s? If we were charitable and assumed that 10% were to be MPDU’s and that all of them would be built, the MPDU percentage of the county’s housing stock would rise to a grand total of 4.1%. Even if every single one of these units was an MPDU, the MPDU percentage would only rise to 11.7%. Of course, this would never happen, but it would be a nice start.

There are other tools the county has to affect residential development, including master plans, Planning Board and planning staff reviews, rezoning decisions on individual parcels and zoning text amendments. But the provision of housing is only one factor affecting these decisions. Other factors including resident sentiment, environmental considerations, traffic tests, school capacity and compatibility with surrounding neighborhoods are also weighed. Inevitably, the number of units ultimately approved is less than would be built in a pure free market. And while the county offers rental and homeowner assistance through its Housing Opportunities Commission, these programs have not solved the affordable housing problem.

Deep in the long-lost regions of my mind that remember my college microeconomics coursework, a neoclassical voice cries out, “The government restricts supply, then micromanages construction and now is talking about fixing prices. Of course the housing market is broken!” But that view is too simple. Residential construction creates significant external costs that are not adequately priced in private buyer-seller transactions, such as pollution, school crowding and traffic. And these costs are not fully recovered by the county’s impact tax system. Some development limits are necessary to protect the county’s Agricultural Reserve, preserve the character of existing neighborhoods and prevent the county from resembling overdeveloped Rings of Hell like Phoenix and Las Vegas. But the cost of pursuing these worthwhile objectives may be to limit the provision of affordable housing, both owner-occupied and rental.

The two paradigms of development politics in this county do not have the answers for this problem. The affordable housing issue nicely demonstrates the critical flaws of each side of the ever-lasting development debate. Anti-growth people will not admit that limits on development tend to put upwards pressure on prices and rents over the long term. Pro-growth people will not admit that a true market solution to housing – allowing supply to meet demand – could necessitate massive new residential construction. No one knows the number of new units required to meet the true demand for Montgomery County housing – 50,000 or 100,000 or even more? – but that number is likely to be much greater than a strained county capital budget and a traffic-choked citizenry can accept.

And so we have market failure for affordable housing. And that’s why we are talking about rent control.

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