In several prior posts I have noted that it is virtually unanimous here in Manhattan that more so-called "affordable housing" on our island is a good idea. See, for example, here and here. You literally need to have no understanding of numbers whatsoever to possibly think this makes sense. But hey, this is Manhattan!
But just in the last several days, I would like to welcome a few people to the ranks of the tiny minority who are at least raising questions: Greg David at Crain's New York Business, in an article yesterday titled "Not-so affordable housing"; Josh Barro at the New York Times Upshot blog on Saturday (also appeared in the print edition in the Business Section on Sunday) titled "Affordable Housing That's Very Costly"; and a Crain's article from yesterday titled "City calls $500K-per-unit Harlem housing 'affordable'".
Barro highlights a new development called the Abington House at 500 West 30th Street, near the trendy High Line park in West Chelsea. This is a large building with about 400 apartments, of which 20%, or 78, have been designated as "affordable." Using 2 bedroom apartments as his benchmark, Barro notes that the market-rate units range in price from $5850 to $8695 per month. That's over $100,000 per year at the top end! But the "affordable" 2-bedroom units (of which there are 17) have rents of only $687 to $873 per month -- about a 90% discount. These apartments go to people chosen by a lottery who supposedly have annual incomes in the range of $25,612 to $42,950.
From the point of view of the City budget, this is a freebie -- nothing on the balance sheet, nothing on the income statement. We "helped" 78 families and it didn't cost the taxpayers a dime! But Barro correctly notes that this is an illusion. The subsidy to each lucky family averages about $90,000 per year. And these families aren't even poor! Also, remember that nobody who gets one of these apartments ever moves out. OK, that's a little bit of an exaggeration, but not much. The New York City Housing Authority actually publishes figures for annual turnover in its steeply subsidized units, and it's around 3%. That's equivalent to saying that virtually no one ever leaves except in a coffin. If you figure that each lucky family is going to claim the $90,000 annual subsidy for an average of about 30 years, you can see that this is really a gift of close to $2 million per family on a present value basis. Wow!
Tuesday's Crain's article by Joe Anuta highlights a new all-"affordable" development in Harlem at 404 West 155th Street. There are 124 units, with an average cost (Anuta cites data from the City's Department of Housing Preservation and Development) of over $500,000 per unit. Compared to the Abington, that's dirt cheap! Anuta gives the rent for a three-bedroom as $1588 per month.
Here's a picture of the development -- Could it be more hideous?
This makes the old time "projects" that New York is famous for look positively pleasant. If you didn't know what it was, you would probably guess it's a prison. And yet that $500,000 cost per unit is about two and a half times the approximately $200,000 median price of a single family home in this country. And again, the recipients of this largesse are not going to be poor, because the actual poor could not afford even these deeply subsidized rents. Instead, the income range for this project is up to $42,950 for a family of four, up to $79,700 for a family of six.
Greg David, the editor of Crain's, correctly points out that the only way to look at this is from the view of opportunity cost.
First, if the city asked for a cash payment from the developer, it could assist far more people in less expensive neighborhoods. Second, the unsubsidized rents are higher than they would be if no subsidy were required. Admittedly, to understand this you must accept that rents are soaring in the city precisely because about 1 million units are rent regulated. I doubt the mayor would agree, but it is Econ 101.
David doesn't work through the numbers, so let's do it for him. You have forced a developer (as a condition of permission to build) to give each lucky family a gift of present value of approximately $2 million of subsidized housing in Manhattan. But only 78 families get the gift. If you got the $2 million per family in cash from the developer, you could easily provide the same housing in a less-desirable neighborhood in an outer borough for three or four times as many families. Or how about thinking outside the box? You could provide comparable housing for easily 20 times as many families in Detroit.
And then there's thinking really outside the box. How about the developer gets to keep the extra $160 million or so as profit? If he behaves like all other developers, he'll immediately want to use that profit to build several more new buildings; and if those succeed comparably, he'll go back and build still more. And before you know it the increase in supply will drive the price of the new apartments down to the cost of production, and even put pressure on the construction industry and land sellers to reduce costs. This is the process that works so well in places like Houston and Las Vegas, but hasn't been allowed to operate in New York since before World War II. This is so long ago that it's beyond human memory. And lord knows that we can't look to unsophisticated provinces like Houston for any guidance!
Unfortunately, there are lots of opportunities for graft in the "affordable housing" racket. Developers get tax breaks to induce them to build, let alone in many instances sites are not put up for auction but rather given to "designated" developers who make promises that politicians like. And the "affordable housing" developers are a great source of political contributions. So the only way to return to sanity is for the public to catch on. Well, now we at least have a toe in the door.