“Government Failure” in the Housing Market

Something is seriously out of whack here. The Richmond Redevelopment and Housing Authority (RRHA) has a vision — a commendable one, I might add — of demolishing the city’s six public housing projects to end concentrated pockets of poverty, crime, substance abuse and social dysfunction. But it turns out that the price of developing new mixed-income apartments runs around $250,000 per unit.

The RHHA has concluded that it would be significantly cheaper to renovate the existing public housing stock at the cost of roughly $50,000 to $60,000 per unit, reports the Richmond Free Press. New construction would take about 30 years to replace the 3,300 public housing units. Renovations would cut the time to 10 to 15 years. De-concentrating poverty, it appears, is no easy task.

But how can it cost $250,000 to build a new public housing apartment unit? At right is a townhouse on the market for $250,000. It has 2,349 square feet with the following features: two and a half bathrooms; a one-car garage, and a master suite with huge walk-in closet and en-suite bath with jetted tub, shower and double vanity. It is located within 10 minutes of downtown, Carytown, VCU, and James River trails and parks.

If townhouse living isn’t your style, then there are numerous single-family dwellings in suburban neighborhoods. For example, the house at left is also on the market for $250,000. It has 1,900 square feet, two-and-a-half baths, a fenced backyard, a two-car garage, and “a glamour bath with Whirlpool” tub.

How big are the RRHA’s new public housing units? What amenities do they have? Was RRHA proposing to place poor people into units normally affordable by the middle-class as part of its proposed “mixed-income” projects — in effect vaulting low-income public-housing residents into vastly improved housing conditions? Did it run up costs by ensnaring the projects in bureaucratic red tape? Or is there some other explanation?

The justification for “public” housing is that government can address “market failure” in the housing market by providing shelter for lower-income Americans at a lower cost than private industry can. Clearly, there is no market failure in Richmond’s middle-class housing market. The failure more likely is a regulatory one in which local governments have zoned affordable housing categories — boarding houses, Single Room Occupancy rooms with shared amenities, garage apartments, granny flats, trailers, and converted cargo containers — out of existence.

Still, it astonishes me that the best RRHA can do is $250,000 in new construction or $50,000 for renovated units. What’s the opposite of “market failure”? Government failure? That, it appears, is what we’re dealing with here. Pity the poor who find themselves wards of the state.

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14 responses to ““Government Failure” in the Housing Market

  1. This is laughable. And at the same time very sad. I wonder what this “government program” by the Richmond Redevelopment and Housing Authority (RRHA) has cost the taxpayers to date?

  2. What they are trying to do is NOT build standard “project” housing but instead housing in middle-income neighborhoods.

    I’d be curious to know more about the costs – in Richmond and other places to get a feel for how much it typically costs and in turn be able to compare.

    But if you think this is pricey, consider TANF, food stamps and Medicaid and more and you get a much better appreciation why every kid should get a basic education instead of “graduating” to an entitlement-provided life.

    Yeah… most of us resent it. Why should we be paying taxes for these folks, right and “giving” them “middle income” homes and health care….

    Hey – we can even more of this if we kick out all the disruptive ones in the schools, right?

  3. Perhaps a reader here who’s a developer can explain how, if given the opportunity to bid on it, he’d evaluate the chance to build the units of his choice on each Project’s piece of land, all existing structures demolished and the land cleared of all but trees. What would he build, given the neighborhood and need to attract a critical mass for gentrification to take off? Then, how long would that rebuild require and yielding what likely sales price/unit? Then, alternatively, would he even consider working with the existing structures to convert them and would that be cheaper/faster or not than new construction? I’ll bet candid answers to these questions would be revealing.

    • I agree and I wonder if developers/builders got tax credits for each structure it would incentivize.

      I’m all in favor of doing this the most cost-effective way that can be achieved but with respect to regular houses in regular neighborhoods with decent neighborhood schools.

      That’s what some of this is about; to get folks out of majority poverty neighborhoods and less than wonderful schools.

      We’re never going to save all those kids – but we can do better than we are now and should do so. We have one of the highest child poverty rates in the industrialized world that is largely due to generational poverty. The kids never escape..grow up .. and their kids never escape.

      I’M NOT in favor of blindly throwing money at it but to think that we can really deal with this problem without money is living in LA LA Land. It’s money spent effectively – not “no money”.

  4. Don’t worry the blue wave will decide upper middle class housing is a “right” along with college educations, food security, and single payer healthcare.
    A city who can’t build or maintain a school finds they can’t build or maintain a house. The whole reliance on government to provide fairness and false justice is truly hysterical. People who don’t work will potentially be literally given homes most teachers and police officers dream of being able to afford on their $40k a year jobs while they are paying back student loans they took in an effort to become productive members of society.
    I hope voters find that the price paid for the cure was worth ridding themselves of the disease.

    • No Blue wave though it’s hard to tell who won and who lost. We’re split down the middle and it’s going to be very little legislation that will find enough votes in both houses and signed by the POTUS – and perhaps this is what the founding fathers had in mind when the country is not united.

      Anyone who thought their side would win and then implement what they wanted – should now recognize that, that’s not going to happen.

      The question is – what will we do about it? Will we try to find common ground and compromise or will we just stay continue to incite each other?

      In terms of school and houses. If those schools are in low-income neighborhoods and poverty is concentrated in the neighborhood AND in the school – money alone will not fix it.

      Schools that are predominately low-income kids – are set for failure. We are more segregated now that we have ever been -but it’s come about through income disparities that get reflected in neighborhood schools.

      Wake County NC approaches this by a form of busing – for low-income kids by trying to balance the numbers of low-income kids – across the school districts instead of concentrating them in low-income neighborhood schools. Richmond is trying to put poor people in houses in various neighborhoods rather than concentrate them in projects in one neighborhood where the majority of kids in poverty attend the same school.

  5. Apparently, few government employees are able to negotiate good contracts. While the infill/teardown project will be more costly than building on virgin land, there is no profit margin required, so they should be able to provide a unit for far less than $250K. If it were “their” money, they would figure out how to get it done for less. This same problem bedevils higher ed, as well.

    • Real estate development is not for Dummies!

      From conception to breakeven it is a race against death.

      At conception the developer slits both wrists and starts bleeding money all the while he’s running toward an unknown point somewhere in the distance – first the breakeven point where his income from what he built that did not exist at the start, begins to earn for him more money than its cost him to build, and then he must race on, still bleeding money, as he works harder against the debt clock to spin off yet more money that he critically needs to hold, carry, and amortize the debt he incurred to build what did not exist before. But still, the race is not over, he must generate even more money to make a profit, to justify his time, effort and risk, and thus gain a fair reward.

      Doing this latter part of this race, he must fill his new buildings with tenants willing and able to pay enough money long enough to accomplish all these distant objectives. But still that is only the half of it. Between the conception point, the breakeven point, the carry p0int, and fair profit point, most everything can, and often tries, to go wrong, and does go wrong. You name it, and it can go wrong – suffocating the project in its crib, ballooning up costs of sorts, from zoning to design to construction, to subcontractors to marketing, to market, to lease up, to tenant failures, to market failures, to financing failures, yes the developer and his dreams are often screwed 4 ways to Sunday, from all sides, for all kinds of reasons, known and unknown, and by all kinds of people.

      It’s one of the hardest, most risky jobs in the world, each job different from all others, littered with known and unknown risks, objective and subjective, sequential and cumulative, that can unravel even the best of plans, ranging from rock or pipe underground, or a war in a far off place, or a mortgage debacle on Wall Street, who can ever know, anticipate or understand, much less overcome, only a few for sure, with luck sometimes.

      In any case, the best developers must have acute vision, meticulous planning, exquisite execution, with unrelenting attention to details involving multitudes of disciplines brought into harness, aimed in just the right direction at just the right time, and ride their execution ruthlessly toward the a line of often moving finish points – through conception, vision, planning, design, zoning, financing, permitting, building, marketing, leasing – the sequencing, balancing and integrating of all these disciplines, and all those people involved successfully for months and often years into the future, only this separates the death of the developer from the developer’s success.

      As a result, what ends up costing a dope $250,000 a unit of slock built within a project that drags the community down for generations, costs a competent developer $90,000 for an exquisite unit within a project that perfectly meets the market at just the right time and angle, so that it spinning off wealth and health and other advantages into its community and its region, and their people, far into its future.

      Real estate development is not for Dummies!

      • I completely agree with this summary of the real estate development biz, it is perhaps one of the most complicated processes. Building subsidized housing is like building dorms. No need to rezone, to worry about market appeal of the build, nor to find a buyer. Takes out most of the most challenging components.

        • Which of course is one reason why far too often the result is so miserable cost wise and result wise for public low income housing, just another inept and corrupt government boondoggle.

          How do we change that? What are examples of changing those results? How did they succeed? And why? What about programs like Habitat for Humanity? Have organization such as that broken the code, or have they been captured too by the system? Lets think out of the box here for a change.

  6. Habitat operates so much from donations of land/materials/labor that they remove the burden of cost.

    I think that the only way to fix the problem of government contracting is to incentivize public sector staff. They need some skin in the game. How to do this without opening big can of corruption is the big question.

    I was in 4 of the 5 richest counties in the US last week, reminded of the abundance bestowed on those who provide to the federal government. The wealth around the Beltway is staggering, and a sign of the inefficiencies writ large .

  7. Lift –

    It looks to me like Habitat for Humanity could build those 3,300 low income homes for poor folks in Richmond Virginia lickedy-split if the The Richmond Redevelopment and Housing Authority (RRHA) would just get the hell out of the way.

    And that, in so doing, Habitat for Humanity would help these low income people build a good life as well as a good house to shelter them and their families.

    In fact. Habitat for Humanities is already working there in Richmond. Why not give them the whole job and get it done right and fast, for a fraction of the price, with a far better result?

    For example, see:

    https://reliefweb.int/sites/reliefweb.int/files/resources/annual-report-FY2017-web.pdf

  8. Not sure if this is true across the nation, but in South Hampton Roads, Habitat relies on developers/builders to undertake the building of the community; the developers then lean on their suppliers to donate materials and labor. Habitat doesn’t do much in terms of managing the projects other than teeing up the lots and the timeline. A few key reps from the builders are appointed, and that works. All is donated. I’m not sure if there are lessons in efficiencies to be shared with government building, but perhaps?

  9. Lift, what got my blood up was the suggestion that the cost of low income housing in urban Richmond could cost $250,000 per unit. This I what I deemed “laughable.” It”s still laughable, but in a quite different way. Likely I underestimated the cost, risks, and complications involved in the “pricing and building of new mixed-income apartments.” I have no experience or knowledge in this sort new development. But, without looking into the matter, I suspect its inherently far more risky and potentially costly than building an all low income apartment project, on a project, or per unit basis, or on a small project single use low income basis.

    Why?

    In my above comment titled “Real estate development is not for Dummies! From conception to breakeven it is a race against death,” I spoke about the risk of building commercial real estate rental properties on speculation. Here a developer builds project on the expectation “that they will come.” In the 1980s boom times, large office building were built on complete spec, with no tenants in hand at time of construction. Disasters ensued. Other projects like condo high rises in the 1970s were also build on thin security, that of contingent purchase contracts. Disasters ensued. Many contract buyers were investors, speculators who vanished when the market changed. “Pre-leased” apartment projects run similar risks against success for a variety of reasons. These risks must be built into the costs of the project, as risk of loss can be very high. Remember the race against death always applies the developer, and lender, and a city;s worse nightmare is a real project that fails, especially one that fails totally, or nearly so.

    I suspect that developing new mixed-income apartments carries substantially more risk than pure higher income apartments. For example, how many middle income apartments must you build to absorb the risk inherent in incorporating 3,300 low income apartments into the mix. Is the number 3-1, 5 to 1, 10 to 1? If I were to guess, I’d say, without knowing, perhaps, five low income apartments to 95 middle income apartments. Pure speculation. But whatever the standard is, and I suspect, it varies, the lower the ratio, the higher the financial risk on the balance of the project. So the ratios to risk caculations would complicate Richmond’s low income apartment replacement scheme enormously. And do so in all kinds of ways.

    If I am right about this speculation, then the job of incorporating 3,300 low income apartment units into middle or high income new apartment projects throughout Richmond could easily turn the efforts into a long running financial nightmare, one that is wisely avoided by simply rehabbing their existing stock on existing tracts devoted to that current purpose, and or mixing that in with piecemeal building or renovation of housing stock. So that their decision is a wise one for all concerned. And my dismissal and implied criticism of their decision was ill founded.

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