Housing: The Real Class Divide in America Today

Why don’t developers build housing for poor people? How come they focus only on middle-class housing and McMansions? Is this a failure of the free market? Or is it another case of local governments using zoning laws to create distortions in the marketplace?

I’ve argued the latter: Local governments don’t let developers build housing for poor people! (Increasingly, local governments are even making it difficult to build housing for working-class and middle-class people.) That’s because homeowners don’t want poor people living anywhere near them. The latest case in point comes from Lynchburg. As reported by the News & Advance:

Lynchburg officials took the first steps Wednesday toward closing a zoning “loophole” that allows a controversial low-income development to come in whether the city likes it or not….

Wednesday’s action was triggered by Pedcor Investments, a company hoping to build low-income apartments off Timberlake Road near Richland Hills. News of the development has angered the subdivision’s residents and prompted calls for legal reform.

The wealth of most Americans is tied up in the value of their houses. Let poor people move in nearby, and the next thing you know, the rate of petty crime begins to rise, property values start to fall, people start moving out, and a vicious cycle begins. It’s hard to blame homeowners from wanting to protect the value of their property. But that can’t come at the expense of ghettoizing the poor or, worse, providing them nowhere to live at all.

This is the tip of the iceberg, a particularly egregious case, of how zoning codes are used to protect the interest of existing homeowners. By creating artificial scarcities of housing except at the highest levels, zoning codes are responsible for inflating the cost of housing across much of Virginia and the United States.

You want to know the real class divide in America? It’s between the class of people whose wealth has increased by hundreds of thousands of dollars while they’ve ridden the real estate boom and those who either cannot afford to buy homes at all, or those who are so strapped financially by paying their mortgages that they are “house poor.”

If there’s a market for housing, at any level, there will be an entrepreneur who seeks to meet the demand. It’s the abusive exercise of local government power that stops them.

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19 responses to “Housing: The Real Class Divide in America Today”

  1. Anonymous Avatar

    This seems to put pressure on neighborhoods that are already home to a disproportionate amount of low-income housing. Urban neighborhoods that are moving towards mixed income development have to deal with the fact that potentially economically displaced residents have little or no options, which perpetuates the existing ghettoization of the urban poor.


  2. nova_middle_man Avatar

    3 subpoints

    1. More Background Its particularly agregious in the Nova area because most people who bought say in 1999-2002 could not even come close to buying there own dwelling today. True, some people made investment decisions but I would argue the majority of people purchase housing based on life-events graduation, marriage, kid, change-in-work location and not on timing the market. This proportion is even higher for first-time and younger homebuyers who are usually at the lower end of the payscale.

    2. As a correction, local governments are raising the income limits to qualify for housing (previous blog entry) and exapanding the amount of affordable housing project units. So, instead of letting the market solve the problem the prices continue to increase putting even more people out of reach. Basically the demand for lower housing is subsidized by the government which eliminates the need to supply lower priced housing which increases the amount of people who cant afford market rates.

    3. The solution to this is having denser development. Condos are cheaper than townhouses which are cheaper than single family. But, the zoning laws are anti-density.

    Unfortunatly its not that simple, In NoVA land the other problem is the land values, so where condos/townhouses are being built the prices have to be jacked up.

    Close on some goodnews.
    There is actually an oversupply of higherend condos and more are being slated to be built so maybe some of these new developments will adjust to target mid-level or low-end condos (of course there is still the land issue). With interest rates climbing the investors are leaving the market so the lowerpriced starter places are actually being looked at and bought by people they were designed for.

    Another long-term option is the need for higher wages or investing in education but that brings all sorts of additional issues.

  3. tobias jodter Avatar
    tobias jodter

    Part of the solution is to reduce legal and illegal immigration. If there weren’t so many people you wouldn’t need to increase density so much.

  4. Anonymous Avatar

    Hold on to your hats because the boom is over.

    The combined numbers for July 2006 for Fairfax County, Fairfax City, Arlington County, Alexandria City, & Falls Church City, VA are as follows:

    Total Sold Dollar Volume sold is down almost 42% from last year.

    Total units sold is down almost 40% from last year.

    Average days on market is up 262% from last year.

    The numbers for Loudon County are almost the same, with average days on market up 280% over last year.

    I single out NOVA because it’s the economic hub for the state. It’s also ground zero for many of the things you mention, i.e., zoning codes, homeowners rights, etc.

    It will be interesting to see what folks think of local governments when the value of theor house goes down, which is what’s happening in many places.

  5. Local Community Development Corporations can make a difference, especially when have strong neighborhood support. I believe public investment in these groups can make a difference.


  6. Ray Hyde Avatar

    We haven’t heard the end of this yet. Here are a few paragraphs from a NYT article:

    “But a new front has opened in the battle against sprawl: cities. From Austin, Tex., to Palo Alto, Calif., from Washington, D.C., to Denver, clashes are unfolding between residents of older, low-density neighborhoods and alliances of planners, politicians and real estate companies that see those neighborhoods as prime locations for higher-density mixed-use projects.

    The debate centers around what, exactly, is the best way to grow. Supporters of such development — known as “infill” because it involves redeveloping existing neighborhoods — say higher-density land use in cities is one key to easing suburban sprawl, since it promotes more efficient use of land, energy and transportation.

    Opponents call it “vertical sprawl” — and argue that it brings many of the same problems to communities as traditional sprawl.”

    In Portland thate is now a backlash developing against auxiliary dwelling units or Mother in law apartments for which the council recently relaxed restrictions.

    The opponents are calling it, get this, “in-city sprawl” and claim it will increase the reliance on automobiles.

    Go figure.

    If there was ever an unholy alliance, it wuld be an alliance of planners, politicians and real estate companies. Kelo anyone?

    Bacon is right on this. It is the abusive exercise of local government power that stops it. I’d like to build a modest house for my Mom to spend her last years in. Later I could use it for my part time farm help, and eventually it might become an inexpensive rental. I have the land and the money, but I can’t get the permission.

  7. Richard Layman Avatar
    Richard Layman

    Sure, some of it’s zoning, but some of it is zoning codes more generally, which militate against a variety of housing types being mixed in. It’s not regulations per se though, it’s limiting the size of lots, etc.

    The biggest thing though is the market. You make more money selling houses (and condos) to people with money than you do to people with less money. Land costs what it does, so do materials and labor. Hence, given the opportunity costs, where would you direct your resources? Probably to the same types of developments as NVRyan, Toll Brothers, K. Hovnanian, etc.

  8. Tiebout or not Tiebout that is the question Avatar
    Tiebout or not Tiebout that is the question

    No one in this thread wants to pick on our antiquted system of local government finance? The state essentially forces local governemnts to be market actors competing with their neighbors in a paralell development market with incentives to stick it to developers of low-mod income housing.

  9. James Atticus Bowden Avatar
    James Atticus Bowden

    Then,there is always the outlier. For years Newport News built apartments that made it the welfare, rent-assistance, magnet of Tidewater and beyond. Some land owners and builders made money. Didn’t help the community.

  10. Jim Bacon Avatar
    Jim Bacon

    Tiebout, I’m not familiar with the phenomenon you’re describing. Could you elaborate?

    JAB: In a rare consensus on social policy, liberals and conservatives largely agree that government-run housing projects like Newport News’ are a disaster. I suspect that privately owned and operated housing for the poor functions differently. Private landlords will act much aggressively to evict tenants that are destroying property, creating mayhem and fail to pay their rents. They want to protect their investment.

  11. Anonymous Avatar

    The title of Tiebout’s most famous article, “A Pure Theory of Local Expenditures,” is a direct play on Paul Samuelson’s famous 1954 article, “The Pure Theory of Public Expenditures”. Samuelson and other economists had analyzed the “free rider problem” that governments face when they provide goods and services. If no one can be excluded from consuming these public goods, individuals do not have an incentive to reveal their preferences for them. Everyone has an incentive to understate their true preferences to reduce their own tax burden, while still hoping to be able to enjoy the public good supplied by others. Markets therefore fail to provide public goods efficiently, and some form of government intervention is needed.

    Tiebout’s key insight was that this problem is different when local governments provide goods to citizens who can move among distinct communities. If citizens are faced with an array of communities that offer different types or levels of public goods and services, then each citizen will choose the community that best satisfies his or her own particular demands. Individuals effectively reveal their preferences by “voting with their feet.” Citizens with high demands for public goods will concentrate themselves in communities with high levels of public services and high taxes, while those with low demands will choose other communities with low levels of public services and low taxes. Competition among jurisdictions results in homogeneous communities, with residents that all value public services similarly. In equilibrium, no individual can be made better off by moving, and the market is efficient. It does not require a political solution to provide the optimal level of public goods.

    In addition to perfect residential mobility, Tiebout’s model assumes that there are no spillovers of benefits across communities, and that costs increase as additional people receive services. These conditions do not make local governments efficient providers of pure public goods like national defense. However, they do imply that local governments can efficiently provide what are essentially private goods like education and garbage collecting. Tiebout noted that at the time about half of all government services fell into the domain of local governments and were then subject to this type of analysis. In contrast to the prevailing assumption that government would often provide inefficient levels of public goods, Tiebout showed that these decentralized systems act just as regular markets.


  12. James Atticus Bowden Avatar
    James Atticus Bowden

    Ray: You can’t build another house on your own property? It’s zoned rural and you can’t add a home?

    The restriction on my lot would be the closeness to neighbors and the amount of the lot covered with impermeable surface (somehow that makes a difference to the Bay).

  13. Ray Hyde Avatar

    Theoretically, I can.

    Practically, I cannot.

    I can build if I’m willing to give up a fifty acre lot for it. That won’t make much difference if I keep the house for myself, but if it ever does get sold, then the house has to be either a large one that I can’t afford, or else a throw-away. Such a plan effectively eliminates any future options.

    The farm once had three building rights which were given out when the property was downzoned and the other two hundred previously existing building rights were taken away. Two were used to cover family emergencies strokes and nursing homes for my wife’s parents. Interesting thing is, that land was bought by speculators years ago and has never been used: I’m still farming it even though I don’t own it.

    The third was taken away when the administrative rights previously given were reduced from three to one. The reason given was that too many were “taking advantage” of the law.

    Lesson learned: strike while the iron is hot, don’t trust the government to keep their word, try to be conservationist and get punished…..

    There is one other alternative. I can file a subdivision plan. That requires environmental impact study, traffic study, drainage plan, soil samples every 400 ft, multiple public hearings, roadways to state standards, etc., etc. etc. The costs are such that it can only be economically done if I elect to subdivide the entire farm in order to spread out the costs.

    The likliehood of that being permitted are near zero. I’m not zoned rural, I’m zoned agricultural, therefore I’m also prohibited from using the land for commercial activities that require space but not development.

    Even though I am zoned agricultural, if I do not prove agricultural activity every year, then I will be taxed at the full residential rate. How many other citizens do you know who are effectively required to pursue a money losing occupation in lieu of higher taxes? As it is, the county claims I am paying taxes at three times the amount I cost in services. I’d say it is more like six.

    The county tells me that evey year I work for them as a unpaid farmer I save the county $78,000 in what would otherwise be increased costs to them. I tell them that since they are effectively renting the savings from me, they should pay me $3900 a year as interest on the savings. Such a payment would just about offset my annual farm losses.

    That is being generous. The $78,000 in savings to them comes at a cost to me of (conservatively) $3.4 million. The interest cost of forgoing that every year is $170,000.

    In order to save the county taxpayers $78,000 per year, they are costing one county taxpayer (me) $170,000 per year. It seems to me there is something wrong with that math, inspite of my personal involvement.

    If I convert the farm into something that provides me with $170,000 per year, that would be more than ten times as much as I make by farming it. It is more than five times what I might make if I gave up my outside job and farm it full time.

    Fundamentally, I am a serf, working for the county, and with no hope of ever operating freely. For this, I get to pay triple taxes. I can, of course, just sell it on the “open market”, as is. Someone out there, who has so much money they can afford to do nothing, will pay me a fraction of what the land is actually worth, because of the artificial restrictions placed upon it.

    I think I can find something better to do with this place, without wrecking it. After all, I have to live here, too. Even though I have three different letters from three different county administrations which outline what my property rights allow, when we tried to exercise those rights we met a dead end.

    “I’m sorry, the county made a mistake. You can’t actually do what they said you can.” And the reason given relates to a farm tenant cottage that was built over two hundred years ago!

    The next thing that is going to happen is that the powers will expropriate anther 40 acres or so along the (mostly dry) stream banks where any activity whatsoever will be prohibited.

    If I sound bitter and angry, it’s because I am.

    On the other hand, living on the farm is a great life, providing you are up to it and you can halfway afford it. I’m not blind to the benefits, and not to the essential unfairness either.

    My wife’s family and those of most of our friends, have been here for generations. Some farms go back to the original land grants. There are surveying instruments here that date back to the original subdivisions in the 1700’s.

    Depending on how you look at it, the new rules have either saved their family heritage, stolen their family heritage, or made them prisoners of it.

  14. Toomanytaxes Avatar

    Ray Hyde – It seems pretty clear that you’ve not been making appropriate campaign contributions or explaining how building very expensive high-rise buildings on costly land would provide affordable housing and eliminate traffic congestion. At least, that’s what seems to work in Fairfax County.

  15. Ray Hyde Avatar

    I wouldn’t want to do anything out of character for the place. On the other hand, it is located adjacent to a four lane highway and within a mile of an interchange.

    Anyplace else in the state, and I would be zoned light industrial.

    As for contributions, even Centex can’t afford what these bandits are asking.

    It will be a long time before anything like that happens. Even if I had Albemarle’s plan, it would take 170 years to fill this place up, and that is with insanely large lots.

    Even if I thought that the county was putting something back in to their precious agricultural land and heritage, if I saw something coming back for all the savings I provide them and extra taxes I pay, I wouldn’t mind so much. As it is, there is nothing.

  16. Toomanytaxes Avatar

    Fauquier and Fairfax Counties must be in different states and subject to different laws. Fauquier seems to have the authority to restrict, indeed prohibit, virtually any real estate development. Fairfax, on the other hand, has no authority to reject or restrict requests for rezoning — or so our supervisors say to the public. Chairman Connolly cites the December 2005 Albemarle County land use case (which involved by-right development) as precedent for why the Fairfax Supervisors cannot turn a request for upzoning. I don’t understand this, but then, I’m just a Washington, D.C. lawyer.

  17. Ray Hyde Avatar

    What Fauquier did was mostly eliminate “by-right” development. That was done by downzoning, requiring huge lots, (fifty acres, in my case) and by eliminating by-right lots that were previously promised. That was AFTER the ones that were promised before that were eliminated through a major downzoning.

    Besides that, in one case they made the regulation contingent on actions that happened before the regulation was passed. Essentially this means they predated the regulation, which is clearly wrong, and probably illegal.

    Even if you have rights remaining, they make the process to actually use them next to impossible. By the way it took me almost two years to get a building permit in
    Fairfax, so Fauquier isn’t alone in putting a lock on the out box.

    It seems to me that if the goal is to preserve and protect their agricultural areas, then the money that is collected for those areas over and above the usual property assessment ought to be dedicated to programs that preserve and protect those areas and enhance the agricultural business prospects. Instead they use the money to keep all other residential property taxes lower than they might be.

    I fail to understand how taxing the agricultural areas more than they cost helps keep agriculture going. I fail to understand how keeping the ordinary residential taxes low discourages people from coming and snapping up rural land to build on. It seems to me that either this policy is backwards or else they are lying about their real purposes.

    To be fair, the county did get involved (I think through some kind of loan) in getting a slaughterhouse re-opened in the county. This is a real benefit to cattle and goat farmers and deer hunters.

  18. Linda Marie Van Tassell Avatar
    Linda Marie Van Tassell

    The Pedcor Investments low-income housing project is the “wrong project in the wrong place at the wrong time.”

    If Pedcor thinks the Richland Hills area is a profitable place to build, why not construct a more conventional apartment complex for median or higher-income residents? The answer: it’s more profitable to use federal and state tax credits, not to mention the potential to access other state and federal programs such as rent subsidy, low-cost interim construction loans, low-cost loans or grants, and waivers of other taxes. The bottom line is that Pedcor pimps for profits on the backs of hard-working Americans, while espousing a desire to help the poor. If it destroys a community in the process, no bother. Pedcor is not a person, and it doesn’t live in Richland Hills.

    Pedcor will not create new jobs, increase household incomes, enhance local revenues, increase business or retail activity, increase tourism, improve infrastructure, stabilize the community, preserve the community, and it will not serve as a good steward for future generations. On the other hand, Pedcor will destroy a community by increasing traffic, noise, crime, the impact on schools, and by denigrating the property values of Richland Hills’ homeowners.

    The other bone of contention that I have with Pedcor is its history of using tax credits to build low-income housing and then petitioning the Indiana Board of Tax Review for lower property assessments in order to reduce its tax liability. Pedcor has repeatedly filed such petitions stating, “It is entitled to an obsolescence adjustment because the rent restrictions, required as a condition of eligibility for tax credits, results in a loss of value.” (See: http://www.in.gov/ibtr/decisions. Scroll to the bottom of the page and type in keyword: Pedcor.) In the case of Pedcor Investments vs. State Board of Tax Commissioners, it also cited a “decreased market acceptability of the apartment community” as a reason for economic obsolescence. So, while Pedcor ignores the fears of residents and City Council in advance of the project being built, it has used those fears come to fruition to further try and line its pockets. Never mind the fact that Pedcor was the cause of any such economic obsolescence.

    While some want to label opponents to this project as being selfish, I say, “Yes, they are!” The residents of Richland Hills have every right to be selfish with the long-term investments they have made in their community. They have the right to be selfish in wanting to maintain the value of their homes, their neighborhood, and their peace and security. They are invested members of the community. Pedcor is not.

  19. HuguenotScot Avatar

    I have a real stake in seeing the zoning ordinance in Lynchburg be corrected, because I live in Richland Hills! The homeowners of Richland Hills are not fighting for the zoning loophole to be corrected because we are against low income housing. We are against any housing at this location. We are average, hard working, “pay as you go” people. My neighbors (all races and religions) and myself are actively involved in all manner of charitable/civic works: Habitat, Meals on Wheels, Gleaning for the World, etc. The proposed site is zoned for business (banks, offices,churches, etc.) which will not generate an increased volume of traffic on one of the most heavily traveled highways in the city. Several years ago a national fast food chain was denied permission (by city hall) to build on the same site due to the volume of daily traffic! The zoning change would simply mean that before a property could be developed (for something other than what the property is zoned for) the adjacent property owners and the city government would have the opportunity to voice their opinions about the proposed land use (Conditional Use Permit). No sneaky, political hanky-panky, just honest, common-sense consideration of appropriate landuse. There are 2 schools directly across the four lane highway from the proposed site. It is sheer fantasy to think that an innocent child wouldn’t be inticed into attempting to cross such a road in order to get to the playground and ball fields at the schools.
    I, for one, would not want the maiming/death of a child on my conscience ( simply because they attempted to do “what children do”.) That is the reason the site was zoned for Business to begin with…because a four lane highway is not a safe place to raise a child.

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