Affordable housing is required.

The County of San Diego’s General Plan (GP) includes several policies that are intended to increase the production of affordable housing. The goals and policies component of the GP Housing Element identifies “Affordable Housing through General Plan Amendments” as a policy to meet the range of housing needs for County residents.  The policy (H-1.9) requires that developers provide an affordable housing component whenever a large scale residential project is proposed as a GPA.

In the City of San Diego, developers are automatically required to include an inclusionary housing element where upwards of 20% of the units are deed-restricted to be affordable to the moderate, low or very low income households.  This means that the housing prices would be pegged to be a percentage of the median income for the area.  The county General Plan, likewise, requires an affordable element.  But the Supervisors are choosing to ignore it, at their peril.

Missed opportunity

On July 25th, when the supervisors voted to approve the three bundled projects (3500+ homes), they should have required 20% of the housing be set aside as housing for moderate income households, which would have yielded 700 more houses to County inventory that a median income household could afford.  Instead they green-lit 3500 market rate homes that would effectively increase the average cost of housing in San Diego County.  Grow the San Diego Way presented a compelling presentation showing that the houses being proposed would, in fact, increase the cost of housing and not address the main issue we are facing, namely that the median area income households cannot afford to live here. They had an opportunity to do something about the housing affordability crisis and purposefully chose not to do anything.

What’s the big deal?

The Board of Supervisors is tasked with approving large-scale changes to the general plan (known as General Plan Amendments), which are often controversial because they set aside the recently approved general plan (which is a consensus-based “constitution” for land use that the County spent $18 million and 13 years developing).  The GP was approved only a few years ago. To justify a GPA, there is a high threshold, namely that the change is “in the public interest” and that it is not “detrimental to public safety or welfare.” 

The two projects located in North County—Harmony Grove Village South and Valiano—were proposed by developers and their out-of-town investors who speculated on cheap land knowing that it was not zoned for the type of intensive uses that they had in mind.  This area of North County, located in a rural valley surrounded by thousands of acres of permanently preserved open space chaparral and coastal sage scrub habitat, has had significant wildfires on average every two years or so since the eighties, including, most recently, Coco’s Fire which destroyed 40 structures.  For this reason, the General Plan specifically zoned it for lower density because the two lane road serving the valley cannot accommodate the kind of evacuation traffic that higher density housing would bring.  The General Plan of San Diego policy LU-6.11 specifically mentions protection from wildfire:

Despite the clear danger of placing more density in this valley, the developers pushed forward knowing that the Supervisors, who are the ultimate arbiters of zoning changes, would rubber stamp any project under the guise of “we need more housing.” In order to do so, they would need to show a) a justification that it is in the public interest and b) that it would not be detrimental to public health, safety or welfare. 

The second point was addressed very succinctly by the community and in this white paper, written by contributor and Harmony Grove resident, Erin Dummer. In it, she puts forth the clearest arguments possible for why Harmony Grove Village South (and Valiano) are clearly detrimental to public safety and welfare. Forthcoming  lawsuits  will have the courts  likely  siding  with  the  community  in  the  “very high  fire  hazard severity”  zone  as  they  have  done recently,  elsewhere  in  the  state.

The real question is, is it in the public interest?  The developers argue that the housing crisis dictates we should set aside the pesky general plan to address the shortage we are facing.

The nature of the housing crisis: it is a shortage in the moderate and low end

If we have a crisis, then we should understand it fully and determine what, empirically, can we do to address it.  According the latest Regional Housing Needs Assessment (RHNA) mid-cycle report, we are producing only half as much housing as we should be producing. In fact, for the past several  10 year cycles, we have not produced enough housing to meet the regional need. However, what this clear fact obscures is that the type of housing we are short on is specifically in the “moderate income” and lower bracket.  In the County of San Diego, the RHNA reports have consistently shown that we are over-delivering “above moderate” housing (e.g. high end homes and condos) to the detriment of the moderate and lower income housing.  In the last complete cycle, we delivered 152% of the “above moderate” and only 20% of the “moderate and lower.”  Housing costs continued to climb throughout that period.

In the current cycle, we have fallen even further behind in the “moderate,” “low” and “very low” categories which are now at 14% of where they should be at this point in the cycle (figure 2).  It is at that level of the housing market where there is a shortage and thus, the most competition.  What this tells us is, while housing production is not where it needs to be, the deficit is exclusively in the “moderate income” and lower housing segments and that is where competition is highest.

This is important because, as you’ll see below, the projects that are being proposed (specifically, Harmony Grove Village South and Valiano) have average costs that are $670,000 and $770,000 respectively for the close to 900 homes being proposed, way in excess of the median house value in the County.

This imbalance shows up in the local real estate market with a tighter market on the low end while the high end softens.

Realtors in North County have already noted that the high end is softening.  Looking at the San Diego housing market overall, most recent figures (June 2018) show that sales have increased year over year in the higher end; the higher the value, the more the sales have increased.  This means that higher value homes are selling more than they did last year at the same time (an increase of 7%).  Housing sales in the sub-$500K range, on the other hand, have decreased significantly from last year (dropping 22% from last June).   This is due to the dearth of production of Moderate and Lower income level housing. And, not unsurprisingly, this is the only housing that the average San Diego resident can actually afford.  The only housing that is being built is high end housing,  despite the fact that it is middle and lower end housing that we desperately need.  Figure 3 shows year-over-year sales increases in the high end and severe declines in the low end.  Further reinforcing this point, the time on market for high end housing is longer (average of 36 days) while, for the lower end housing it averages only 29 days.  What this points to is a clear softening of the high end and a tightening on the low end due to the over-supply of the former and under-supply of the latter.

And the rental market in San Diego County fares no better.  According to MarketPointe Realty Advisors, a glut of high end rentals is starting to hit the market and the vacancy rate has hit the highest point since 2014: 4.08%. Average rents have hit close to $1,900 per month.  However, the most telling figure is that for moderate or lower income apartments ($1,200 per month or less), the vacancy rate is about half, at 2% due to lack of supply.

How about similar North County developments?

We can look at specific projects in North County to see how well they’re selling and at what price points.  Since the two GPA projects in North County are immediately adjacent to an existing project in build-out phase (Harmony Grove Village) that is about 40% complete, we can look to that project for some data on the market for recently-built, high end housing.  

Over the past 12 months, the average sale price for HGV was $668,032 (based on MLS data).  56 homes were listed, 22 were sold.  They averaged 2,254 square feet of living space. Interestingly, these houses spent an average of 42 days on market which is almost twice as long as other housing in that price range.  That means it is taking longer to sell homes in HGV than in the rest of the County for similarly priced houses.  HGV was approved in 2007 and broke ground in 2014.  They are approved for 742 homes.  Only about 300 have been sold. As the media and the building industry have focused so intensely on the dire nature of our housing crisis, one would think that these houses should have been sold by now. In fact, the developer, Lennar, has lowered prices to entice more sales, according to frustrated residents who purchased prior to the price drop.   

It is in this context that two developers would like to place close to 900 homes of similar size and design (small lots, clustered) despite clear evidence that this type of housing is not moving very quickly.

The Harmony Grove Village South project features 453 units across five housing products ranging in size from 800 square feet to 3,000 square feet, with the majority being above 2,100 square feet.  Again, using the existing sales at Harmony Grove Village, these homes will conservatively fetch in the $664K range. The pricing model underestimates cost per square foot for smaller units so the housing costs will likely be higher.  Needless to say, this will not be affordable to the median family household income of San Diego county ($82K) nor the local area ($62K per year in the I78 North County market area).  You would need to make $170,000 per year to afford this type of housing, if you include the HOA fees (average of $300 in SD County) and Mello Roos which will likely come in at $200 - $300 per month range, which is what HG Village residents are paying. Even the handful of studios they are offering in this project will be unaffordable to the median income.  Given that the median home value countywide is $575,000, this project will actually increase the average cost of housing in the area as it will be about $100K higher than the median priced home.  

Based on Newland Sierra’s own market analysis, conducted in 2016 by MarketPointe Advisors, the average Newland Sierra home would cost $548,000 (in 2016) which, not coincidentally, matches the average cost of the detached single family home for the market areas in their analysis. However, this figure does not take into account the fact that the market has increased significantly by almost 20% since 2015.  So in actuality, the average cost for a Newland Sierra unit would be around $658,000 which is in line with the average single family home cost countywide ($660,000).

But, won’t the high end homes filter down to the lower income people as they age?

Filtering is another popular term in the BIA literature.  Filtering is the phenomenon that, as housing ages, it loses value so the luxury housing of today will eventually become housing for the less well off of tomorrow.  The biggest problem with filtering is that the process is so slow that it  is outpaced by job and population growth and would not begin having an impact until after several decades. A study by the prestigious American Economic Review show that for owner-occupied housing, homes lose their value at the rate of .05% per year which means these homes will take decades to become affordable if they don’t deteriorate beyond viability before that.   

So what should we do?

The building industry would like us to believe that to solve the housing (affordability) crisis, we need to build more market-rate housing. While, clearly more housing is needed, the building industry desperately wants us to believe that building market-rate unsubsidized housing will solve the problem.  Of course, it is the high value of housing that drives industry profit so it would be highly unusual for an industry to be promoting something that is clearly not in its best interest. When housing prices rise, industry profits rise.  When they fall, industry profits fall.  Just look at Lennar’s stock prices and they’ve tracked almost to the month, housing prices for the pasts 18 years. So, we should take their prescriptions at face value.