Thursday, June 16, 2005

NYC's Housing Woes

And how to eliminate them.

By last counts, I read that some 750,000 people are seeking housing in NYC's market. Some of those will rent a basement, others a classy/posh/hip long-term rental unit. Greenback-endowed snobs will buy a coop in the snazzy new Astor Place (~$9k in maintenance fees, - forget about the mortgage!), and still others will drop $15+ million for a townhouse to hobnob with the elites on the WASPy Upper East Side.

What do all these people have in common? They are all negatively affected by the arcane, asinine, and the totally arbitrary zoning regulations which govern and actively stifle the ability of profiteers (read: developers) to provide housing at all income levels.

You see, we have a major problem in NYC, and it's price. The reason for the price? Supply and demand of course. The demand simply cannot be met in a satisfactory fashion for the bulk of the homeseekers in NYC. Surely, you realize that if a developer paid market price, for example $250 per buildable square foot, after his costs of demolition, construction (hard & soft), contingencies, financing fees, interest, legal, marketing, et al, he will have to sell it for at least $800-1,000 per square foot.*

Where does this leave affordable housing? Nowhere. All the developer did was alleviate demand by increasing supply of units that 90% of NY'ers can't even dream to afford. Not that there is anything wrong with that; any potential developer would have probably done the same, since that's where you have to be if you want the project to be profitable.

Does this mean that developers hate the poor and middle-class, and only want to sell expensive units to rich people? Hell no!

It would be silly to ignore the largest market of potential buyers. All you need is the right product at the right price. Developers should be fighting tooth-and-nail to build the most affordable housing of the highest quality standards to gain these customers, no? So why aren't they-- because the land is too damn expensive to build more affordable housing.

Sure, if you've got nothing better to do than stir a hornet's nest, go ahead and try building a Mitchell-Llama project, get yourself a modest tax-abatement, and prepare for the headache of dealing with 2,000 tenants in a rent-stabilized/controlled project, sit thru 400 community board meetings with hippies and self-appointed "contextual"-development utopians/authoritarians, who insist on how you build, where, when, and what amenities you have to offer to whom, renovate these 16 adjacent tenement buildings, and fix the local subway access while you are at it. By the time you are done with these board meetings, you have your hands tied behind your back, forcing you to give in so you can get your little concession: helping low-income people buy or rent affordable housing.

Well that's if you haven't defaulted on you 18-month construction loan, while visiting and revisiting the Landmarks Department for the 30th time. You might have already simply hung yourself from the ceiling fan, too.

The proper solution for all this is a re-instatement of property rights, to the hundredth degree. Have a disagreement with the hipster neighbors who hate your proposed glass curtain facade? Tell them to go f-k themselves at a nightclub on the LES. Same with those statist pigs who insist on "contextual" development. Tell them to go tear down their home immediately and replace it with the forest/farmland/cornfield which existed prior to their homes development.

Property rights mean that a developer can build as much or as little, as expensive or as frugal, etc as he desires. Want to put a skyscraper? Go ahead! A farmhouse? Sure thing. A strip mall? All yours. An apartment tower? Why not?

All of a sudden, something incredible will happen. That $250 per buildable square foot will be over-priced! If every property all of a sudden becomes capable of building to the-skys-the-limit, the amount of buildable square footage which was once in short supply becomes abundant, and hence, cheap, cheap, cheap!

Does that mean that unsustainable development will occur? The answer is no. A rational developer will know that there is no incentive to outbid others on what is no longer in limited supply; square footage becomes almost a commodity, and will probably constitute a minute fraction of their total project cost, as opposed to today.

More importantly, there will be no more incentive to only produce expensive units. The developers would probably than choose to compete on producing the market-determined amount of affordable units needed to supply the demand of the lower and middle classes. Developers would hence be cautious, not producing more units than needed, and therefore will limit themselves on the amount of projects and units they complete annually.

The fierce bidding wars will probably be a thing of the past. There is even a good deal for the hippies in this scenario; the profit margin for developers might dip low enough for them to ignore sensitive, battleground markets, such as the Village and the Lower East Side.

It will be good news for rich people too, unless they resent the idea that a significant portion of the middle class will now have access to comparable units of their own, at far lower prices.

This whole thought experiment ends here; because property owners are enjoying the lazy status quo. The current high prices, serve their needs. Selling a couple of high-priced condos per year is certainly much easier than building 5,000 affordable units in the same time frame. The elimination of zoning regulations will mean the lowering of their property's value, as the scarcity disappears and supply dramatically increases. They will fight to keep a lower-standard of property rights, even though one would think that they should want the right to determine what they want to do with their property, instead of groveling before the building department and other bureaucrats to beg permission to develop a project.

I know that this article may read like a missive from Nigerian scam artist, but its only because my writing skills are average, and secondly because it's way past my bedtime. Please feel free to comment on this thought experiment, and where you think the housing market would lead if all zoning laws were repealed.




*Land value should never exceed 25%-30% of the total development costs. Cost to build in NYC grew an average of 300% in 2004, leading to many a default. Of course this also means that it's an excellent time to be in the bridge-lending/mezzanine business, as yesterday's developments come today begging at the door for much-needed funds. The $800-1,000 per square foot of course is based on net, or sellable/rentable square footage, not including the gross square footage you had to build but have a loss factor of common areas, elevators, hallways, etc, which sometimes reaches an 18% ratio (considered high) or as low as 12% (considered incredible). Also, the price quoted will be an average blend; you expect the less desirable units to sell for $600-750 per square foot, while the penthouse, and better units to come in at the $1,200-1,500 range.

3 comments:

GetInvolved@joshyablon.com said...

You're 100% correct. Take a look at friends web site: www.joshyablon.com He's running for local city council based on these issues.

Escap said...

Absolutely. I've recently been arguing this point on dailyheights.com but have received a chilly reception. Feel free to jump in and back me up!

iceberg said...

Escap4,

I'm busy manning the front of both Gothamist and Brownstoner.

Thank god Curbed doesn't have a comment section or I'd probably go insane from the staggering amount of sheer idiocy guaranteed to be posted.

I'm only one man, an individual(-ist) anarchist, in the tradition of Rothbard just trying to get by and be left alone.