To: Moderate Income Subcommittee (HAC)
From: Commissioner Thomas Lord
Subject: draft report for the 2017-2018 "Moderate income housing" subcommittee
Date:

Introduction

The existence of a "moderate income subcommittee" on the HAC is something of a historic milestone.

For roughly 20 years, Berkeley's affordable housing strategy concensus has been premised on the idea that only a minority of residents will not be able to afford market rate housing, and that there would always be subsidy from superior jurisdictions (primarily the federal government) to assist with the needs of that minority.1

To recognize, today, that market rate housing is unaffordable to those with "moderate" income means, literally, that the housing market has become unaffordable to the majority of regional residents. Meanwhile, federal subsidy continues to wane, relative to need.2

Current affordable housing strategies that were not designed for these newly recognized conditions will have difficulty adapting. New strategic thinking is called for.

In this report we examine three affordable housing strategies3 through the lens of the needs of moderate income households.

Background

The HAC work plan entry, which is also the charter of this subcommittee, is slight. In its enigmatic brevity it reads:

Prioritized problem

Strategies

Exploring the current situation

In this section, we consider who is "moderate income", what are their housing needs relative to the market, and how large is the current problem.

Definining moderate income

Policy definitions of "moderate income" vary, but only within a narrow range. Various sources use 80%..115% of area median family income, 80%..120%, and 80%..125%.

Berkeley law uses 80%..120% and we will stick with that.

Complicating matters, when the income thresholds of various income categories are calculated by HUD, the numbers they arrive at are not a literal 80% of area median family income, but the result of a calculation that includes various adjustments to account for local market conditions.

For simplicity, examples in this document will refer to a two person household. The average household in Berkeley is between two and three persons.

According to the currently applicable HUD calculations4, the low end of income for a moderate income two person household is $64,351. We infer an upper limit by taking that amount as 80% plus $1 of the 2-person family median:

Estimating affordability

We adopt the common assumption that housing is affordable to the persons in a household if their expenditure on housing, utilities, and transportation does not exceed 1/3 of their income.

We adopt a rule of thumb that transportation and utilities will account for 5% of income, leaving 25% for housing.

Applying this:

Current market prices

The City's 2nd quarter 2017 report on median rents lists these market prices:

unit size median rent
studio $1,750
1 br $2,150
2 br $3,012
3 br $4,100

Continuing our example of a two person household, it follows that:

At current market prices, no owner-occupied housing in Berkeley is affordable to a moderate income two person household either. For simplicity, examples will concentrate on rental prices.

Incumbent population

The situation for Berkeleyans may be even worse than the preceeding analysis suggests.

The area median income used to calculate the moderate income category is the median for a large area that includes more than just Berkeley.

Berkeley's household incomes appear to be lower. For example, the 2016 American Community Survey (ACS) 5-year estimates place the median household income for Berkeley (for households of any size) at only $70,393.

The average household size in Berkeley is a bit more than two people. As noted earlier, median rent for a 2 bedroom apartment is $3,012 or, annually, $36,144. Using our earlier rule of thumb, such a rent is affordable at a household income 4 times greater: $144,576.

Thus, using the 2016 ACS data, a median two bedroom apartment in Berkeley is affordable to only about 25% of all Berkeley households. Such an apartment is unaffordable even to many households making well above the moderate income limit.

The data available (as of this writing) is inadequate to do more than make a rough guess of the size of the number of incumbent moderate income households in Berkeley. With the understanding that our estimate is crude, rounding numbers from the ACS, we are using the figure of 20%. That is, we think that roughly 40% of Berkeley households have income below a moderate income, and 40% above.

20% of Berkeley households is just shy of 9,200 households.

Notoriously, Berkeley remains substantially segregated by income and race, with parts of South, Southwest, and West Berkeley particularly vulnerable to (further) gentrification and displacement.

Student population

The number of students at Berkeley's colleges and university far exceeds the housing available for them in the City.

Student households often compete with moderate income households for the same housing units. Anecdotally, we are aware that students often crowd, converting living rooms into additional bedrooms, and often putting more than one unrelated person in each bedroom.

For some landlords, student households are preferable. The University of California at Berkeley has even gone so far as to obtain master tenancies for several apartment buildings, effectively removing them from the public housing market.

In those conditions a small 2 bedroom apartment may provide overcrowded housing for 3 or 4 students but at today's prices, such a level of crowding brings the high rents within reach for a larger number of students.

Summary of current situation

Because market prices are so high compared to most incomes, the majority of the City and regional population are vulnerable to displacement, and there is essentially no housing in Berkeley that is affordable to them.

Housing demand from overcrowded student households, and from high income households, appears to be much larger than either group is currently represented in Berkeley. Consequently, no conceivable amount of new supply in Berkeley is likely to "free up" enough units to restore widespread affordability to the market.

With the exception of a few income-restricted "inclusionary" units here and there, Berkeley has no programmatic approach to providing housing for moderate income households.

Examining the work-plan "strategies"

We now examine the three "strategies" written on the work-plan.

"Encourage ADU's"

The Terner Center's December 2017 brief, titled "ADU update: early lessons and impacts of California's state and local policy changes"5 show that removing barriers to ADU construction has significantly increased their production relative to the past, but that the rate of ADU production remains extremely small in absolute terms.

Additionally, the Terner update suggests that when ADUs are put for rent on the open market in the East Bay, "the average ADU was advertised at a rental rate that made it afford able to a household earning 62 percent of the area’s median income" -- which is to say, below the affordability window of interest for moderate income households.

Lastly, from our perspective, ADUs considered as open market rental housing have undesirable qualities, specifically reduced eviction protections for tenants, and a higher probability of non-professional landlording.

We note that a large square footage house in an R-1 zone, together with an ADU, could be a prime candidate (zoning notwithstanding) for subdivision into 3, 4, or 5 units. This is a concept worth thinking about as part of a strategy for greatly increasing the supply of units -- eventually -- but we do not recommend any immediate action in that direction at this time. (Not least because the land use question itself is more properly for the Planning Commission.)

"Work with BUSD to increase teacher housing"

Assembly Bill 45, passed in September of 2017, created a system of grants and loans which can assist California school districts to finance private development of public land for housing that will be restricted by occupation and that will be affordable to "low or moderate" income households.

In December of 2017, BUSD voted not to consider pursuing this program until (at least) 2020, while affirming that it might try to move forward with it in 2020.

For those reasons, we feel it is not timely for the HAC to take up this issue.

"Encourage new development in alternative ownership modes..."

This full item from the work plan reads:

We note that, generally speaking, the operating expenses of housing, including routine maintenance and even modest improvements, are widely affordable.

Market rate housing is unaffordable today because of various forms of rent and interest, including but not limited to:

We turn next to the relation of those factors to ownership structure:

Co-ops and land trusts

The ownership forms mentioned in the work plan (co-ops and land trusts) have this in common:

Traditionally, the City of Berkeley has financially supported the expansion of privately owned land trusts and the establishment of privately owned co-ops for housing which is, by deed restriction, provided below market rate.

Acquisition and rehab / social housing

We are intrigued by the possibility of social housing, as (loosely, abstractly) defined below.

Social housing is a variation of the land-trust and coop model, but it is a non-traditional variation.

Social housing makes use of a land trust that is majority owned and controlled by the sponsoring jurisdiction, in this case, the City of Berkeley. In other words, if the City had a social housing program, the land in that program would in essence be part of a City land bank. This is in contrast to private-sector land trusts, over which the City has no particular authority.

Social housing makes use of a structure trust that is also majority owned and controlled by the sponsoring jurisdiction. In other words, all of the housing in a social housing program has a single legal owner, which in our case would be a holding company owned by the City.

The consolidation of ownership of social housing allows for cross subsidy. This means that if there is extra income from one building, but a shortfall need from another, that funds from the former can be used for the latter in a tax efficient way.

The property management of social housing is democratically governed, is not for profit, and emphasizes to the degree practical direct social labor including tenant self-help. In the case of Berkeley, we might envision a single non-profit property management firm, majority owned by the City, and subject to strong public oversight. Such a property management firm can complement other municipal policy goals such as job training and creation, including youth employment.

City owned social housing does not need to be restricted by deed or contract for the simple reason that it is fully price controlled by the City for as long as the City owns it. Unlike private land trusts and coops, this makes it natural to lease some social housing at premium rents, capturing 100% of the net income on such housing units for the purposes of reinvestment into the social housing program.

By policy, the acquisition of social housing should emphasize cash purchases, using debt only very conservatively, and only when it serves a tactical purpose such as increasing net income after debt service.

With the above sketch in mind, we now consider our sources of high housing prices:

Social housing and income categories

Social housing is a stand-out among strategies for providing housing affordable to today's moderate income levels because it does not rely on state or federal subsidies (which are mostly directed towards lower income levels, some home ownership subsidies notwithstanding).

Obstacles to social housing and future steps

As sketched above, a Berkeley social housing program requires quite a lot that doesn't already exist. It is, as they say, a "heavy lift". A short list of issues to work through:

Social housing and students

We note in passing the potential opportunity to unite a social housing effort as described above with efforts to expand affordable, democratically controlled student housing.

Here is a straw-man example:

Perhaps if the City of Berkeley acquires a small amount of housing suitable for use as shared housing, it could enter a contract with a student Coop in which, for a limited time, the City provides below market shared housing to coop members, in exchange for the Coop providing the City with technical assistance creating a democratically controlled property management entity that can scale to operate multiple properties.


  1. "From Community Control to Professionalism: Social Housing in Berkeley, California, 1976 - 2011", Stephen E Barton. Journal of Planning History; May 2014

  2. The most recent federal budget, celebreated as a huge budget increase, accomplishes little more than a renewal of existing affordable housing contracts.

  3. The three strategies examined were referred to the subcommittee by the HAC's 2017-2018 work plan.

  4. https://www.cityofberkeley.info/BHA/Home/Payment_Standards,_Income_Limits,_and_Utility_Allowance.aspx

  5. http://ternercenter.berkeley.edu/uploads/ADU_Update_Brief_December_2017_.pdf

  6. Other sources of high housing prices in this area include:

    • "professionalized" high-fee development services
    • contractor capacity shortage
    • labor intensivity of construction relative to other sectors


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Copyright (C) 2018 Thomas Lord

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