Good article, great photos.
I sympathize with folks worried about changing their neighborhood. At the same time there's really no magic solution to high housing costs outside increasing supply.
I sympathize with folks worried about changing their neighborhood. At the same time there's really no magic solution to high housing costs outside increasing supply.
A number of my neighbors are Prop 13 'princelings'. Their parents snapped up a bunch of housing, have next to 0 annual cost, and extract fantastic wealth renting them out, all while receiving a huge tax subsidy. This position passes to the next generation, who essentially become absentee landlords and are heavily incentivized to prevent more housing.
A number of places in Santa Cruz and the rest of the county are completely underutilized because these families prefer to do absolutely nothing and collect insane rents on dilapidated properties to the detriment of everybody else who lives here.
According to this site [1] the percentage of renters in SC in 2017 was 60%.
What it would do is reduce the property value of existing real estate supply (by making expected cash flow from renting far less profitable), effectively forcing nonresident owners to sell their buildings to would-be renters, who would now be able to afford a mortgage on their homes.
My thesis, fwiw, is that there's actually a sufficient supply of housing, it's just cornered with artificially inflated prices by people who treat housing as an investment vehicle rather than, well, housing.
I'm a bit bitter because there's so much of this around where I live, and it's just sad they're systemically incentivized to keep the next generations renting forever.
FWIW, as more and more California homeowners become non-residents of California (moving to other states such as Florida, Nevada in retirement is fairly common), I think Prop 13 will gradually become less popular among the actual voting-eligible population of CA. But this will take decades, I imagine.
It just benefits far too few at the expense of too many to stay law forever.
Eventually the older/wealthier people pass away and the younger people wonder why they can't afford a home, even though they work the same job that their landlord's grandma did.
The demographics of prop 13 support are pretty interesting. The slope for prop 13 support is overall trending negative as time goes on, but the "intercept" is still quite high. Hence my statement that I think we're still a few decades away from it becoming a common rally cry for voters – whereas today it's a third rail.
FWIW this tax would also explicitly not affect "ordinary" homeowners. I think the main issue is that people are not imaginative enough to dream of a progressive property tax, since it's not progressive today.
It's probably untenable alongside local democracy. Instead, zero real appreciation seems like a reasonable target.
Even in very low demand small towns though there is demand for some density - a 3 story apartment will often exist in those towns and have no problem renting to people who want/need to live in the small town but don't want a single family for whatever reason. These smaller low rise buildings are the cheapest housing possible - they are small enough that they don't need expensive elevators and the like, though of course they don't make sense in high property value areas.
Which is to say that even on the low end of property value density can be justified to some extent.
You also want the natural increase (well, Prop 13 permitting) in tax revenue for city amenities.
It would be a not-minor hiccup for the segment of retirees and near-retirees who depend on rental cash flow for their retirement. They could sell their 2nd and 3rd properties for reduced values, buy an annuity, and live an appropriately downscaled lifestyle.
IDK, my main goal is to restore our communities with 70+% residential homeownership. I think the emergent socioeconomic & cultural effects of communities where the majority of people are long-term committed to their locale are more valuable to society than the effects of rent-seeking.
If you're concerned about what it will cost someone to acquire someplace to live, come out and say that. Don't couch it in language that opens the conversation for devaluing what we already have.
I wish I knew enough to consent to or refute your statement, alas here I am!
I'm interested in having urban and suburban communities of homeowners. I do think most people prefer the autonomy that comes with single-family and (occasionally cooperatively-owned) multi-family homes when it comes to long-term residential-use ownership, fwiw.
Buyers with means in supply-constrained markets don't really care about a seller's asking price (read: their acquisition price as a buyer) beyond having a lower bound, and a pattern of buyers just throwing money at sellers has the knock-on effect of increasing property values.
Acquisition prices drive values.
Basically, my thesis is we probably don't need to increase physical supply, we can probably get away with increasing market supply, and that the physical supply is actually probably sufficient to satisfy the physical residential demand.
If that isn't the case, obviously you have to build. But I don't see high prices as evidence that the problem is the lack homes for residents. It could very much be that the problem is that physical supply is over-consumed.
I think we tend to reach for high-density supply as a solution, without thinking about whether that's actually the best solution. It's definitely the simplest, but we don't even explore the other issues that cause distortion in the market. Like prop 13, the retiring generation treating their homes as retirement vehicles, etc.
It doesn't seem implausible to me that if we solve those distortions in favor of resident homeowners, that the "affordable housing crisis" goes away without requiring high-density housing in downtown Santa Cruz.
Additionally, the biggest piece of evidence for physical supply being the constraint is overcrowding: how many unrelated people are living in a single housing unit? Especially in college towns like Santa Cruz (and especially as we've not stood up new schools elsewhere), this seems particularly acute.
Need to find the case study, but the precedent for this is rents go up. There are more barriers to housing than the price. Better strategy is taxing unoccupied housing.
The broader idea is to tax absentee landlords and pied a terres, in favor of the people who actually live in the city. Moral justification of the tax is that if you want to profit off a community's residents while not living amongst them, you have to pay differentially higher taxes for the right (which would presumably benefit the civic life of those residents).
The point is taxing "absentee landlords" means taxing the people who rent from them. These sorts of policies sound clever, but they don't change the supply nor demand, and so just wind up raising housing prices more.
There isn't a loophole around supply and demand other than rationing, i.e. a community board deciding who can and cannot move in. (The answer is always white people.)
If a family is paying $3k/month to rent out a $800k single-family home, and we tax the landlord 15% the value on the home, could he find a family to pay $13k/month in rent (covering the tax)?
I think this would just cause the value of the home to crater, to come closer to a reality that tolerates $3k/month-ish rent. To the point where the property value is low enough that the resident family can just buy a property.
At that rate they'd sell. That would lower purchase home prices. But there is plenty of primary residential demand, so not by much. Unless that family has $100k+ for a down payment (and good credit, and a long-term outlook towards staying in the area, and all their paperwork in order), they're not in the running to buy it.
After that one-time transfer of housing stock from landlords to residents, you'd be back in the same situation: more demand than supply. Moreover, this would be something one could anticipate. So if Santa Cruz passed this law, I would help my parents pull together the cash to move there. Because once the supply surge is absorbed, you're likely to make money on the return to business as usual.
I think the renter population is the most straightforward proxy for primary residential demand. Those are people who are actually paying to live there. Because they go to UCSC, work, have kids, whatever. We know the rental population is 60% of the actual SC housed population. Of that, maybe 80% have primary residential demand (students, etc. might make up the balancing 20%).
So that's ~50% primary residential demand. I'm sure that some proportion of the housing stock that belongs to non-renting people belongs to people who are residents, but I'm relatively bearish on that. Even if only 25% are vacation homes, second homes, etc. that leaves us with a marginal 30% primary residential demand and a cumulative primary residential demand of 80%. So for every 100 homes there's demand for 80.
On surging. I'd say if you want to move your family to Santa Cruz as resident owners, we would love to have you. If you can afford to pay more than the people who already live here and are paying rent, I agree that's a shit situation.
I guess you could ban nonresident buyers for the first N years or something? That might be one degree of complexity too far, but I agree that's a shortcoming that one should have a plan for.
I think it's really difficult to enact these kinds of programs at the municipal level – it really has to be done at the state level. You'd still end up with weird border scenarios, where you have a 80% resident homeowner utopia on one side of the border with nevada, where all the labor for that town reside in 80% renter dystopia on the other side.
This would be correct if rents were stable amidst rising home prices. that happens from time to time. But it tends to correct itself, and it is not the situation in Santa Cruz. Even at prevailing prices, there are more people who want to live there than there are spots; that’s why prices and rents keep rising.
The supply side for "current rental market prices" is different than the supply for all rentals. Rental turnover rate for places that have been rented out for 10+ years is quite low. A disproportionate number of newly-marketed rentals in the last decade are comparatively recent conversions from resident-ownership to rental (hence, rising proportion of renting population), and the cost basis of ownership for those landlords is an OOM higher than landlords from a couple decades ago.
We don't really know if the median paid rent "could afford" to rise to median market rent, I can't imagine that it would. That market rent prices are rising does not directly entail that more people want to live there than there are spots, the story is a bit more complicated.
There's also a bill out there that would simply preclude hedge funds ownership of single-family homes: https://www.housingwire.com/articles/democrats-introduce-bil...
The combination of taxing rented property + reducing corporate ownership would do wonders for affordability. It would also stall or crater any retirement/dynastic wealth plan based on renting SFH properties.
In most locales, from what I've seen, it's the retirement/dynastic wealth folks who are squeezing supply – they've been in this game for 30+ years and have a big head start on the PE firms.
Crafting a bill with popular support that targets those folks is going to be a bit more challenging, because these people are not all terribly extractive, and a lot of up and coming people still actively aspire to become those people. In my observation, the younger and less gainfully employed / marketably skilled these people are, the more extractive they are. As such, I think it's a matter of time before we hit a breaking point.
There's precedent for this in American history, where we've had dramatic step-changes to property law in response to varying-degrees-of-obvious injustice. I don't know if my generation will develop the political will to enact it, but it does feel inevitable that it'll happen in the next 80 years. It's either that, or we've become an effectively-feudal and urban society – which feels less likely, to me.
Over the past 5 years, I have gotten no shortage of "cash buyer offers" for our property, and I have no doubt the counterparty in almost all of those cases were corporations.
Remove that, and the lack of upward pricing pressure will force a reversion to the mean, which makes it more costly/risky to seek rents.
This is the same logic that says any tax simply increases the price. That's not how the price/availability curve works, there are many places that simply mint money because of collusion amongst landlords.
If rents CAN go up why wouldn’t they just go up absent the tax hike ?
Competition. The hike is symmetrical to a collusion agreement as it’s uniformly applied.
However:
- the size of the benefit is small
- my understanding is there is very little effort to confirm these for small owners
https://www.santacruzcountyca.gov/Departments/AssessorsOffic...
And to your point about the benefit being small, I'd suggest the tax should be fairly punitive. Not enough to make profiting off a rental impossible, but to make it barely beat, idk, inflation.
I've even thought about the idea of making it lever-up depending on the cumulative number of months you lease the property for. 12 months = X, 24 months = 2X, 36 months = cap of 3X, where 3X is that magically-painful amount that makes it almost impossible to make a >5% Internal Rate of Return.
Killing rentals is bad for anyone who find owning is not the best option for them. To own a house/condo you need a large down payment, then you need to pay maintenance fees (some of this can be personal labor if you are able), and worse if you move soon you need to sell. Buying a place can be a great idea for some, but for others it is wrong. Most of us will go through different phases in life and odds are until you are 25 or 30 years old renting is clearly the best decision, but after that many of us settle down in a location where we are likely to live for the rest of our life and buying starts to make sense for many.
There are a few houses in the world when some rich foreigner has bought the house and leaves it vacant. However so far all data I've seen suggests the number of people doing this is tiny (it is generally a stupid investment)
I think anybody who intends to be a long-term resident (5+ years) shouldn't be financially excluded from residential homeownership because nonresidents (who maybe used to be residents) bought up all the local property, when it was more affordable 20-40 years ago.
I'm trying to tax the intersection of nonresidency and single/multi-family homeownership, which includes empty houses and the many rentals.
Yes. I've paid more than 100% of the presumed costs of owning the rental unit I'm in, and have recently received a rude awakening as to my rights to the property whose equity I have fully funded for five years. It's a scam.
In any case, I tend to think that outlawing for-profit ownership of multiple SFHs or multifamily units would actually go a long way toward increasing supply and dropping costs without building. Reduced centralized ownership means lowered capacity to play pricing and vacancy games.
The real enemy of affordable housing is that so many people benefit from housing being unaffordable. Tell them to kick rocks and find another source of income at the federal/constitutional level, please.
The problem is everyone is saying this. So you have nowhere to build. Santa Cruz should not get special treatment - it will be offered the same deal as everyone else: build what is required to house people in the way you want, or build what is required to house people in the ways other people want.