June 13, 2006 > The Housing Game
The Housing Game
The continuing cry throughout much of California is for more housing. We hear about this through the efforts of developers, builders, cities, housing advocates and government mandates. To verify the existence of a housing shortage is one thing, but solutions can be quite another. Much of the greater Tri-City area has been the focus of intense building efforts, primarily single family dwellings with zero lot lines, packing as much square footage onto a lot as possible. Any vacant land has been fair game including small slivers within spitting distance of railroad tracks and infill spaces often needing variances to accommodate developer plans.
Along with this rush to residential development have come low and moderate income advocacy developers who have created some balance to the process. Many municipalities require developers to carve a small niche of each project for those who may not have access to $100,000 or so for a down payment and $4,000 monthly mortgage payments. This is a good thing although definitions of low and moderate income in the Bay Area are problematic. When the definition of low income is far above minimum wage, what is left for those who exist on true low wages? In A Connecticut Yankee in King Arthur's Court, Mark Twain spoke about this saying, "It isn't the sum you get, it's how much you can buy with it, that's the important thing; and it's that that tells whether your wages are high in fact or only high in name."
Renting is the answer both for those who choose to avoid the responsibilities and labors of ownership and families without the means to purchase exorbitantly priced homes. Many in the housing industry tout condominiums as a solution to the cost dilemma faced by potential homebuyers. Owning only the inside walls and spaces of a home (i.e. apartment) is considered a low cost approach for buyers without substantial financial resources. Joining this chorus are apartment owners with older units in need of capital investment. Conversion from rental income to a much larger one-time income from sale can be an extremely profitable way out of property in decline.
Any good corporate raider knows that great financial rewards await those who can successfully separate a whole into pieces, selling each at a premium. Someone who holds property in need of repairs and upgrades can make much more money and relieve themselves of further property maintenance through "condominium conversion." Each apartment unit becomes a sale and new "owners" collectively assume responsibility for common maintenance and liability.
For buyers, balancing equity considerations with the cost and pitfalls of sharing ownership and maintenance responsibilities can be difficult to assess. Furthermore, trading a "low" rent of $1,000 per month for a two-bedroom apartment for a substantial down payment and well over $2,000 per month mortgage and insurance for a studio condominium is not feasible for many. Problems are often minimized in a rush to perceived profit. In some cases, if conversion is done well and buyers are properly informed, a condominium purchase will make sense, but a remaining issue is the welfare of those who depend on existing rental space for shelter.
While rental property owners may debate the wisdom and financial gain of condominium conversion for their property, cities have a different problem to resolve. In some cases, building codes have changed and older apartment complexes may not qualify for conversion without a "variance," allowing substandard units on the market. Government entities have also worked toward maintaining a balance between rental and for-sale housing for a variety of family incomes. What happens when rental units are removed from the market in favor of for sale units still priced beyond the means of many?
If a simple mathematical calculation (i.e. percentage of rental units or vacancies) is used to determine the feasibility of allowing such conversions, new and more expensive rental properties in the mix may signal an unacceptable increase of average rental rates. Displaced renters may have little or no choice when searching for replacement housing; they are priced out of the market.
In Roughing It, Mark Twain said that "all that glitters is not gold." He went on to say:
"So I learned then, once for all, that gold in its native state is but dull, unornamental stuff, and that only lowborn metals excite the admiration of the ignorant with an ostentatious glitter. However, like the rest of the world, I still go on underrating men of gold and glorifying men of mica. Commonplace human nature cannot rise above that."
In the coming months, when planning commissions and city councils are confronted with housing pressures and condominium conversion actions, will they be men and women of gold or mica?