Reed and Oliverio on Opportunity Housing, Prop 19 impacts (2 of 3)
In Part Two of their discussion about local housing issues, with ex-Mayor Chuck Reed and SJ Planning Commissioner Pierluigi Oliverio explore the potential impacts of citywide residential upzoning, and whether or not it makes sense to move from SJ to Redding.
Pierluigi Oliverio: Why is it that up until the 1970s we could build a lot of housing in San Jose that was affordable, didn't cost $500k per unit, and we didn't price people out? Why is it so much more expensive now to build a house?
Chuck Reed: It was easier in those days, in the 60’s or 50’s to build because there was essentially an unlimited supply of land. But California decided in the 1970s that controlling sprawl, having greenbelts and urban growth boundaries and preserving farmland were more important than building new housing. And so if you look at where the growth boundaries of San Jose were in the 70’s, we’re still in the same place. And so the land supply has been constrained, driving up land costs and the ability to build things. We did the easy stuff, and so now the projects are hard. Infield projects are hard for lots of reasons. .
PO: With the COVID migration people have left cities: SF has seen a 35% drop in rent, other cities have had significant declines including SJ. Do you believe this is a level of permanent migration, or purely cyclical?
CR: We’ll need to see what’s going to happen to jobs and whether or not the demand for housing is going to be affected by job density. As long as the Silicon Valley keeps creating jobs, that provides pressure on the supply and cost of housing. To the extent that SV permanently decides people are going to work remotely, then that would have an impact on the cost of housing. But my guess is that while companies will use a lot more remote working, they’re going to continue to add headcount to SV for all of the reasons that made SV great. SV has suffered CA politics, CA taxes, CA housing constraints for decades and has coped with that not by picking up and moving out of state, but by expanding out of state. It’s Intel’s ABC rule: which is Anywhere But CA for expansion. I think that most likely the remote working from smaller communities around the country will continue to grow, but I think the headquarters headcount is also going to grow, also.
PO: I agree. But will also note HPE just announced they’re moving their HQ from SJ to Houston. There will still be HPE employees in SJ that will have people living here buying houses or continuing to pay their mortgages. But--as you know how cities are financed--now that the point of sale will be Houston instead of SJ, that’s a significant sales tax loss for the city of SJ, which is a disappointment. Cities don't receive sales tax from software sales since there’s no sales tax, but if a physical object is sold such as in the case of HPE, or Cisco, there is sales tax. So companies relocating can have a tremendous financial impact on a city’s finances.
Which brings me to Prop 19. It passed, and it’s going to allow anyone over 55 to take their tax basis anywhere in the state of CA. There’s some other implications on the cost basis for property tax or inheritance. Do you think this will incent people to sell their house in SJ and move to Lake Shasta or Tahoe?
CR: There’s always been an incentive to do that, because housing is cheaper in some of those areas. So if people are not in a position where they need to work in the office every day, I think Prop 19 adds to that incentive. When you do the math and you’re at a low tax rate and suddenly you’re going to have your taxes go up a lot, that wouldn’t be a big incentive to pick up and move. But if your taxes are going to be the same, then the price differential between SJ and Redding is a big plus. But this only affects people who don’t need to be close to the office, so it’s a relatively modest percentage of homeowners. I would guess it won’t be a measurable difference in the cost of housing because I think it will just be absorbed by other supply and demand factors.
PO: Minneapolis and Portland have declared war on the single family home by eliminating the single family home zoning in their cities. Single family zoning has historically had some evils and therefore in the name of trying to correct the wrong, they are allowing fourplexes or sixplexes in all neighborhoods, byright and with no public or community meeting. They think this is a way to provide affordable housing. Your thoughts?
CR: There’s a long history of zoning in the United States as a tool to enforce segregation and constrain housing. Opening it up and making it easier to build certainly should add to the supply. Whether or not that will be significant, I don't know. I think as a policy matter starting out by saying you can put a fourplex on any single family lot, I think that’s probably a little too far. But I think if you took a more reasonable approach and start looking at distances from bus stops or light rail stops and saying duplexes instead of fourplexes or second units, that starts to make more sense. It’s like what San Jose has tried to do by making it easier for people to build ADU’s, second units, and granny flats. This way, you can spend a little bit of time demonstrating that it’s not going to destroy the fabric of the community and get a sense of which lots make sense and which don’t. I don’t think wholesale abandonment of single-family zoning will work politically because you have to bring people along, you can’t just dictate it. But the real question is: will it actually generate more housing or just remove one of the constraints?
PO: In the General Plan you and I voted for, we estimated that by 2040 we would be adding 400,000 people to the city. So that’s like adding another 300,000 residents to San Jose in the next 20 years--and all of that would happen without invading the single-family home neighborhoods. We projected it all to happen within Transit Zones and well-positioned pieces of land. We wanted it to make sense to people and to get people in suburban areas to support the density we were trying to create in San Jose. I think the elimination of single-family home zoning would eliminate that trust. We have seen the state supersede city zoning and allowing two ADU’s by right per lot regardless of size. But it’s unclear to me that with the cost to build an ADU, that this increase in density will even have an impact on the affordable housing market.
CR: I think “affordable” is a term that has a variety of definitions. Whether or not it gets to a level that the ADU could be rented by somebody who qualifies for a government-subsidized affordable housing is unclear. It is going to depend on the nature of the housing, where it is. My concern is that newly constructed housing is not going to be affordable because the cost of construction is so high-- even when there is no land cost. So by the time somebody has finished with their permitting process and the construction process and paying for everything they're probably not going to rent it to somebody that would qualify for affordable housing. Nobody's going to build an accessory dwelling and lose money on it when they rent it out it unless they have to.”
PO: I heard that we have found that San Jose may have the highest construction cost in the world. Do you believe that?
CR: That may have been true a while back, but that could be changing with the COVID crisis. I do know that there are many market-rate housing projects that have been approved, got through their permitting process and through the political process, but they can’t move ahead because of high construction costs. It just doesn’t pencil out. And now with rents dropping due to the COVID recession, it makes it even more difficult.
We did see during the Great Recession in San Jose that construction costs went down. You'll remember that we used to get the bids on public projects, all of them below the engineer's estimate because companies just wanted to keep their workforce together and they were bidding just as cheap as they could. But as long as the big tech companies are raking in the money and expanding and needing a bigger footprint--and that seems to be the case-- the construction costs are not going to come down very much I don't think.
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