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Tuesday, January 02, 2007

Developers: Don't let any competitors build houses!

Notes on council comments, 18 Dec 06:

Introduction:

In Manteca, a "Community Revised Growth Management Program" (CRGMP) restricts the number of new houses that can be built to about 3.9 percent each year. The stated purpose is to "help" the community, preserve the "small town culture" and control or limit traffic "congestion" and other high-minded principles. However, as Milton Friedman explained years ago, you shouldn't judge a government program by its intentions, but by its actual effects. The actual effect of the CRGMP, or "growth cap" is to limit the number of houses that can be built. This serves two main purposes: First, the city wants to get large sums of money for the permits to build each house. (The mayor made these comments a few yeas ago, he said "we're in the driver's seat" and we can demand almost anything from developers, they want to build so badly.) A secondary benefit, for the developers is that limiting the number of houses that can be built helps them demand higher sale prices for their houses. This would help explain why the developers tend to complain a little, but generally go along with the "growth cap" scheme.

The problem with these two effects is that they, as with almost any interference with the free market, the law creates winners and losers. The newspapers and press tout the rising home prices as nothing but a good thing, for the most part. The same is true of the city officials. But there is another side to the issue. For every developer that is able to command a higher than market price for their houses, there is a loser, the individual who wishes to purchase a house at a lower price.

The city even gives lip service to the goal of providing "affordable housing" and has created and proposed programs that cost the taxpayers millions of dollars with the stated goal of providing low cost housing. These "affordable housing" programs are in direct conflict with the "growth cap" policies. One arm of the city attempts to lower the cost of housing, and the other attempts to raise the cost of housing. All at taxpayer expense!

Last month, one of the city's prominent developers asked to have their permits to build houses extended. The spokesman talked about "delays" and "paperwork" first, but then added, almost as an aside, that the market has taken a downturn. He talked about how, darn it, those papers sat on someone's desk for months and we just never got to build the houses in the two years the permit is valid. But I submit that it is the market conditions that is really the issue. Papers don't sit on desks gathering dust when there's millions of dollars to be made. But when the market turns down, as it always does at some point, then perhaps papers can sit on desks gathering dust. In other words, the delay was not primarily caused by paperwork. The delay was deliberate and an attempt to hold off building houses when the price wasn't high enough, and to wait until prices became higher.

This is, of course, a decision the developer is free to make. It's a gamble. The developer knows how much time is left on the permits and he can makes a judgment to build or not build houses. The same is true when a developer requests the permits. They are extremely costly to obtain and the developer has to make a business judgment. Will the cost of the permits be "worth it" considering the current price of houses and the future risk?

When the housing market (bubble) was booming, developers were falling over each other to obtain those permits. There was so much money to be made, they competed with each other with more and more elaborate housing plans, larger houses, more ornate "amenities" being promised; all in the hope of beating a competitor and obtaining the coveted permits. Other smaller or lower cost builders were out competed for the permits.

The developers who made such grand promises to the city in return for the rare and coveted "allocations" were making a decision. Like all business decisions, there are benefits and risks to consider. There's never a guarantee that any business venture will be profitable. When the developer entered into the agreement with the city, they knew the permit cost a certain amount. It was valid for two years. They had to consider the possible amount of profit that could be made, and had to consider the risk of what would happen if housing prices dropped. There was never any agreement to "fix" things and go back and re-negotiate if the market didn't go their way!

You could think of it just like buying or selling anything else. The stock buyer doesn't know for sure the price of the stock will go up. It might go down. But the buyer makes his best judgment. If he guesses right, he makes lots of money. But what if he guesses wrong? Should the government or city council tell the buyer, "we'll fix market" to make it right for you? In the case of houses, there are two sides, the developer (seller) and the buyer. If the city steps in to try to "help" the sellers, they end up hurting the buyers who want to buy houses at lower prices.

The lower housing prices are good for some, bad for others. The city should not be taking a position that favors one side of the economic equation (the house sellers) and harm the other side (the house buyers). Why would one group deserve favor and the other group deserve to be harmed?

The talk at the Council meeting was about how they want to "stimulate" the market. This is confusing talk. Nothing could be further from the truth. They mentioned how important it was to "keep the builder working!" But the effect of the policy is to reduce, not increase, the amount of construction! They are reducing the number of building permits available. That does not help the builder to build more, it prevents the builder from building. The one it "helps" is anyone who owns the development firm and doesn't want any competitors to get permits. That is not "stimulating" anything. The home buyers also will be spending more money on their home instead of spending it on any other business in Manteca. In a way, trying to "support" the price of houses hurts a lot of people, not just those who wish to buy a house, it hurts every business because their customers must now pay more for their houses instead of something else.

The new proposal:

The plan is complicated, but I'll try to simplify it. The plan is to "extend" all the current permits by an additional year. This helps the holders of the permits because what they can do is "hold" the permits for another year and hope that the prices of houses goes back up, then they can possibly build houses when the price is better for them. The drawback of this is that there will be no permits available for any others who want to build houses. There may be lower cost developers who want to build, and would be willing to apply for the permits. Competitors may be able to get the permits at less cost, and not need to promise as many "amenities," etc. Also, they may see an opportunity to build and sell lower priced houses. They may, correctly, decide there's pent up demand on the lower end of the financial scale, and this presents an opportunity for selling lower cost housing. This would provide "affordable" housing at no taxpayer expense!

But the current permit holders don't want that. They want to "hold" all the permits. By holding the permits, they are, in effect, stopping every competitor from building houses at lower cost! This is not good for the people of Manteca. Many people need housing! There are many who would love to buy a house at lower cost. But the city, in attempting to be "nice" to one group, the developers, and give them "help" will end up hurting those who want an affordable home.

The plan also includes adding a few hundred allocations. The justification is silly. The argument given is that the new police headquarters is allocated 60,000 gallons per day, but will probably only use 6000 gpd. So, then that leaves 54,000 gpd "available." But there are other buildings around town, like department stores and things like that, that use a fraction of what the city rules estimated. There are millions of gpd "available" if that is the standard. It appears that the city planner simply picked a figure of 54,000 gpd so that it would permit about 250 new housing permits.

In other words, the bottom line of the plan is to let the developers hold their expiring permits, leaving none available this year. So, instead of having 890 permits available this year, the new plan will hand out about 250 "extra" permits. But whatever they are called, instead of giving out 890 permits, they will give out 250. This is an obvious attempt to raise the price of housing by making it scarce or harder to build a house! It's an attempt to "fix" what they see as a "problem," namely, houses becoming affordable.

For the first time, the city staff actually acknowledged this. For years, they have been saying the reason for the housing permits is for those previously mentioned reasons, to "control growth" for "the good of the everyone." In the meeting, the assistant city manager (McLaughlin) talked about "the price of housing" and how the goal is "to try to stimulate the ... uh... economic" something. What she was saying, or trying to avoid saying was that the goal is to limit the number of permits available, in the hope that this will make housing more expensive, and in turn, make the developers happy, regardless of how this may be bad for everyone who's not a developer.

Which finally leads to my objection to the whole thing. The city government should not be hurting the people who need affordable housing, in order to grant favor to politically well connected developers. The people shouldn't have to pay extra taxes to help "provide" affordable housing at the same time the city is creating the shortage of affordable housing!

Last, to add insult to injury, there is talk that the much touted fire station may not be built. The reason is that the developer promised to help build the fire station, and if he doesn't get this special favor, he won't build the fire station as he promised. The city just passed a controversial sales tax increase, Measure M, and promised the voters if they approve it, there will be a new fire station by July! By July! And now, we are being told that "the fire station will be built on schedule, but, oh, the schedule has been changed, now it may not be until ... get this... 2014. The year 2014! Incredible!

In fact, at the previous City Council meeting, when the issue was first raised, the Fire Chief of Manteca gave a presentation. Why the fire chief was talking on behalf of the developer is anyone's guess, I didn't ask that question. He showed maps of how needed this fire station was, and urged us and the City Council to "give the developers what they want... we really need this fire station! Live are at stake!" But the people of Manteca had just voted for Measure M, raising the sales tax to 8.25 percent and were promised the fire station if they voted for it! This is an outrageous betrayal of the public trust.

As a side note, if you look at those maps the Fire Chief provided (I'll have to scan those in) you can see that only a small portion of the "3000 homes" outside the 5 minute response time will be helped by the addition of this new fire station. Only houses in the northwest section of the city are helped by the new fire station. There are huge new developments in the southwest and southeast of the city that will go "without" even with the new fire station, as well as a neighborhood in the northeast. This wasn't mentioned when the city leaders promised that the measure M tax increase was "needed." They mentioned how there were 3000 or 2000 houses far from a fire station, but they didn't mention that even with the new fire station, there still will be thousands of houses that won't be helped at all by one fire station in Northwestern Manteca. (Yes, thousands. They are still building in those other areas, meaning there will still be thousands of houses outside the 5 min. response time even if or when the new station is built) (That figure of 2000 or 3000 houses is also in dispute. That's a subject for another article. The last count was really1,979 homes outside the 5 minute range. But I digress)

Along the same lines, the city backed "citizen group" that campaigned for Measure M repeatedly said "We have the money to build the fire station, we just can't afford to staff it!" They repeated that many times. Yet no city official corrected that. (The city disputed things I said about Measure M, even though it turns out I was right, but that's another story). After promising the new fire station, now we find out that it "depends" on giving special favor to some developers!

OK, one more point. The developers were big contributors to City Council candidates, and, maybe most importantly, all of the largest developers gave cash to the "Measure M" campaign group. Why would developers want to give money to raise the sales tax? Raising the sales tax doesn't help you sell houses. People are slightly less inclined to buy a house in a town that has a high sales tax verses a town with lower sales taxes! So why were the developers giving thousands of dollars to get Measure M passed? Could it be they are now getting their payback in the form of special privileges? They get to hold their permits and stop competitors from building houses for the next year. It's brilliant.
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