Economics of affordable housing in Bay Area

Santa Clara County Housing Authority finalized the purchase of a Palo Alto mobile home park in 2017.

In 2012, the owners of the park, the Jisser family, announced their intention to close and sell the 4.5-acre site to a private developer, a move that threatened to displace as many as 400 low-income residents. A years-long effort to preserve the park followed with the Jissers finally agreeing in May to accept a $40 million purchase offer from the Santa Clara County Housing Authority, the city of Palo Alto and Santa Clara County.

Source: Purchase of Palo Alto mobile home park finalized

So $40m for 400 units equals $100,000 per unit.  At current interest rates, insurance, normal property tax, etc. that implies about a rental change of about $1000 a month.  Some of the economics depends on the funding for ongoing repair and maintenance. Normally that would be the owner’s responsibility.  With the county as owner, we have a classic agency problem.  The implementing partner and the tenants have incentives to get as much maintenance and upgrades as they can if they are reimbursed on a cost-plus type contract.  But an experienced staff and good oversight should be able to keep those costs reasonable.  With that proviso, this seems like a reasonable cost-effective way to provide affordable housing. The county trades $40m in cash for $40m in property, and if rents cover basic maintenance costs and opportunity cost of earning interest on the $40m, there is no “cost” to the county.  The county is the owner of the property and so benefits from future property price appreciation.

But… the economist in me wonders about opportunity cost.  Suppose a private developer put in a mixed use complex that ultimately generated $4m a year of tax for the city or county.  That $4m then would be equivalent to what the city is “paying” for the affordable housing.  Now the county keeps $40m as cash (or in some other investment), receives tax equivalent to the benefit it is offering annually to the 400 families (so it could give the families a $12,000 a year housing voucher), and county residents and developers benefit from the value created by the development (whatever it is, housing for wealthier people, offices, bowling alleys).

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
This entry was posted in San Jose, United States. Bookmark the permalink.