Speaking of below market rate (BMR) units, applications to purchase a brand new two-bedroom condo at 3190 Scott (aka 2350 Lombard) for $277,650 are due by July 11.
The purchase price for the 1,057 square foot unit #303 on the border of Cow Hollow and the Marina includes a parking space. HOA dues are currently set at $428 per month. And to qualify, a two person household (the minimum for a two-bedroom unit) can currently be earning no more than $71,550 per year.
Market rate units in the building are currently priced from $799,000 with the most expensive two-bedroom having sold for $980,000 in December.
∙ MOH Listing: 3190 Scott Street #303 (2/2) – $277,650 (BMR) [sf-moh.org]
∙ 2350 Lombard Rising: Twelve New Townhouses Over Commercial [SocketSite]
∙ Below Market Rate For Above Market Down (And A Bit Of Irony) [SocketSite]
What terrifies social engineers is the fact that more than 80% of income disparity can be explained within the family, which suggests that your income is up to you and not society’s fault. If you doubt these statistics, look at any family you know and you will see rich and poor. Often the gulf just between siblings is astonishing, Jimmy and Billy Carter, Bill and Roger Clinton.
There does seem to be a statistically identifiable disparity between oldest and younger siblings, however, so maybe we should give these BMR’s to loserish middle and youngest children instead of just slackers in general.
So, since American workers have been earning less and less of the rewards of capitalism this is proof they are slackers?
http://www.frumforum.com/incredible-shrinking-workers-income
No wonder unemployment for the young and minorities is sky high–they are losers and slackers.
Whereas the FIRE economy workers must surely represent the pinnacle of human achievement, because everyone knows one’s salary is directly commensurate with one’s contribution to society, and surely Wall St. bankers deserve those billion dollar bonuses.
If you make 90% of the median income you are a slacker to unwarrantedinlaw.
That guy making 90% of median is probably in the middle of the rental pool, which in SF means a moderately subsidized renter (Paying 1500/m instead of market 2500, for instance). He has little incentives to jump into homeownership, except if you make it really really attractive for him, like a 60-70% subsidy on a new home.
He’s not a slacker, but a guy living in an oxygen tent that helps him survive in a very hostile environment. He’ll never really know what the real world looks like. Neither will his kids…
Ha. Ha. Ha. You think the “subsidy” for rent control is the difference between $1,500 and $2,500? Give me a break. You’ve really started to believe your own propaganda.
Which is why it’s not surprising your math is wrong on the “subsidy” for BMR units. The person buying the BMR unit is not getting a 60-70% subsidy. He is similarly restricted on the price when he goes to sell it to the next owner. The buyers are agreeing to limit their upside potential so they are not reaping a windfall. The property has encumbrances on it so it’s not “worth” the same price as the free market place. You can say the developer paid a “tax” of a few hundred thousand or so for each unit when he sold it for less than it was worth. But the BMR owner isn’t getting a subsidy–he’s just making an agreement to limit his property rights (only sell under X price) and only sell his home to others that will also agree to so limit their property rights.
You obviously take the position that those at median income and below should only rent (and you will resent them for that because you think they are getting a huge “subsidy” for renting). What’s the cutoff? Should only the top 15% or so own?
Maybe instead of only a few people owning, we need to fix the corrupt rules we currently have, and make housing cheaper for average folks, like was historically the case when the policies seemed to work out better for the middle class.
“But the BMR owner isn’t getting a subsidy–he’s just making an agreement to limit his property rights (only sell under X price) and only sell his home to others that will also agree to so limit their property rights.”
Absolutely not true. When the developer sells the development for $X/sqft, and the BMR buys it for well under $X/sqft, then the BMR buyer is definitely getting a subsidy.
Giving up the upside is just passing part of the subsidy on to the next buyer. That’s the substance of the transaction.
We already know where you stand vs. where I stand on the policy issues, so I won’t get into that.
You think the “subsidy” for rent control is the difference between $1,500 and $2,500?
Yeah, like, duh. Subsidy from the landlord to the tenant. Sure the tenant is in a golden cage but many market-bound prospective tenants would take that any time.
The person buying the BMR unit is not getting a 60-70% subsidy. He is similarly restricted on the price when he goes to sell it to the next owner.
He still gets to live in a place priced 60 to 70% less than the guy next door, pays 3 times less in mortgage, 3 times less in property taxes. Not everyone is buying in SF to get into the appreciation lottery. That’s not why I bought late last year.
Historically prices have followed inflation. We are in a period of high prices which makes future big upswings less likely. Also a BMR at 60-70% discount will fare pretty well even if prices fall 20 to 30%, because it will still be way cheaper than market priced units. The case of 888 7th street shows that it was an overpriced BMR in an overpriced building.
What’s the cutoff? Should only the top 15% or so own?
Open the rental and property market by repealing prop 13 and rent control and you’ll get huge adjustments. I have met a guy who was sub-letting his 90-year-old mom’s apartment for 20 years. She’s been in a home in NM for ever, but yet her apartment is not on the market. All of this is illegal and there’s a ton of these around. Many are 2nd homes kept just for the week end or the occasional guest. I know 2 of them in my former rental building.
When people have to pay the right price, they’ll adjust. Pay more, move out, whatever. People locked out from today’s market will welcome the newly marketed and cheaper units. The current system is suffering from congestion with too little rotation.
Well, a subsidy would be the government giving someone a credit to buy a home, as it did the last couple of years. In this situaton the government is requiring developers of certain sized projects to sell a certain number of BMR units. So, they developer will make less profit and, if anything, this is best described as a tax developers have to pay for building. And the tax is earmarked specifically for affordable housing.
But after the first transaction is done, the program is a net gain for society (even when looking at it from the capitalist/developer point of view, as lol and UWIL are doing). Remember, this is a voluntary program. There is no “subsidy” for subsequent owners–a group of buyers could get together and decide to limit their property rights in this manner and it should be okay with our uber-capitalists because it’s all done under the normal rules of capitalism, right? This is no different–except the government is running it, and in effect, suggesting it to the parties. These people are all agreeing to buy for a lower price but be limited to selling at this lower price. And the only people that lose are the realtors and bankers who make less money off housing. BMR units can put downward pressure on other market rate housing as well, because many buyers could choose between market rate and BMR.
And I’m sorry lol, a $1,000 rent control “premium” for the typical medium income renter is ridiculous. We are talking about the average, or typical, rent control “subsidy”, for someone at 90% of medium income. You seem to have all these long term renters that are making a killing but I hardly know anyone that is in their 20 to 40s that is making a killing. Even people that have been in their places 10 years aren’t making a killing. Some are at 10 years and may be benefiting, but nothing like the scale you envision and the average is probably someone in their place for like 3 or 4 years and thus is not getting much of a “subsidy”.
Open the rental and property market by repealing prop 13 and rent control and you’ll get huge adjustments.
I agree with this, but I also strongly favor removing the humongous federal homeowner/buyer subsidies (i.e., the mortgage interest and property tax deductions).
I’m not a supporter of subsidies in principle, whether it’s the BMR program, prop 13, rent control, finanical bailouts, etc. But calling people who make $80K or less “losers” or “slackers” is a “let them eat cake” type of comment and shows how out of touch with reality certain San Franciscans are.
Society can’t function if everyone is a lawyer, doctor, social networking programmer, or real estate flipper. The world also needs teachers, nurses, social workers, cops, chefs, welders, mechanics, plumbers, etc. All of these are either skilled trades or jobs requiring a college education. How much do you all think these people make, on average?
And I should add a caveat: the price limitation on resale doesn’t act as a “subsidy” in my book, but the down payment assistance does. The way I understand it, the downpayment assistance loan is interest free and payable at 30 years, but the Mayor’s Office (or other agency providing the assistance) gets the commenserate percentage of any apperciation (so if they paid 6% of the 20% down payment the agency would get 6% of any future appreciaton at resale). That acts more like a subsidy.
And I don’t know how I would classify the mortgage interest tax deduction or capital gains exemptions that apply to all housing–as subsidies, I guess.
the government is running it, and in effect, suggesting it to the parties
I can imagine the discussion: “if you would like to build your building the way you want, we suggest you put 30% BMR to expedite permitting”.
There’s no “suggestion” in developer’s BMRs. They simply have no choice if they want to build what they want to build where they want to build. The city is in charge there and can block the project very easily if the developer doesn’t comply to the “suggestion”.
BMRs are subsidized. Because BMRs remove units from the market, it makes the other units less accessible and therefore more expensive. Market rate and developers subsidize BMRs the same way Market renters and landlords subsidize rent controlled tenants.
The same way we taxpayers and tenants subsidize the FIRE economy. There are subsidies all the way around in our crony-capitalist economy. You just seem to be confused as to which way the subsidies primarily flow–they usually flow to the rich. Middle class Americans are the are “losers” not because they deserve it, as you imply, but because neoliberal policies have succeeded in diverting our collective wealth to the wealthy few at the expense of the majority of people. Your arguments about the free market fixing our housing problems are a fantasy. Unregulated capitalism with result in more real estate bubbles, not less.
As always, you are focused like a laser on the point of view of the capitalist, in this case, the developer. Yes, the poor developer has to pay a tax. Boo hoo. But the program is remarkably efficient because once it’s in the BMR program, it locks in affordable housing for a long time to come and is fair to everyone. The only people suffering are the bankers who can’t charge interest on a bubble price. It’s a price that’s well worth it for society. I would gladly take that bargain: some developer made $200,000 less than he could have in 2007, but for the next few decades a working family can live in the City and have a monthly cost of housing of only $2,000 vs. $3,500 they would normally pay. For decades!
And the government doesn’t even have to make it mandatory (although that’s a good way to do it). They could do it voluntarily–the City could pay people to deed their property into BMR units, or something.
Agreed on the fact that the PWBs have given too many subsidies to cronies.
But a well regulated system shouldn’t be prone to bubbles.
– Impose banks to hold a sizable chunk of mortgages on their books (see these crybabies whining at the 5% we’re trying to impose on them)
– Mortgage should be regulated to be 20% down minimum, no Neg Am or I/O ever. 30% should be wound down and 15-20 years should become the norm.
– Gross Income requirements should be 4 times mortgage + taxes.
– No more tax deduction on interests. The taxpayer shouldn’t be in the business of paying for someone’s mortgage. Of course this will kill industries that live on Itemize deductions like charities, but a world with a good safety net shouldn’t require charities.
No more recklessness, no more bailouts, no more subsidies.
I bet the owner of that unit could almost cover the HOA dues by renting out their parking spot. Otherwise, the economics seem pretty tough for a couple earning $71k. Not a lot of cash leftover.
Re:”…..And to qualify, a two person household (the minimum for a two-bedroom unit) can currently be earning no more than $71,550 per year.”
Forgive me, I’m unaware of the rule. What happens if the “applicant” earns more than $71,550 in the future. Would they be required to lose the subsidy?
No, the income limit is only a requirement at the time of purchase.
lol,
I thought you were a full-fledged free marketeer, so it’s surprising to see you propose fairly strict governmental regulation of mortgages. I actually agree with your reforms–which is actually getting back to the governmental regulations put in place after the Great Depression. But the regulation you propose is very similar to the BMR program, as far as the net effect. The net effect is the government limiting the price of housing–albeit through different mechanisms. And your proposed regulations would apply to more people than the BMR program.
I used to have the same hostility to the BMR program as you because I too was taught neoliberal propaganda. Our society is saturated in it–so that we view regulation of rich people as a tax that makes the market less “efficient” and trickles down to us all, whereas regulation of average folks is necessary because they are greedy and will cheat and steal from the producers of society (the wealthy). Neoliberal economic philosophy is simply a sophisticated rationalization for the inherent inequalities and unfairness of unregulated capitalism. I have lost all faith in that religion.
So I’m glad to see you are not a total neoliberal and you see the need to regulate housing and banks. I just want to dispense with the quaint notion that “free market” capitalism is fair or efficient, and to go with the most practical solution that helps the greatest number of people. Keeping housing prices at a traditional multiple of income is the result we should be shooting for. Using traditional regulation of housing, as you suggest, is okay. But it’s not nearly as efficient as a program like San Francisco’s BMR program. We should expand that to all people in the country, so that one will be limited on what they can sell or purchase a home for (based on income), with very few exceptions (such as new construction, those that make over $500,000, or something).
Housing is a fundamental need. We need to end the system that puts a huge “tax” on average working Americans and provides a “subsidy” to banks, insurance companies, and realtors. There really is a transfer of wealth–but it goes the opposite way that the capitalists claim. The transfer is from the middle class to the banking and elite class.
lol,
I should also point out that your solution also provides a “subsidy” to new homebuyers while taking from current home owners and banks. By regulating who can buy and the terms of a mortgage you will be using the government to lower the price of housing and thus take money away from current homeowners and banks who could have made more money off of a unregulated market.
“I should also point out that your solution also provides a “subsidy” to new homebuyers while taking from current home owners and banks. By regulating who can buy and the terms of a mortgage you will be using the government to lower the price of housing and thus take money away from current homeowners and banks who could have made more money off of a unregulated market. ”
That seems like stretching the definition of subsidy quite a bit.
The BMR program is an obvious subsidy, so I’m not sure why you put it in quotes. The buyers of the market rate condos are literally paying more money in order to subsidize the BMR units.
To many programs in this city are based around helping special interests, so it’s not surprising that this program screws certain classes of people (even for example, those with low-for-the-city income but responsible savings) and also makes the whole rest of the city more expensive, which screws everyone else except the BMR buyers. Lose-lose.
The net effect is the government limiting the price of housing
Probably. Just like the government forbids civilians from shooting each other. The end result is a pretty peaceful society even if it’s a restriction of personal freedom.
A house is a place to live. Creating bubbles messes up a lot of things. Too much of the people’s income can be spent on overpriced housing and less on retirement planning, education, health protection. Then the bubble burst and the overpriced mortgage that prevented you from saving or investing for your future drags you down with no safety net.
About BMRs and social programs, that’s where we agree to disagree. There’s just so much social programs should do. Joe Schmoe #1 kills it at work, takes in a great pay, makes personal sacrifices (his kids don’t see him much)and pays 700K for his condo. Joe Schmoe #2 never really lived up to his potential. He got a part time low paying job but manages to live in the same building that JS#1. His kids see him a lot because of the schedule.
Who do you think the kids of JS#1 will take as a model? Hard working absent dad? The smarter player JS#2?
In some way Joe Schmoe #1 is Germany. #2 is Greece. The subsidy keeps coming and #1 is really pissed. But he has no choice because they’re in the same boat. We will all become Greece if the rewards are not worth the risk.
I agree with the premise stated above that a home is a place to live. For some folks “participating” in the real estate marketplace however, the housing marketplace is a casino.
Flippers, speculators, foreign hot money sources and fly-by-night mortgage brokers create, inflate, sustain and up until fairly recently perpetuated the bubble that lol decrys in his comment of 10:45 AM. Certainly not on their own, I’ll admit, but a significant factor. At least as significant a factor as the amount that the mere existence of the BMR program “makes the whole rest of the city more expensive” (really, the BMR program’s two-bedroom units are making condos at the Ritz-Carlton more expensive? Get real.)
As I indicated above however indirectly, I think that The City has a reasonable interest in supplying a small countervailing force to the ridiculousness of the housing marketplace in this city where lots of people want to make money by flipping, speculating, etc. That activity distorts what would normally be the market-clearing, equilibrium price for low-end, entry-level condos for people that actually live and work in The City (which is the market segment we’re discussing here).
The BMR program, for all it’s faults, does limit the participation of flippers, speculators and foreign money in a very small sliver of the market and again, for that reason it is worthwhile, lol’s attempt to make it out to be some human potential-threatening, soviet-style cradle-to-grave “social program” notwithstanding.
“At least as significant a factor as the amount that the mere existence of the BMR program “makes the whole rest of the city more expensive” (really, the BMR program’s two-bedroom units are making condos at the Ritz-Carlton more expensive? Get real.)”
So market forces do not apply here. Got it. 🙂
“That activity distorts what would normally be the market-clearing, equilibrium price for low-end, entry-level condos for people that actually live and work in The City (which is the market segment we’re discussing here). ”
Why is that more true in SF than elsewhere? I realize that market forces do not apply here because the Board of Stupidvisors creates a magical forcefield over the city, as you mentioned, but what else makes SF different? What do you think the equilibrium price would be and why are units not available at that price?
It’s worth mentioning that, even if you think Bayview and other southern neighborhoods should not be the only place for affordable housing, there appear to be units in this price range at the Palms, per SocketSite:
https://socketsite.com/archives/2010/04/palms_to_palms_for_555_4th_street_103.html
I wonder what is going on with the Palms every time I walk by.
MLS only shows 2 units for sale(1 short, 1 REO). Commercial space never seems to have been utilized.
How many units are delinquent, and just waiting for the banks to foreclose??? Certainly, the banks are not looking forward to showing $200k+ losses on each unit and taking over the $500+/month HOA payments…
The Ritz Carlton example is a real stretch to prove your point. Let’s use a hypothetical example that’s closer to real life. Developer builds a building with 100 2BR units and has a total nut of $70M or $700K per unit at market rate. He has to sell 15% of the units as BMR for $250K each. That means the remaining 85 market rate units must sell for $779 each for him to nut out. Each of these 85 buyers received abso-friggin-lutely ZERO value for the additional $79K they paid for the units. What they have done is collectively subsidized 15 people to the tune of $6.7 Million – and it’s not tax deductable and your property taxes aren’t adjusted to compensate. It’s the subsidy that keeps on giving.
Yeah, that seems like a more realistic scenario. However, the developer would presumably be competing with other buildings/bad economy and may not be able to pass the full $79k onto each market rate buyer.
Agree with J. They have to charge what the market can bear so the buyers of the market rate units are not “subsidizing” the BMR units. If there is any “subsidizing” going on here, it is the developer that is paying out of his (potential) profits. And all zoning limits developers potential profits.”
But once the sale is done then there is no more “subsidy”. The buyers are agreeing to limit their selling price and only sell to others that similarly agree. It is not “taken off the market.” It is sold to someone else that agrees to follow these rules. I don’t like the word “subsidy” because it implies BMR buyers are getting such a good deal at the expense of other average people–it’s a word that describes one’s emotions rather than the economic reality. The only one paying is the one most able to afford it–and he is building condos anyway so making him pay a tax via a good in kind seems like an efficient way to do it.
Most people here mocked BMR buyers in the past for limiting their upside potential! They weren’t smart capitalists and were foolish to agree to limit their property rights, according to our free marketeers! So now once it becomes apparent how sweet it is to avoid bubble prices and not have to pay a huge mortgage (as long as one isn’t greedy and doesn’t insist on 10% plus appreciation a year) the uber-capitalists want these people punished. Only the rich deserve to have any benefits flow to them. Why should some people get to pay a reasonable price to live in their home? We should all suffer at the hands of the bankers?
Plus, I’m not so sure the developer can’t be creative on their taxes to account for the “loss” because of this regulation. In fact, I would suspect that there is a tax break of some sort.
But once the sale is done then there is no more “subsidy”. The buyers are agreeing to limit their selling price and only sell to others that similarly agree.
You fail to understand economic substance here. The buyer is getting a massive subsidy, and then he/she has to pass part of this massive subsidy onto the next buyer when he/she sells.
You’re trying to frame it by saying it’s about sacrificing gains, and that’s not really the purpose here. It’s nice framing for an ideological argument, but not really true in substance.
I don’t like the word “subsidy” because it implies BMR buyers are getting such a good deal at the expense of other average people
You may not like the word, but that’s exactly what’s happening if you understand anything about economics. BMR buyers are becoming the chosen few who benefit, at the expense of average people, below average people, and above average people.
lol, your hypothetical is unrealistic and exhibits your prejudice:
“Joe Schmoe #2 never really lived up to his potential. He got a part time low paying job but manages to live in the same building that JS#1.”
A part time, low paying job is only going to bring in around $20,000 a year. Unless by low paying, you mean median, and by part time, you mean full time. Then yeah, people that make around $60,000 by definition aren’t living up to their potential in your world. I guess some of the BMR units go down to 60% of the median, but I doubt there are many people that make around $40,000 on a low paying part time job. I would say these people are smart. It’s about the only economical way to live in the City. They are probably the type of people that also limit their budgets in other respects and even though they have a median income they may be saving a lot more than people that make over $100,000 and blow through it.
And forget the Palms, here’s a BMR unit at the Metropolitan: http://sf-moh.org/index.aspx?page=829
What I want to know, is how often the units sell for under the price the Mayor’s office allows? Are there usually multiple offers during a “lottery”? Are the offers usually below asking?
They have to charge what the market can bear so the buyers of the market rate units are not “subsidizing” the BMR units.
um… they are subsidizing the BMR units. without the BMR units, there would be a larger supply of market rate units, increasing supply, therefore decreasing the price for all market rate buyers… clearly someone was asleep in econ.
“BMR buyers are becoming the chosen few who benefit, at the expense of average people, below average people, and above average people.”
Yes, you keep repeating this allegation. But you haven’t proved it. I submit that it is you that is failing to think critically about the economic reality of the program.
Subsidy = 1. A grant or gift of money. According to my Webster’s dictionary.
Is the government giving any money? No. It is requiring the developer to sell to certain people for a restricted price. The people buying the property do not receive the same property rights that people that pay market rate. So they are not getting a “subsidy” to buy the same thing the market rate buyers are buying. Market rate people do not have the same restrictions–they can sell for any price at any time in the future to any buyer they choose. Therefore, their property is “worth” more, but they also obviously have higher carrying costs because of these greater rights. The BMR people are getting a lower priced home because they have fewer rights, but they have less carrying costs because they are not gambling on the same upside potential. Again, you uber-capitalists mocked the BMR owners in the past not because they got a subsidy, but because you thought they made a bad economic choice for limiting their upside–so it’s ironic that you are now focusing on the benefit they get–not all of sudden that you realize how valuable it is.
“BMR buyers are becoming the chosen few who benefit, at the expense of average people, below average people, and above average people.”
Again. You have proved no such thing. Average people are benefiting more than they are being burdened by this program. Way more. The ONLY possible “subsidy”, and it is not best described as a subsidy, is from the developer to the first buyer. And these developers are not “average” people. No other average people pay. You can make the argument that it raises the cost of housing in general, but I think it’s just as possible that it lowers the cost of housing in general because it competes with market rate and rent controlled properties for housing. It provides a reasonable priced home for many working families in the City.
The beauty of the BMR program is that it doesn’t take from average people–it has a very minimal cost! Some people are going to be lucky enough and smart enough to qualify. But just because not all of us can escape the clutches of high priced housing because of the subsidies our society gives the FIRE economy doesn’t mean we should all suffer. We should all demand similar regulation instead of turning on people that are living within their means and acting prudently.
“um… they are subsidizing the BMR units. without the BMR units, there would be a larger supply of market rate units, increasing supply, therefore decreasing the price for all market rate buyers… clearly someone was asleep in econ.”
I did not sleep through econ. I am the one that is trying to be more precise and labeling things as “subsidies” seems to muddy the waters more than it describes reality. To certain people, it seems to mean a benefit or advantage that people I don’t like get.
As to the substance of your argument yao. Maybe it raises prices. Maybe not. Many of the people that purchased BMR units would be competing for market rate units or rentals and would have thus been bidding up prices. That was certainly the case during the last ten years when BMR buyers would have easily qualified for many MR homes. In the mania of a bubble I bet the BMR program slightly ameliorated the rise in condo prices.
Furthermore, that’s not the way the people above-thread were using it. They were arguing that people in the same building were subsidizing the BMR units. Now you guys are shifting to a broader argument–that the City-wide effects of BMR units raise prices for market rate people. As I said. Maybe. Maybe not. I’m skeptical however.
And it’s not that I slept through my econ classes. I am now simply questioning the neoliberal assumptions (propaganda) I was taught.
For BMR units, you can’t sell for a profit until you live there for a certain period of time. For San Francisco, how long do you have to live there until it is completely yours and be able to sell at market rate in the future?
On subsidies there are two ends : the provider and the consumer. It is pretty clear that the developer and/or the market rate buyers are subsidizing the BMR program. Depending on how well the developer can sell the building they might be able to transfer the subsidy liability completely to the market rate buyers. If the building flounders then the developer might eat the entire subsidy.
On the other end the recipient of the subsidy is the BMR program itself, not the individual BMR buyers. As someone mentioned above, BMR buyers ultimately transfer their subsidy to the next owner when they sell.
… that is unless the BMR program has a time limit (50 or 100 years?) in which case the last owner before the limit expires lands a huge windfall when the property purchased BMR becomes MR. Or maybe there’s a boundary condition clause in the contract that redirects that windfall back to the city’s housing program, whatever that might be in the next century.
This is unlike rent control where landlords directly subsidize their tenants.
Just some musings though, I’ve never taken an econ class let alone 101.
“labeling things as “subsidies” seems to muddy the waters more than it describes reality. To certain people, it seems to mean a benefit or advantage that people I don’t like get.”
Most people would consider something a subsidy not just if a direct grant of money were made, but if some good or service was provided at below market rate. You can generally make an economic equivalence between indirect subsidies and some set of direct payments. (i.e. The BMR unit has a market rate “price”, the government gives the BMR buyer a check for the difference between the BMR price and market rate, the builder pays the difference back to the government as a development fee,…)
I’d consider the governments implicit guarantee of Fannie’s debt an indirect subsidy for homeowners since it reduces the cost of financing below what market rate would be.
You do have a point that ownership of a BMR unit is not the same as free market ownership of a unit due to the appreciation cap on the BMR, but you could estimate the value of the appreciation cap to compare the two. Given that historically home prices have tracked wages somewhat (which I believe sets the BMR cap) and that especially in SF the monthly “owners premium” is a chunk of homeownership cost, which is probably reduced or eliminated at a BMR price, my guess would be that even net of the appreciation cap BMR ownership is subsidized below the cost of free market ownership.
“This is unlike rent control where landlords directly subsidize their tenants.”
While not a fan, I technically don’t consider rent control a subsidy as long as there is vacancy decontrol. If you were a landlord writing a 100 year lease of your own free will, you could pick some rental price that you felt would compensate you adequately for the inflation risk over those 100 years.
With vacancy decontrol a landlord in theory could do the same and set a rental price to compensate for extended tenancy/inflation risk. In practice, it is very difficult to calculate a correct price and there is an adverse selection issue with getting someone to pay that price.
It’s an interesting question. How would you go about separating the investment and cash flow aspects of home ownership from the “place to live” aspect so that people could just buy “a place to live” without having to compete with investors?
I suppose the city could buy units on the open market and then sell them with the following restrictions.
1. You can never rent it out. (If you’re renting it out then obviously you don’t need it as a “place to live” and should sell it to someone who does.)
2. When you wish to sell the unit it is sold at auction. If the price is above what you paid the city keeps 100% of the gain. If below, the owner takes 100% of the loss. (Although the owner gets first right of refusal if they’d rather not take the loss.)
3. Only fully amortizing loans to be used to purchase the property with no subsequent refinance or second mortgages. (If you want to “unlock your equity” you will have to sell the unit to someone who “just wants a place to live”.)
It would be a fascinating exercise to see just how much of a discount a unit would sell for under those terms. The difference between that and the market price would make clear the subsidy being provided. Unlike the current system where the subsidy is in kind instead of in cash and is provided by some combination of the developers and market rate purchasers.
You’ll notice that I haven’t made any mention of any restriction on who could bid on the units. Anyone who “just wanted a place to live” could.
If you’re going to divide society into a favored and a non-favored class then you cannot enhance the ability of the favored class to own without impacting the non-favored class’s ability to own. Ownable units in SF is a limited resource.
Before you take that step there should be a clear general societal benefit to implementing this discrimination.
I can easily think of examples. It would be useful to society for emergency responders to live in the city so that when the big one hits they’ll be here to respond instead of in Santa Rosa or Hercules or Livermore. So you could create a favored class of police, firemen, doctors, nurses, and utility workers. Enhancing their ability to own in the city would create a general societal benefit even for those in the non-favored class whose ability to own would be impacted.
However I would love to see a cogent explanation about how society benefits by enhancing the ability of someone who earns 1 dollar a year less than some cutoff at the expense of someone who earns 1 dollar a year more benefits society as a whole.
I would also like to know why the favored owners are not required to sell their units if at some later date they leave the favored class.
Now one might argue that our current system of allocating resources to the highest bidder creates a favored class called “the rich” whose ability to own is enhanced at the expense of “the poor”. However in the libertarian fantasy world where “acquiring wealth” is 100% correlated with “generating economic value”, allocating resources proportionately to wealth would be an optimal system. In the real world where wealth is more correlated with the ability to extort money through cartels, control over taxes and financial jiggery pokery one might be able to make a case for other allocation systems.
In the end my conclusion is that the current BMR system is a hot mess created by good hearted people with good intentions and no ability with critical thinking.
Rent control is not a subsidy for the following reasons.
1-Landlords buy their buildings at a price that takes into account the potential rental value of each unit. The landlords may wish they could make more cash by stripping away tenant protections, but they arer not subsidizing another party by honoring a deal that had an upside for them, too.
2-Even the very few landlords who owned before the implementation of rent control had an opportunity to raise rents as high as they wanted before regulations went into place. Every rent-controlled unit in the city has a market-rate rent underlying its current cost.
3-Everyone has choice in the matter. A landlord can sell or refuse to buy a protected buildings. Tenants who arrive in 2011 can choose to pay current prices or reject them and commute from a cheaper city.
A real subsidy works this way: In CA, unless they have the rare option of commuting from Nevada, wage earners have no choice but to pay the higher income and sales taxes created by the Prop 13 handout. (Both have nearly doubled since 1978.) At the federal level, wage earners have no choice but to pay for the mortgage-interest deduction and $8,000 buyer tax credits. Or mortgage bailouts. Or worst of all, the Federal Reserve’s persistence in cheapening money to the benefit of mortgage holders at the expense of workers and savers. This is the ultimate subsidy, and it all goes to property owners, not renters.
Long-term landlords have seen their costs drop dramatically over the last 20 years. Their interest rates have been slashed by more than 60 percent, driving property values higher, often out of reach of responsible tenants who refused to use option ARMs.
Renters cannot escape this dynamic by moving a few zip codes away. They’d have to leave the country. SF and other rent-controlled districts allows them to duck some of the fallout by not imposing a ruthless “free” market on tenants, while the feds and state coddle property owners to the point of absurdity.
A few more points: If you truly believe that rent control inflates the current market, then you have to concede that most long-term tenants once paid excessively for their units. If they lose the protections they expected when signing the original lease, they should be compensated accordingly, correct? After all, they would be losing their protections because of a need to eliminate subsidies, so they’d be entitled to regain any subsidies they paid.
Also, to the poster who ranted about rent-controlled pied a terres and hand-me-down homes: You’re right. Those are illegal. So crack down on them. But don’t strip hard-working tenants — who have subsidized the rest of the real estate market — of a protection that allows them stable housing AND has created purchasing discounts for the landlords who own their buildings.
“Rent control is not a subsidy for the following reasons.”
If you divide society into a favored class and a non-favored class, the favored class cannot benefit except at the expense of the non-favored class.
It may sometimes be obscure and difficult to quantify exactly who is paying the price for the favored class’s benefit. In the case of rent-control it’s some combination of the landlord who cannot charge market rate and the market rate tenants.
The fact that rent-controlled tenants cling so ferociously to their units is all you need to prove that there is a subsidy. If there was no benefit it would have no value.
“It’s an interesting question. How would you go about separating the investment and cash flow aspects of home ownership from the “place to live” aspect so that people could just buy “a place to live” without having to compete with investors?”
If you were separating the pieces of ownership in an economic sense to look at the value of different pieces (i.e. what is the value of the “appreciation option” that the BMR owner loses, what is the value of the “rent control option”,..) My guess is that you’d be best off thinking of some of these pieces like financial options and trying to price them along those lines. Forgoing appreciation on a BMR unit above a certain level is similar to having a covered call on a stock.
“It may sometimes be obscure and difficult to quantify exactly who is paying the price for the favored class’s benefit. In the case of rent-control it’s some combination of the landlord who cannot charge market rate and the market rate tenants.”
I agree that in these cases quantifying the price can be hard, but what makes it not a subsidy is that at the start of tenancy the landlord could charge market rate plus an appropriate premium to compensate for rent control. If I write a 10-year option contract agreeing to sell an amount of corn for $100/bushel in return for some premium, if corn goes to $200 of course my counterparty is going to cling ferociously to the contract and derive a benefit as well, but since we both previously agreed to the option premium their benefit isn’t really a subsidy.
Were owners of RC’d units forced during vacancy decontrol to rent them at the same price as equivalent free market units that would be a subsidy. In that case the owners would be forced to give the tenants a free rent control option where the option obviously has economic value.
Not that not being a subsidy makes it a good market regulation though. These types of long term options can be hard to value and can blow up on one party. Rising inflation can drive a landlords’ fixed costs above rental payments. Banks being basically forced to offer 30-year fixed mortgages is a similar regulation that can similarly blow up on the mortgage holder.
“The beauty of the BMR program is that it doesn’t take from average people–it has a very minimal cost!”
Umm, no. But thanks for playing. SFHawkGuy, you’re clearly stuck in your own bubble, no pun intended, and don’t understand economics in the least. There’s really no point in discussing this further, because you don’t understand market forces, don’t understand subsidies, and don’t understand how BMRs affect the overall housing market.
SF housing is a limited resource and should be treated as such, instead of creating favored and non-favored classes as tc_sf said. tc_sf also makes a good point that we should allow certain types of people in these houses because it’s beneficial to the city. This income nonsense doesn’t do anything for the city.
“tc_sf also makes a good point that we should allow certain types of people in these houses because it’s beneficial to the city.”
I think I made two mistakes there:
1) it should say “diemos” instead of “tc_sf”
2) it should say “could” instead of “should”
Re: “However in the libertarian fantasy world where “acquiring wealth” is 100% correlated with “generating economic value”, allocating resources proportionately to wealth would be an optimal system. In the real world where wealth is more correlated with the ability to extort money through cartels, control over taxes and financial jiggery pokery one might be able to make a case for other allocation systems.”
San Francisco seems to excel in class distinction.
Cartels, control over taxes, and financial jiggery have more correlation to generating economic value than acquiring wealth
? Really?
If your statement were true, would not Libya be the most prosperus place on Earth?
Given our current economy, I’m not surprised capitalism is suspect. But, I am surprised what passes for fact.