A reply to the CodeNEXT prescription on household affordability by Paul Svhumann

1. Household Affordability Prescription
Comments
Introduction
My comments on this prescription are divided into two sections – things that are talked about and
things that are not talked about. My general impression is that this is not a topic that should be
considered a top issue for CodeNEXT. I fear that the emphasis is placing an expectation on CodeNEXT
that it cannot fulfill. Land development code can only have a minor impact on household affordability.
The real issue is socioeconomic. And, that leads to affordability problems. Oversimplified, Austin has a
situation where 50% of its population cannot afford to buy a home in Austin. Over the years, we've
created though our policies and actions a great divide that separates the city economically, socially
geographically and racially into two regions. This is resulting in a forced migration and diversion of
people with less than the median income away from Austin and out into other cities in Travis County
and other counties. This results in increased traffic, and difficulty in providing services, especially
medical care and education. Changing this will require more policies, tools and actions than
CodeNEXT can supply.
Talked About
Subsidies
There are varies types of incentives and subsidies that are being considered. These do not address the
fundamental underlying issue and only act as band aids affecting few people. And, the money from
these programs has to come from either tax payers, redirection of tax revenue or contribution. None of
these methods create new wealth. Large scale application of this type of policy is unacceptable in
today's political environment.
Density or Diversity (missing middle) of Housing
Increased density or diversity of housing does not automatically result in affordability. An analysis1
of
the sales of housing in ZIP 78704 indicates that size and age are the two major factors. This is shown in
Illustrations 1 and 2. For comparison, the approximate affordable housing price for median income in
Austin is about $200,000. In Illustration 1, it is shown that for recent sales of all types of housing in
ZIP 78704 that this is achieved at a size of zero square feet. There are a few examples around $200,000.
By analyzing the data for housing less than $400,000, the effect of age (when the house was built) can
tell us the type and age of housing that achieves that low price. This is shown in Illustration 2. Only
condos built in 1972 or earlier are $200,000 or less. Also note that the trend is for condos, townhouses
and single family forms of housing to be priced very close to one another.
Illustration 3 shows the distribution of housing by type and price. The numbers at the peaks indicate
the average size of the housing. This demonstrates again the effect of form and size of housing on
1 This analysis was made of data provided by Ed Wendler of sales data in ZIP 78704. The complete analysis is available
at https://drive.google.com/open?id=0B2_qS8rhVYnsMzRRMEJHZ0ZPRkE
June 24, 2016 Paul Schumann 1

2. price.
The analysis considered:
• Form (Condo, Single Family, Duplex, Townhouse)
• Address
• MLS#
• Price
• Square Feet
• Price per Square Foot
• Year Built
My overall conclusion was that at least in ZIP 78704 there is no reasonable way given current market
conditions and construction technology to achieve a price of $200,000, a price still not affordable by
50% of Austin.
Supply
I don't think it is possible to lower the price sufficiently enough to be affordable through increased
supply of homes. According to an article in the National Bureau of Economic Research, typical housing
prices exceed housing cost by about 20% in the U.S. If this is true for Austin, then the only way to
achieve lower prices is to reduce the construction cost. Even lowering the profit margin to zero would
not achieve true affordability.
Preservation
Preservation is great for many reasons, but does nothing for affordability. It usually raises the price, as
a restored historic home is more desirable.
Reduced size
This is not practical. At current price/sq ft of $350, a 429 sq ft residence would cost $150,000 and be
affordable at an income level of $46,000.
Reduced parking
Very minor impact and increased inconvenience
Less regulation
Dangerous and I doubt that the trade off between construction costs and safety or durability would be
acceptable.
June 24, 2016 Paul Schumann 2

3. Not Talked About
Renovation
As age of the residence is an important factor, minimum renovation of the old stock of residences
might possible produce lower priced homes, but still not affordable.
Innovation & Technology
Residence construction technology has changed little over recent times. This should be explored and if
there is potential to significantly lower production costs while maintaining other factors, incentives
could be provided to builders to use these new technologies and innovate.
Paradigm Shift
Perhaps it's time to rethink what we define as a residence. For example clusters of smaller residences
could be designed in a way to share some services. For example on Jekyll Island, the homes were built
there with no kitchens and the residents all went to a common club with dining and recreation. Mini
homes and even micro homes (tiny home movement2
) are being constructed that can be transported
complete and placed on a site. And, we always have the prefabricated homes (single and double wide)
that could be permanently placed on designed land. For an extreme version of a new paradigm for
housing with shared services, look at Community First3
in Austin.
Higher Income
In order to affect his factor, I think we have to look beyond jobs and careers. Many people see the
future as “job less”, and work becoming a series of “gigs”, a concept borrowed from the music
industry.4
And, I think we have to always keep in mind that we designing solutions to enhance the lives
of people who now reside in the bottom 50% of Austin's citizens, almost 1 million folks who can't
afford to buy a home in the city. We should reintroduce vocational education back into the public
schools. It is also important to educate people in civics and how civic engagement can change their
world. We should introduce programs at the middle school level to teach the fundamentals of modern
economics such as Exchange City5
. And, introduce creativity and innovation in various forms and
places from K to12.
As a requirement for thriving in a job less economy, learning how to learn throughout a life will be
essential.
I think we should look to some of the extremely poor areas of the world and how they have had success
in economic bootstrapping. Micro loans6
and replacement of money with digital cash comes to mind,
2 http://www.npr.org/2015/02/26/389263274/living-small-in-the-city-with-more-singles-micro-housing-gets-big
3 http://mlf.org/community-first/
4 Gig is slang for a musical engagement hired. Originally coined in the 1920s by jazz musicians, the term, short for the
word "engagement", now refers to any aspect of performing such as assisting with performance and attending musical
performance.
5 Exchange City is the largest hands-on education program in the world with more than 1,000,000 students participating to
date. Created by the Learning Exchange of Kansas City, there are six Exchange City centers in the United States.
6 Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral,
steady employment and a verifiable credit history.
June 24, 2016 Paul Schumann 3

4. for example M-Pesa7
. Innovation creates wealth. We should encourage and facilitate innovation that
uses local resources and returns new or improved resources back into the local area. Resources includes
people, capital, knowledge,natural, facilities, and partners. Methods to establishing community
funding, and business collaboration would be highly desirable.
Don't bring in companies from the outside. Build endeavors from the grass roots and keep the benefits
within the community.
Contact
Paul Schumann
Lost Creek Civic Organization, Inc.
info@lostcreekcivicorganization.org
512.632.6586
www.lostcreekcivicorganization.org
7 M-Pesa (M for mobile, pesa is Swahili for money) is a mobile phone-based money transfer, financing and
microfinancing service, launched in 2007 by Vodafone for Safaricom and Vodacom, the largest mobile network
operators in Kenya and Tanzania. It has since expanded to Afghanistan, South Africa, India and in 2014 to Romania and
in 2015 to Albania. M-Pesa allows users to deposit, withdraw, transfer money and pay for goods and services (Lipa na
M-Pesa) easily with a mobile device.
June 24, 2016 Paul Schumann 4

5. June 24, 2016 Paul Schumann 5
Illustration 1: Price as a Function of Size of House
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
$2,000,000
f(x) = 216954.09 exp( 0 x )
78704
Square Feet
Price
Illustration 2: Price vs Time by Form

6. June 24, 2016 Paul Schumann 6
Illustration 3: Frequency Distribution of Housing Price by Different Form and Price

7. Appendix
Summary
• Data provided by Ed Wendler Jr.
• Analysis by Paul Schumann using:
◦ Watson Analytics8
◦ Open Calc
• Price is a function of year built.
• Average price for condos, duplexes and townhouses are almost the same, and lower than single
family.
• However, averages are misleading.
• Price is a function of year built, but also a function of size of the residence.
• Price is exponentially related to size of residence for all forms, with a lower limit of ~$200K.
• Price is increasing for all forms built after 1960.
• Size of residence is increasing with year built and there is little differentiation in size by form
for modern construction.
• Price per square foot is also and function of time built, form and size of residence.
• Average price per square foot is essentially the same for condos, duplexes and townhouses and
higher for single family residences.
• However, averages are misleading because of the dependence on size of residence.
• For residences priced lower than $400K:
• Price and price per square foot are strongly related to year built and size of residence.
• Condos built in the 1960s and 1970s are now selling for less (and less per square foot) than
townhouses and duplexes, modern condos, duplexes and townhouses are all selling for nearly
the same price and price per square foot.
Conclusions
• Given the existing market conditions in 78704 together with contextual factors such as
transportation and prevailing construction costs, standards and technology, affordability cannot
be practically achieved through density or diversity increases using newly constructed condos,
duplexes and townhouses (without financial incentives).
8 www.ibm.com/analytics/watson-analytics/us-en/
June 24, 2016 Paul Schumann 7

8. * Based on average price per square foot currently ($350) for residences less than $400,000
** Calculator.net, using approximately payments equal to 30% of income, 2.4% IR, 30 year, 10% down
payment, no other debt
*** Using median income of $64,000
Note: Price per square foot is probably not a constant over this range of sizes. It will probably increase
for smaller sizes.
Reference: http://www.calculator.net/house-affordability-calculator.html
Supply and Demand of Residences
“Prices have escalated relative to production costs in various markets over time, with the temporal and
spatial patterns roughly as follows: In 1970, there was no metropolitan area (including New York City
and San Francisco) in the United States in which average house prices exceeded fundamental
production costs by more than 20 percent. Fundamental production costs are defined as the sum of the
physical costs of construction for a basic, modest quality home, plus a 20 percent land share, plus a 17
percent gross profit margin on structure and land costs for the builder (which is typical over the cycle).
By the 1980 census, mean house prices had become much higher than production costs in the major
metropolitan areas along the coast of California. A similar phenomenon occurred during the 1980s in
many east coast markets running from Washington, D.C. to Boston. The 1990s saw the expansion of
this pattern to a very few interior markets, such as Austin and Denver. Even so, average house prices
are still quite close to fundamental production costs in most metropolitan areas.”
http://www.nber.org/reporter/2009number2/gyourko.html
June 24, 2016 Paul Schumann 8