The Nasty Logistics of Inclusionary Zoning

Moneybox
A blog about business and economics.
June 7 2012 7:21 AM

The Nasty Logistics of Inclusionary Zoning

For the past few years an "inclusionary zoning" ordinance that tries to help modest-income people by mandating that developers set aside a share of new units to be sold at below-market prices have been in effect in Washington, DC. You'd think condos priced well below market rates would be selling like hotcakes, but as Lydia DePillis writes in practice they tend to languish vacant. Why? Because it's hard for low-income people to get a mortgage:

The very first two condos created through inclusionary zoning are in a building at 2910 Georgia Ave. NW. While the rest of the units have sold out, these two have been on the market for almost a year now. Acquiring them requires filling out a tall stack of paperwork, but it should be worth it: One costs $130,000 (compared to the market rate of $250,000) and the other is $220,000 (compared to a market rate of $350,000).
The problem is, you can't get a mortgage—or not very easily, at least. Most low- to moderate-income buyers want to get a Federal Housing Administration-backed loan. But the banks that FHA works with don't want to issue loans on properties that can't be resold at market rates in the event they go into foreclosure. As currently structured, the District's IZ program keeps those affordability restrictions in place, so FHA is a non-starter.
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One solution would be to try to further tweak the program. But the fundamental issue here is that IZ is an extremely cumbersome way to try to help people. Instead of giving one family a $120,000 discount on a condo and giving another family a $130,000 discount on a condo the city could just hold a lottery. Look at the list of DCPS students eligible for free school lunches, select two of them randomly, and cut each family a check for $125,000. There'd be little need for paperwork, no need for loans, and the families could decide for themselves how they want to use their bounty. If the city wants to obscure the cost of the lottery, they could simply say that developers of market rate housing projects need to stage the lotteries.

It's true that unlike IZ, my "give lots of money to people in need" initiative would not ensure the existence of economically diverse neighborhoods. But a question people have to ask themselves is what's the purpose of these policies. Are they supposed to help low-income families or are they supposed to make upscale yuppies feel better about their neighborhood? I think the giveaway is that the lucky inhabitants of these "affordable" units aren't allowed to sell the units at market prices. Imagine a low-income family faced with high medical bills. Luckily for the family, it actually owns an apartment that's pretty expensive. But perversely, no matter how badly they need the money they're not allowed to sell the apartment to raise it.

The saving grace is that in practice it's hard to enforce these rules perfectly and many units may in the end wind up being rented out at market rates under the table.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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