How To Finance Housing in a Smart and Local Way: A Housing Q&A

What cities have successfully financed housing at the local level? How does tax increment financing work? When should cities stop subsidizing large-scale housing projects? Strong Towns President Chuck Marohn answers all these questions and more in this episode of the Strong Towns Podcast.

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  Chuck Marohn 0:00

  Hey everybody. This is Chuck Moran. Welcome back to the strong towns podcast. A while back, I gave a virtual presentation to a group in Bozeman, Montana, and the presentation was on housing. And we got to the end of the session, and there were still a lot of questions that we hadn't been able to answer. And so I said, Go ahead, submit them. We'll take them, and I'll try to do them in a podcast. I've done this a couple times before, and kind of crazily to me, you guys have given us pretty good feedback on these. So the team here set me up to do this again, and I'm going to do it again. They've arranged these. They put these in a, you know, in a Google Doc that I just printed out. I have not read them, so I'm going to read them live with you, and I'm going to try to answer them, starting with this one.

  Chuck Marohn 0:55

  What municipalities or jurisdictions have been successful in local financing and how? What tools like geo bonds, municipal, Community Bank, etc, exist. This is on local financing of housing. Let me, let me answer a question in two ways. First, not many we, we've been searching for examples. You know, we wrote up about Muskegon, their use of tax increment financing. I think that's really brilliant. There's a couple places we've seen that have done some a couple, like, small, innovative things. City's role in our current housing market is to lose money. That that's what the current role of local governments is when it comes to housing. And let me just add, like, another layer on top of that. We ask local governments to lose money providing a tiny trickle of housing when the demand is like an ocean. That's what we ask local governments to do. So the agencies we've set up, the programs we've set up, the things that we do generally ask local governments to lose money, and that's what they typically do. We give away incentives. We give away infrastructure. We, you know, lower permit fees that are designed to pay for review times. You know, we basically like ask local governments to subsidize this style of development in a way that loses that money. One of the main things that we push back against is this idea that local governments can continue to lose money, and that somehow this is a good thing, that somehow this is like a righteous thing for them to do, especially when it builds an ineffective number of units. So you know, where are the examples that we can copy? They're few and far between, and we need to actually grow some more. I think part of that is recognizing that your Government needs to opt out of losing money.

  Chuck Marohn 2:51

  Okay, next question, could the federal government help cities fund these TIFs? TIFs is a tax increment financing I talked about, again, I'll bring up Muskegon. I talked about muskegons use of tiff to help fund entry level housing. Can the federal government help with it? No, no. I know this will be abrupt for some people, but let me just say cities and local governments have a different operating system and a different set of incentives than the federal government does. We make a tragic mistake when we think of local governments as like a smaller version or a lesser version of the federal government is like a completely different entity, right? It's a completely different thing, doing different things with different constraints. When we look at the federal government involvement in things at the local level, we can't look at the good without looking at the distorting effects. Right? Again, when we're doing these kind of tax increment financing, the idea is for the city to be able to do as many of these as people walk in the door, because you actually make money on them. You don't lose money on them when the federal government gets involved. You've got a certain scale that you have to work at which is out of scale of the types of units that that would make sense for local government to do you also are going to have, I think, the underlying idea be, we don't care about making money or losing money. We care about providing the housing. And for local government, yes, we care deeply about providing the housing, but we have to do it in a way that is fiscally responsible, because unlike the federal government, the local government actually has a budget that has to balance. You know, there's this conversation of, well, governments are not like a family. A family is not like a government. That's an insane conversation. It has some sliver of truth when you are looking at the federal government, but when you are looking at. Your City Council, your city government, your city budget. I'm sorry, it is exactly like a family. You have money coming in, you have money going out, you have promises that you have to keep and that you have to pay. You can actually, like, default on those you don't get to print your own money. You don't get to run deficits forever. You actually are as a city, just like a family and so, yeah, you know, could the federal government help with these tips that kind of goes against the entire idea of fixing your local balance sheet and building a lot of housing at the same time.

  Chuck Marohn 5:36

  All right, a lot of TIF questions here in this first section, when our city borrows through the TIF district. How does it exercise the public portion of the project? Does the city retain ownership of the land? Okay, I think here we're getting, like, deeply, deeply. It's interesting that we are going there. We're getting deeply, deeply, deeply into the Muskegon example that I gave. So let me, let me kind of go over how that actually works. I'm going to use really, like, rough numbers, okay, so that, because I know numbers are hard to communicate on a podcast. I mean, they're hard for people communicate in in in writing, in graphic form, too. I realize this, but they're even harder on a podcast. So let me use, like, very, very round numbers. And these are numbers that you're going to say that's a crazy number. Okay, I'm doing this for the sake of talking this through tax increment financing. Is the idea that before you develop a piece of property, it has one value, and after you develop a piece of property, it has a different value. And before, you would pay taxes based on the pre built value, and afterwards, you would pay taxes on the final value. Let me use round numbers. Let's say you have a lot, and the lot is worth $0 it's not gonna be worth $0 but let's just go with me here, $0 so they're paying zero taxes. They go and build a house, and the house is worth $100,000 so the difference now is $100,000 right? It went from zero to 100,000 the tax difference is going to go from, let's say zero to, let's say they pay 2% of the property value in taxes, zero to $2,000 all right, that $2,000 is the tax increment. What we are talking about when we do tax increment financing is capturing that increment between zero and 2000 the new the additional new taxes that they pay. We're talking about capturing that increment and then using that to fund the project. The question here is like, how does that actually, that funding actually work in the case of housing? Well, in Muskegon, what they've done is they've said, All right, there's some conditions here. We're not using this on a greenfield lot on the edge of town. We're not using this on the five over one apartment complex. The only place we're using this is on an existing lot. So planners might call this an infill lot, a lot that has existing sewer, existing water, existing road, existing sidewalks. It has been undeveloped for a period of time, for whatever reason, right? This neighborhood is 100 years old, and this lot's just been sitting there for 100 years, not developed, right? It's the market is not filling this gap. If you want to build on that lot, and you are willing to build a house that is a starter level house, so something that would be 600 square feet, 700 square feet. I think in Muskegon they go up to 900 square feet. I can't remember exactly what the amount is, but there's a cap, right? We're not building mansions. We're not doing this for people with 2500 square foot homes. You know, we're doing this in in the low entry level range. What we will do is we will take that increment again. I'm going to go back to my zero 100,000 we'll take that $2,000 a year that you're paying in taxes now, more than what you were paying before, and we will use that to make your down payment. And the way the city would actually do this is the city goes out and in the bond market, borrows the money. So the city would go out and borrow, say, $20,000 make the down payment. So now, instead of the house costing 100,000 the house costs 80,000 for the purchaser, and then the city would collect that $2,000 a year over the next 10 years. I'm ignoring interest here. Just to make the numbers easy, we collect that $2,000 a year over the next decade to pay off that loan. After that loan is paid off, the city then collects the $2,000 a year in taxes, and that goes into the city coffers. It's that increment that is used to make the. Down payment. Now the city would create clawback provisions. So if you're a house flipper and you get this great deal, and then you sell it six months later, sorry, you're gonna have to pay back the entire $20,000 if you stay for five years and then you get a new job somewhere else. Well, you might have to pay back 10,000 of the 20,000 you only get the full thing if you stay through the entire increment, right? But the idea here is to take that and use it to lower the price of those entry level homes in those neighborhoods where the properties are stuck. I think that answered the question. I hope that answered the question, how does the city exercise its public force? Does the city retain ownership of the land? The city doesn't retain any ownership, but basically what the city has is like a lien on the property. They have a tax lien. So if you sell, you have a clawback provision. If you sell early, where you the city gets made whole and gets repaid. Let me point out one other thing about this whole thing too. Is that if you get a primary mortgage and a secondary mortgage, and then you default, the primary mortgage gets made whole first before the secondary mortgage gets made whole. That's just, that's how the secondary mortgages work. If you do a tax, a government financing a project like this, through the city, the city, in a sense, jumps in front of the primary bond holder. In other words, the city becomes the primary mortgage. And there's nothing the mortgage company can do about that. That's just a, you know, agreement, a lien, a sense that the city would have, and the city would need to be made whole. And so the reason why this is an attractive way to get starter homes built is that the city is essentially taking no risk and losing no money doing this. We can do this over and over and over again, create housing in places where we have existing infrastructure, existing neighborhoods, existing stuff there. So in other words, we've already made the investment. The investments have sat, you know, sterile, like not developed, for a extended period of time. Let's go in, get that housing, entry level housing in there, get that neighborhood moving in the right direction and collect that increment. All right.

  Chuck Marohn 12:05

  Next question, if cities are in recession and cutting their budgets, can the federal government help? Oh, come on. Can the federal government help them create these TIF funds? No, no. Stop it with the federal government coming in to help, like, just, let's get over that idea, right? Let's, let's get over that idea. It's like there's a magic I mean, I was just gonna say Uncle Sam. There's a magic uncle out there who just got loads of money, who can just come in and help with everything, stop that, thinking that's part of the problem. That's why we're here. That's why the system doesn't work. That's why our cities are broke, because we chase after these things. No, look at what you can do for yourself. There is a ton of things that we can do. Here's the thing, cities can borrow ridiculous sums of money, like insane sums of money. We have the capacity at the city level to borrow ridiculous sums of money, because the market will just throw money at us, they will now, most cities borrow money to make investments that are negative, that don't pay off, that don't work, that actually lose them money and create huge future obligations for them. What I'm saying is take your borrowing capacity, of which you basically have way, way, way more than you will ever have demand to build housing. Take that use that borrowing capacity that you have. You don't need the federal government. You don't need the state government. You can do this on your own. Take that borrowing capacity and use it to make people's down payment and have the tax increment pay that money off so you don't lose money. The only thing you're doing is leveraging your borrowing capacity to get more housing built in your place. You don't need the state's permission. You don't need the federal government's permission. You don't need any of their help. If you're in a recession, you can still do this anyway. This will not impair your balance sheet in any way. Go out and do this, build a lot of housing. You know, the way cities write these agreements, if the city is borrowing at 4% they'll generally lend out at 5% so, you know, you look at a lot of like assessment projects where they'll do this kind of thing, or other tax financing districts where sometimes this mechanism is used, the city actually creates a little bit of a spread, and so there might be a little bit of, you know, profit or margin built in to pay for staff time, staff costs, all that kind of thing, and still provide the homeowner with what would be a below market rate of borrowing while Using their taxes to pay this back. Right, please. Friends, stop. Stop. Like defaulting to, can the federal government do this for us at strong towns like I've got no animus towards the federal government, but the federal government needs to do federal government things and do them well. Local governments need to do local government things and do. Them. Well, one of the big problems that we have now, just generally, with the way governments work in our society, is that the federal government tries to do all kinds of like local things comes in, you know, puts the big thumb on the scale, and in terms of housing, has, like, really, really messed up the housing market. And then local governments stand back and say, well, we can't do anything without the federal government or the state government. Or the state government. Stop that. Stop it. We need to be really, really competent at the local level. We have tons of tools to do it. If anything, we should be going to the federal government saying, Give us more tools. Give us more responsibility. Allow us to do more. We will do better off doing this for ourselves. And let me just be clear. Cities are broke, states are broke, the federal government's broke. We're gonna be doing this on our own anyway. Let's start getting let's let's get started now. End of rant. All right, let's move on.

  Chuck Marohn 15:54

  Okay, that last section was called local financing. This section now is called affordability and costs.

  Chuck Marohn 16:03

  First question, what are the implications for housing to be affordable if, as you say, the cost is not quote related to supply and demand? I don't really understand that question. I have not said that cost is not related supply and demand. I've said cost is not related to local supply and demand, where the local supply of housing and the local demand of housing is what drives the prices, the supply and demand that is, you know, determining the to a large extent, the spike in housing prices is the supply and demand of mortgage paper and of financial instruments, and so it is supply and demand. It's just not the supply and demand that you you think it is. So the implications are that, you know, we can build in in high demand places, San Francisco, New York, we can build as much housing as we could possibly ever build. I mean, think about like the maximum, the maximum amount that could be built in a place like that, and there will be, there will be money to buy it, because those are good investments. And, you know, people will people will consume them. People will buy them. There's a kind of an unlimited demand and an unlimited supply of money to do it. If you go to a smaller town like mine, you know, what you will see is that, again, as fast as we can build housing, it will be purchased. It might be purchased for people to live in. It might be purchased for vacation people to come up and live in. It might be purchased as Airbnbs. But the reality is, is that there's no amount that we could build that would, in a sense, like crash the market and make that that big spike in prices we see, in a Case Shiller Index, where we're, like, 240% over what would be affordable. Bring that down to that affordable level, maybe that's getting to the the actual nut of the question, because, like, what are the implications? The the implications are that you don't control, in a sense your local market. This is why we talk a lot about building entry level units. These are the units that are not going to be financed on a secondary market. They're not going to be financed by your local bank and sold off to bundlers and then securitized with other places and then bought up by pension funds and insurance agencies and other places around the world, there is no market, in a sense, there's no financing mechanism that's national for them, and so they are left behind. They're a product that has no financing market. If we create that financing market, if we create a way for those products to be financed, and then create the conditions whereby they can be built right regulatory reform, building an ecosystem of incremental developers and then cities providing that financing to allow those products to emerge. If we do those things, what we will find is that we can fill that entry level demand, and then alleviate or cool, in a sense, the demand for those nationally subsidized, nationally priced products. If you are a family, we want to get you into a house that you can afford. And then the decision to move up to, in a sense, a nationally subsidized, national product is a decision that you can make from a position of strength and security, as opposed to a position of desperation or decline, right? What we see today is that a lot of people, particularly when they're getting started, have to rent. The rent keeps going up. The rent goes up faster than inflation. It's hard to save that down payment for the house, but yet you're sitting there in this rental unit losing money, knowing that if you had a house, the house would be appreciating too, and you would have equity. So at some point you make the jump. You make the jump, you pay more than what you can afford. You pay more than what the house is probably worth, but you. Figure that you know you got to get in or you're going to miss out, you can take the equity out every year and help make your payment. So that becomes part of how you finance it. In other words, you're not really getting ahead. You're just kind of treading water in a different way. This is the national market. It's like deeply, deeply dysfunctional and deeply unhealthy. If we can get you into that entry level unit. It might not be the exact unit you want to be in. It might be too small. It might be a small house, like you might want something bigger. If we get you into a smaller house and you can add on to it, there's always that option and opportunity. But what we can do is we can get you in a place where you can actually be stable. Save some money. Save money for the down payment, so you don't have to be kind of captive to this big national market, right? And the choice for you to move up is a choice that you can make voluntarily, not one you feel squeezed into. And because it's voluntary, you can essentially shop around. You can wait for your price. You can look at it. The market will be filled with people who, in a sense, housing needs are somewhat satiated, as opposed to a market where housing needs are always desperate. That's that's the shift, right? That's the shift, okay, how do you prevent housing price escalation if there is a high demand to live in your community that exceeds the housing created incrementally, when to lack of supply increased prices. So yes, I'll go back to kind of the way I answered the prior question. Think of this as two markets. One is a national market. That national market is going to have volatility, prices are going to go up. Price are going to go down. But in general, prices need to stay up or stay elevated, because they are tied to the financial system. If prices go down and prices crash, banks will start to fail, insurance companies will start to fail, pension funds will start to fail. And so there will be a push a counter reaction, to prop them back up, right, to push them back up. And so the national market has this kind of financialized bubble dynamic to it. What we are talking about is creating a second market, a market that is more locally driven, that identifies or works in that gap of the entry level unit that is no longer part of the national market, but is historically part of a housing market. It's absent today. We can create that I can't do anything about, and you can't do anything about, and really no city can do anything about the craziness in the national market. We just can't. What we can do is we can create this second market of entry level homes, and in doing that, we will moderate the overall impact of craziness on our local market, because, again, people can participate in that national market from a position of strength. Let me dispatch with one of the underlying currents of this question too. It says, Hey, if you're building housing incrementally and supply doesn't meet demand, you know, how's this gonna work? I think a lot of people associate incremental with slow. Stop doing that. I wrote an article a couple months ago. Incremental does not mean slow. Go, go search strong towns. Incremental does not mean slow. There's this kind of underlying, I think, mind thing that we do where we think if we build incrementally, we actually are building in a slower way. Building in large blocks to a finished state is really, really slow. It is slow tedious. Now, visually, we see a lot of change happen in a short period of time in one place. That doesn't mean that net, the overall number of units is growing rapidly. It's not the only way we grow units rapidly. The only way we add a lot of units and a lot of places and get a lot of things built is by thickening up every neighborhood, by growing incrementally, by adding one here and one there and one there. You know, I look at my town, you can go out and build a new subdivision on the edge and have 40 homes put in it, and you're like, Okay, great. We got 40 new homes. I can tell you, we can put one backyard cottage on every block in the city. No one would know. No one would be able to tell. It would be indiscernible to everybody. It could be done quickly. It could fit in. And you're talking like 1000 new homes, right? It's like, not even comparable. That is incremental. So don't equate incremental with slow. In fact, if you want to do anything, equate incremental with fast, nimble, right? All right.

  Chuck Marohn 24:31

  Next question, a common narrative is that, quote, affordable housing cannot be built without subsidy. End. Quote, okay. Thoughts on when the market will have to stop building products that the local economy cannot reasonably afford. I like this question. Yeah. I think it's a common narrative in our kind of centralized, top down financing system, is that local government's role is to. To, you know, subsidize affordable housing and essentially be the dumb money at the card table that is going to lose money, in a sense, subsidizing Wall Street and large developers to build products that otherwise the market would not be able to build. I look around and I mean, I can use the numbers from my own city we are building right now, an apartment complex that is getting, I can't remember, it's like $180,000 a unit of subsidy. This is in a city where, like, the median home price is like 200,000 so we're basically, you know, subsidizing this in a massive, massive way. We've got state subsidies, we've got local subsidies. We're forgiving all their sewer and water cook up and connection fees. We're giving them money. We're lending them low cost money. We're doing all kinds of stuff. We are losing ridiculous sums of money doing this because of our, you know, commitment to affordable housing, all right, the building itself is going to have 80 units. And of the 80 units, it is, like, 16 or 18 are going to be below, you know, non market rates, like, basically, like, subsidized units. In my region, we did a housing study. There's a need for something like 3500 affordable units. So we are doing, we are pulling out all the stops doing, like a once a decade type of project here to get 18 units when we need 1000s and 1000s of them. The city's losing money doing it. So this is not a trick we can do, like, again and again and again and again. This is a trick we can do once and then it's like, well, that now, you know, now we're out. Like, think of the blackjack table, like, I'm done. I'm out. Like, I, you know, I'm out of money. That's basically, like, where we are as a community doing this. I think as long as we cling to the idea that affordable housing can't be built without a subsidy. We will never have affordable housing. And Daniel Harris, my colleague who helped write the book, had a had a great saying that is incorporated in the book and that, you know, we you're going to see in other places where strong towns talks about this stuff. He said, We have to stop talking about making affordable housing and start talking about how to make housing affordable. And those are those are two different conversations. One is about taking the existing system and subsidizing the cost of it so that a handful of people can get into units that they can afford, but everybody else is kind of left out in the cold. The latter making housing affordable is about changing the way we deliver housing, changing what we build, where we build it, how we build it, how we finance it, how we regulate it, how we bring it to market so that the end product is at a lower price point. Those are two different conversations. And if you have traditional housing, people in your community that are doing traditional housing projects, they are generally bringing to you ways for your city to lose money. And what we are talking about, and we're here advocating for, and what the book escaping the housing trap is all about, is, how do we actually build housing in a way that doesn't make cities the dumb money at the card table, the one who's subsidizing this whole like messed up market so that a handful of people in a sea of need can get a lifeboat.

  Chuck Marohn 28:41

  Next question, if we make entry level housing easier to develop on a small scale, should we eliminate higher level housing subsidies, which really destroy towns and don't build much in the way of entry level Yes, yeah, get out of that game. You just lose money doing it, and you're not providing that many units, and that part of the market already has, like, massive, massive subsidies. And the way to bring that part of the market down is to actually have competition within your market at lower price points. Again, we want to get people in a position of strength, so that when they do enter that other market, that bigger market, they can do it from a position of security and not desperation. And so the prices that they pay would be prices from a secure standpoint, not a desperation standpoint. Yeah, stop doing that. Like, get out of the no more subsidies, you know, for the big housing subdivisions. No. I mean, let's just be clear, cities should be done. Expanding anyway. We should not be adding sewer and water and roads, new subdivisions, greenfield development, all that your city, and I don't care who you are, whatever city you're in, is functionally insolvent, is broke, has more liabilities and promises than you. Have capacity to meet them, and so you need to just be done subsidizing this stuff. You need to be done building that kind of stuff, or taking on the liabilities to allow that kind of building to happen. It's just a it's a bad investment for you. It's a bad investment for your taxpayers. It's a negative investment for your community, like, stop doing it all right.

  Chuck Marohn 30:23

  Next question, does diversity of housing types create a stronger neighborhood? Single Family, duplex, cottages, mid rise, etc, yeah, yeah. And let me be clear, because a diversity of housing types, what you're really saying is a diversity of price points, if we're going to be honest with ourselves, I think part of the recognition here that we have to make is that the resistance to a lot of this is about price point more than it is about housing types. Let me state this uncomfortable truth, if we have a neighborhood of single family homes that are all half a million dollars, and you go in and you say, we're going to build a single family home here, that's going to be $200,000 people would flip out if you went in and said, we've got a neighborhood here half million dollar homes, and we're going to build a duplex, and each side of the duplex is going to be worth 600,000 or 700,000 because it's gonna be like luxury, like really nice units. I think people would have less problem with that part of the insidiousness of zoning and the post war development experiment that we've been living through is that we sell people price point neighborhoods. We sell we sell neighborhoods at price points. So this is x price point of neighborhood, this is a different price point of neighborhood, and this is a different price point neighborhood. I know a lot of people reduce this to race and reduce this to, you know, other points of conflict. I'm not going to argue that that isn't a factor, because certainly, you know, a lot of us equate, I think, I think incorrectly so, but I think a lot of us equate wealth with race or race with wealth, those lines get blurrier. You know, every decade that goes by, I get the reaction, I understand. I see people do this. What we really have done post World War Two is say, you know, if you live in a neighborhood of half a million dollar homes, you should not have to suffer the indignity of sharing a park, sharing roads, sharing, you know, streets and sidewalks with people who can only afford a $350,000 home, and that is deeply insidious, because, you know, that's not a natural B sustainable financially over time. You know, did I just say AC? I don't know what I said. I'm sorry. That kind of arrangement just is not, does not have the dynamism and flexibility to endure over time. It is an, it is part of the aberration that is the post war development pattern. And so we can have a preference for that, and we can say, you know, this is like, the natural setup we've got. I want everybody to recognize, when you look at a lower price point unit being put into your neighborhood, and you say, I don't want that like I don't like that. Understand that whatever unit that you are in, unless you are a tiny percentage of people in this country, whatever unit you are living in, would also be undesirable and unwelcome in a different neighborhood. Right? Zoning can be simplified down to segregation by wealth or segregation by income. And the reality is, I'm talking in this instance, about individual wealth and individual income. The reality is, is that for community wealth and community income, both of those, you know that segregation by individual wealth as lower community wealth. That's just the fact some of the poorest neighborhoods in in my city are the most financially productive for the community. They they provide the most tax base with the least cost. That is true in your community too. It's true every place we've ever modeled it or looked at it, big city, small city, everything in between, Northern, Southern, new, old, every place we've looked this is the same kind of reality. So yeah, does a diversity of housing type create stronger neighborhoods? Yes, let's not simplify it down to diversity of housing types, though. Let's say diversity. Of income levels. That's what makes a stronger place. That's what makes a place healthier and more productive.

  Chuck Marohn 35:07

  All right, last question in this section on affordability and costs, I like this question. Isn't there a similar story here for what government backed student loans did to ballooning college costs? Yes, before that flips you out and offends you, I wrote a piece about efficiency, efficiencies of scale in the housing market. You can probably search Google for that. One too strong towns housing efficiency. I had an economist. She's not an economist. She is a real estate finance professor at a university. I was giving a lecture. I knew she was a little spicy, because beforehand, we were just talking, and she's like, you know, so tell me who you are. And I was talking with her, and I said something about, you know, local banks not owning, retaining mortgages. And she's like, Oh yeah, they do. And like, What are you talking about? She's like, Oh yeah, they, they hold mortgages. And I'm like, no, they, you know, we started going on, like, they sell them off to bundlers. They can't take the long term interest rate risk. I mean, I wrote a whole book about this. She's like, Oh no, they, they hold them. They hold jumbo loans. And this was like a new thing to me, like, I hadn't occurred to me, like, do they hold jumbo loans? And I, I talked to some people in banking, and they're like, oh, yeah, occasionally we hold jumbo loans. Jumbo loans are, like, Big Think of them as, like, big mortgages. But every place that I talk to is like, yeah, we, we will hold a jumbo loan. But we hold a jumbo loan because we want that person's banking, right? I've got a mortgage. I don't know what I owe now. I buy my house for 220,000 and had some equity going in. So you can you know my mortgage is somewhere like 130 something, right? Now, that was sold off on day one, right? It was sold off to a different bundling place. I make my payments. I got my loan from a local bank. I make my payments to US Bank, right? Like one of the five biggest banks in the country, they bought my loan. They bundled it with other ones. I'm sure when I make my payment to them, parts of it go to different securities across the country. Like, that's, that's what happens with my loan. If I had millions and millions of dollars and I went to the local bank and I'm like, I want you to finance my like, third home, and I want to do a jumbo mortgage on it, and I want you to hold the loan. I don't want you to sell it off, because I want to deal with you. I don't want to deal with some bundling, you know, whatever, far away the local bank will say, Yeah, we will do that. If you have your savings account with us, right? If you put ten million in a bank account and have it here, and then we would be glad to be your servicing agent, right? Like, just put some of your wealth here in our bank, and we're happy to do that. That that's a very different relationship than the relationship that I would have, or you would have with a bank, right? Okay, so the question was, you know, is this like a student loan? And I was getting to this, this woman who asked me this question. She got up after my housing trap talk, and she said, you know, basically you don't know what you're talking about. You You You are wrong, what you are saying is that we should put our money into building like these local, these entry level units. But of course, that's not the way we reduce costs. The way we reduce costs is economies of scale efficiency. We should be putting more money into the housing market. We should be pumping more liquidity in the market, because then we will get innovation. We will get efficiencies. We will get, you know, the free market battling each other to build the lowest price product and deliver it to us. And then she went on and cited electronics as like an example of this happening. Used to pay 1000s of dollars for a computer. Now you pay hundreds of dollars for a computer that does 100 times, you know, is 100 times better than what it was before. So if we could just put more money into housing, it would work better. My response to her was, I don't think you understand what's going on. Housing does not work like electronics. Housing Works more like universities and the medical profession. In the universities and in medical profession, the more money we pump in the system, the more prices go up. Now I don't want to get in a big macro economic argument with everybody about well, like, hey, there's a lot of waste and fraud on one hand, and then on the other hand, it's like, hey, you know, we micromanage and this insurance companies in the middle and yeah, like, we could dissect this in, like, many, many, many ways. Obviously, I believe healthcare is really important, and obviously I believe university education is really important. But both of those don't change the. Fact that when we pump more money into these systems, they don't become more efficient. They don't respond to, in a sense, market pressure, the way that tech companies have competed with each other to deliver the best product at the lowest price, right? It's a very different kind of market dynamic. What we see is that the more money we pump into them, the higher prices go. This is the way that housing has worked as well. When we subsidize demand, we make it easier for people to pay more for housing than they otherwise would. When we subsidize the financing of housing, what we see is that it allows people to pay more for housing than they otherwise would. And when you consistently have people who are able to pay more and more and more and more. And the whole thrust is like, how do we get people to pay more for the same house? What you see is that supply chains actually do the opposite. They become non responsive. They become non competitive. Basically, like, I can create as much sheet rock as I want, and I can sell it at whatever price I want, because there's this unlimited demand for it, right? And take that through every part of the supply chain, whether it's plumbers or, you know, foundation, concrete people, the guy who hooks up your electric like everywhere through the market. There's been no, in a sense, tightening up, because there hasn't had to be. There's just tons and tons of liquidity flowing into this market. I've said, you know, I've given talks to groups of developers, and I've said, Hey, there's a lot of people in this room who are really bad at their job, but the market has bailed you out. Over and over and over again, you started out with, you know, 10% margin that you were expecting to get you screwed up the project, and now you're losing 5% and all you had to do was wait six months or 12 months, and the market increased so that now you're breaking even. You should be out of business, but the overall, like craziness of the market is bailing you out. That's what we see. It is a lot like the university student loan question. It really is. It's a great it's a great insight. All right, let's go on to the next section. I realize that, like we're getting up there in time, I'll try to stop here somewhere, and we'll maybe do this again.

  Chuck Marohn 42:11

  The next question is called zoning, urban design and development. My team came up with these section names, but the questions were from participants here.

  Chuck Marohn 42:18

  So how do you reconcile incremental change with historic preservation and looking forward to identify future historic properties and districts. Okay, this will take the rest of the time we have. How do we reconcile incremental change with historic preservation? I think it's important to step back and recognize two things that are true. One, it is important that we retain, let me put it this way, it is really destructive and really negative and really counterproductive in many, many, many, many dimensions for us to wholesale destroy older properties, historic properties, and properties that you know have become, in a sense, passe in our market. It is bad, it is unhelpful, it is counterproductive. And I recognize that this is like a net negative on society. A lot of the historic preservation reaction that we've had in this country in the 70s, and then really taking on in the 80s of the last century, a lot of this was based on a very real insight that we were just wholesale destroying, not just like very usable structures, but structures that were significant and important and beautiful and important to our culture, important to the character of our communities, important to who we were. I can look at my place and the things that we did to get parking lots would just make you cry. It would just make you cry. What do we tear down so we could have more parking in the downtown? We tore down the public buildings first, right? We tore down the historic post office, a gorgeous, gorgeous building. We tore down the historic depot building to get a strip mall and a parking lot. A beautiful I mean, my dad was describing this to me once, like, how beautiful this building was. He actually got tears in his eyes because we tore the thing down. We tore down two theaters. Now, did the roof leak? Maybe? Did it need some TLC and love, yeah, absolutely. But we just tore them down to make parking lots like literally, one of them is fenced off today with a barbed wire at the top for a parking lot that is 5% full at any one time, and a max is like 25% full. Disgusting. Is horrible. So I get the reaction of the historic preservationists who said we just got. To make this insanity stop. We got to make this stop. I get it. I understand that. Being said, the reaction to just say, Stop is so unhealthy. It's so deeply destructive to our communities. It's created this thing where one of the kind of NIMBY reactionary tools now is historic preservation. I mean, I've seen, I'm going to use my own moral judgment here, but I've seen buildings that should not be preserved, right? I was in like, gas stations that needed to go away and have something, oh no, that's a historic building. It was just like, I don't want change in my neighborhood. I've seen houses in horrible disrepair, like, Oh no, that's, that's an historic structure. Can't, can't be changed. This is deeply, deeply unhelpful in other cultures around the world and at other times in history. What we have recognized is that there is a character to a community. And I know character is one of those, again, triggering words. It's a triggering word for the the yimby people, right? Because they, they get it thrown back in their face a lot like you're changing the character of my community. I think that there is such a thing as community character, and it is worth preserving, but it's worth preserving in, like, the macro sense, right? In healthier places around the world, what you see, and really in in pre Great Depression America, what you see is that neighborhoods were always in a state of re inventing themselves. And the way you reinvented yourself was not wholesale destruction. Generally, the way you reinvented yourself was, you know what we talk about in the book, what JC Nichols disparagingly called the mushroom cities that are constantly growing up and coming down like building and rebuilding and building and rebuilding. It's the idea that a neighborhood would start small and then more organically, change over time, thicken up, mature, become a more mature version of what was there before. In this case, every change, in a sense, creates a a better, more improved version of what was there. So the historic character, the historic nature, is not lost, but the buildings itself are like a a more grown up version of that which was there, when we look at this, I mean, I, I've been, I spent quite a bit of time in Italy. I've been fortunate enough to do that. I was in a castle once, and, you know, on the outside is a castle. It's a castle in the middle of the city. It's a historic building. It's one of those ones that you, you wouldn't, you would never tear down, right? And I'm not suggesting that maturing a neighborhood would say, tear down the castle. The castle is like an iconic historic structure. It's unlike that corner gas station or that that little house that, you know we all like that we don't want to see gone. It's a historic structure. But when I went inside the castle, I was brought in, it was the city hall, and it had carpeted floors and conference rooms built in it, and it was like a functioning building. It remained, in a character sense, to the community something, but it also got a lot of like, love and use. They did not have like a hyper like, you can never change what this is in any way, shape or form. I think we have to find a detente here. I think we have to find a healthy compromise, where most neighborhoods, most places, are not subject to wholesale destruction. Ever, ever that's like never on the table, but what they are subject to is a continuous maturing over time, where the character of the community is retained, but in like a new and improved, ever changing, ever evolving kind of version of it. And then we reserve our historic designations for the truly historic structures in our community, like the federal courthouse, like the old theater, like the the depot building, those iconic buildings that maybe have outlived their usefulness today, but which we can retain, fix up, take care of and repurpose to give a community purpose to. I think that we can reconcile incremental change with historic preservation in that way, it's a really hard one to do, because people are very dug in about this. And, you know, I love the historic preservationist. I think their heart is in the right place, largely. But I think that the way they went about it was in reaction to the 1970s and 80s, like urban renewal, wholesale destruction, and I think what is needed is, like a modernization of that framework. All right, I'm gonna do one last question, and then we'll pick up the rest of this at a later time. How can we push for more citizen driven developments? I think the answer that is going to be based on your definition of developments, right? Right? You use a plural in that question. Developments. In my mind, as I read this, I'm thinking, you know, the develop, the big developer comes in and builds the 200 unit subdivision. How do we get that to be citizen led? The big developer comes in and buys up the block and then builds the five over one apartment complex. How do we get that to be citizen led. The answer is that development shouldn't look like either of those if you want it, citizen led, if you want it, citizen led. What it should look like is a thickening up of every neighborhood. So we've got a neighborhood, it's got five houses on one side of the block and six houses on the other side of the block. So 11 houses on the street total. Incremental, developer would say, add a couple backyard cottages and build a house between the other two that's kind of small. Now you've got, you know, five more units on that block. This is what incremental development looks like. This is what citizen led development looks like, or citizen driven development looks like. It's just a different form. It's a different style. And I think if we can lean into that one style, you know, what we see is that we can meet a ton of demand very, very quickly and actually make kind of shift the competitive landscape in our market to where those incremental developers actually have a crack, actually have a crack at doing things right. What we have now, and I think this is important for us to understand, is a competitive landscape that is skewed dramatically towards the large developer, the outside developer, the person who can access outside capital and put that to work in our place, the person who's going to work at a scale that is disproportionate to our neighborhoods and our communities. The whole playing field is skewed in favor of that person, whether it is the regulatory process, whether it is the supply chain process, or whether it is especially when it is comes to financing and capital, it is easier to borrow $200 million than $2 million right? The person who can qualify to borrow 200 million will have an easier time accessing it than the person who's qualified to borrow $2 million right? That that is, that is the reality. We can alleviate that skewed nature by following the recommendations in escaping the housing trap. We can reform our local regulations and make it easier to build entry level units. We can nurture an ecosystem of incremental developers, the people who are going to go build those kind of units, and then we can use our of power at local government dealing with finance to help finance those units in a way that doesn't lose the local government money, but allows the creation of a market that does not exist today. We can do those things, and if we do those things, you will get citizen led development, but it will look very different than the development you have today. I'm going to pause there. I think that's probably enough. I'm about halfway through. A little over halfway through, let me just say we at strong towns have released a toolkit called housing ready cities. This deals with the first of those three planks of escaping the housing trap. It deals with the regulatory reform issue. If you go to strongtowns.org/housing, ready, you can get that toolkit, download it for free. You can take a little quiz to see if your city is housing ready. If your city does meet the six things that we've said every city should do to be housing ready, let us know. We'll put you on a map. We'll celebrate you. We'll let people know about you. We'll tell people like, Hey, if you want to, you know, go to a great place like here it is. We are collecting a list and publishing a map of cities that are pursuing this goal and cities that achieve this goal of being housing ready. We want to we want to put you on the map. We want you to be part of that so strongtowns.org/housing, ready. Thanks everybody for listening. Keep doing what you can to build a strong town. Take care.

ADDITIONAL SHOW NOTES

• There are six code reforms your city officials can implement today to welcome more housing to your community. Learn more here.

• Do you want 1-on-1 coaching with Chuck on how to bring more housing to your community? Sign up for the Accelerator coaching program before spots run out!

• Chuck Marohn (Substack)

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