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regional brief No.


Cities keep low- and middle-income
families from home ownership

Dr. Michael Sanera

Abby Alger
April 2008

for Truth 200 W. Morgan, #200

Raleigh, NC 27601
Executive Summary
Many North Carolina cities use affordable-housing policies to pro-
vide housing to low-income citizens. No doubt started with the best
intentions, those policies ignore fundamental economic realities. This
Regional Brief demonstrates that, in most cases, affordable-housing
policies produce the opposite effect than was intended. In American
cities that have implemented mandatory affordable-housing policies:
• Home prices have risen dramatically. This effect has made houses
even more unaffordable for low- and moderate-income residents.
• Homebuilders must sell a percentage of the homes they build
below the fair market value. This effect means an economic loss
phone: 919-828-3876 for people who would build homes.
fax: 919-821-5117
• Homebuilders, at the urging of city governments, have transferred
private property to unaccountable land trusts in order to avoid
The John Locke Foundation is a administrative burden and extra cost. These trusts offer residents
501(c)(3) nonprofit, nonpartisan research
institute dedicated to improving public an illusion of homeownership.
policy debate in North Carolina. Viewpoints
expressed by authors do not necessarily • City councils have passed price-fixing schemes for homes that
reflect those of the staff or board of
the Locke Foundation. seem to violate a North Carolina law that prohibits rent control.
To make matters even worse:
• In some cities, past city councils have created the “housing cri-
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sis” that affordable housing must solve projects in municipalities that have inclu-
by imposing restrictive land-use policies sionary zoning become less profitable. As a
(“smart growth”). Now local governments result, builders take on smaller projects, build
do not consider their culpability. Instead, in neighboring communities without those
they want homebuilders and homebuy- restrictions, or both. The effect is the artificial
ers to pay for the consequences of their reduction in housing supply in a town and,
mistakes. as a result, the artificial increase in hous-
• The Triangle has a significant amount ing prices because the same (or increasing)
of affordable housing as a metropoli- amount of homebuyers are competing for
tan region. This eliminates the need for a smaller amount of non-restricted homes.
Triangle cities to pass coercive affordable- Price is driven up on market-rate homes
housing policies — often far above the amount they were sold
for before the policies took effect. Middle-
Introduction class buyers are particularly affected, because
Affordable-housing policies are based on a they have too much money to qualify for
simple premise: since home prices are high, affordable housing but too little to compete
the local government should lower them. in the “new” housing market.
To do so, cities use (voluntary) affordable- A 2004 Reason Foundation study of Cal-
housing policies and (legally-mandated) ifornia’s housing market found that approxi-
inclusionary zoning to set “affordable” prices mately 20 percent of Californian cities have
— below the fair market value — based on inclusionary-zoning ordinances. The study
the median income of area residents. Home- found that, one year after the adoption of
builders must then designate a percentage, inclusionary-zoning ordinances, new home
most often 10 to 15 percent, of their new construction fell by 31 percent on average.
construction as “affordable” and sell those Prices of market-rate homes skyrocketed, up
homes to low-income individuals and families $22,000 to $44,000 in median cities and by
for a government-set price. This price ignores more than $100,000 in high-value markets.
construction costs to the builder and value The total cost of forcing builders to sell at
to the consumer (i.e., the amount a buyer is below-market prices averaged $45 million
willing to pay). per jurisdiction. To make matters even worse,
For example, suppose that Smith Con- fewer affordable units were produced; the
struction Company wanted to build 40 average city added fewer than 15 each year.1
homes in a North Carolina city that had
an inclusionary-zoning ordinance. Smith What are affordable-housing initiatives?
must build six of the homes (15 percent) as Many cities begin with voluntary afford-
“affordable” units. The cost to construct reg- able-housing policies that offer incentives
ular and affordable homes would be similar to builders. Density bonuses are a common
because most ordinances allow no outward form. These bonuses allow homebuilders to
distinctions between them, but their prices construct more homes per acre of land than
would be very different. Smith would sell the is permissible under existing regulation — so
affordable homes at a price determined by a long as the builder provides a set number of
government formula. This ordinance would affordable units. This incentive is supposed
result in a loss for the builder: if homes were to allow the builder to recover some of the
worth $100,000 on the market, but Smith losses he will incur when he sells the afford-
was forced to sell them for $60,000 each, able homes at below-market prices.
there would be a $40,000 loss in revenue. There are two problems with this policy.
As a result of this policy, homebuilders First, bonuses may not offset all the losses
and homebuyers both lose. Construction imposed on the homebuilder. In fact, some

regional brief
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builders may choose not to Table 1: Income definitions based on

utilize them if they are ill- Area Median Income (AMI)
suited for their project. Sec-
ond, these incentives illustrate AMI Level Income Definition
the arbitrary nature of the Less than 30% AMI Extremely Low Income
original planning restrictions. 30% AMI to 50% AMI Very Low Income
If density restrictions allowed 50% AMI to 80% AMI Low Income
a builder to place 200 homes 80% AMI to 100% AMI Moderate Income
on 100 acres, but the restric-
tion was changed to 300 What is inclusionary zoning?
homes on 100 acres if the builder complied Two North Carolina towns — Manteo and
with a new government policy, then the origi- Davidson — have moved beyond “voluntary”
nal restriction was strictly arbitrary. There- affordable-housing policies and adopted
fore, rather than create complicated incentive coercive inclusionary zoning. Inclusion-
schemes, the city could increase the allowed ary zoning makes mandatory the goals and
density and increase its housing supply. This, processes of voluntary affordable-housing
in turn, would reduce prices overall. initiatives. By law, homebuilders must sell a
In addition, “voluntary” affordable-hous- percentage of their construction at a price set
ing policy can often become government by the town government. Builders must also
coercion. In Carrboro, builders who propose guarantee the affordability of these units for
developments of five or more homes need a a time period that can range from 15 years to
special use permit or a conditional use permit perpetuity.
from the Board of Aldermen. The alder- Homebuilders are sometimes permitted
men use this requirement as leverage to force to avoid the requirement by paying a fee.
homebuilders to meet the town’s “policy The fees most commonly go to a town fund
goal” of 15 percent affordable units. Build- earmarked for affordable housing. This is
ers may choose to construct that 15 percent, typically used to subsidize even more afford-
pay a fee, or set aside lots to sell to the town. able housing in the town. But town govern-
Those who refuse these options must meet ments have consistently expressed their
with the Board for an “Affordable Housing preference for homebuilders to construct
Review Meeting.” This leaves little room for
2 affordable units. Therefore, it is the most
a builder to avoid compliance with a “volun- common result.
tary” policy.
In Chapel Hill, it is the Town Council’s Determining the price of affordable
“expectation” that rezoning applicants housing
include affordable units in any “residential Local governments set the price of
component.” As advertised on the town affordable units based on federal calculations.
website, “a zoning change is a legislative deci- Each year, the U.S. Department of Housing
sion and as such is a discretionary decision.”3 and Urban Development (HUD) publishes
In order to increase its leverage on builders, the area median income (AMI) for each
the Council attempted to downzone most section of the country. To qualify for afford-
property “around town” to R-1, currently able housing at the local level, a household’s
one-third acre per home. Had this been suc- income must be in a certain AMI percent-
cessful, builders would have had to apply for age range. Because this classification scheme
rezoning in almost all cases and thus would is based on percentages, rather than dollar
have been forced to include affordable hous- amounts, it can identify “low-income house-
ing in their plans. (As it happened, public
4 holds” in a community completely composed
opinion quickly ended the change.) of multimillionaires.

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Individual Table 2: Difference between federal and local income figures

specify the ranges Percentage Median Income Median Income
that correspond AMI (Durham MSA)* (Chapel Hill) Difference
to income levels 100% $61,700 $92,106 $30,406
(i.e. what per- 80% $57,050 $73,685 $16,635
centage of AMI 50% $35,650 $46,053 $10,403
constitutes a low- 30% $21,400 $27,632 $6,232
income house-
* HUD adjusted the income limits at different AMI percentages for the Durham MSA.
hold), so there is
variation among
municipalities. However, the breakdown is misleading at best and deceptive at worst.
shown in Table 1 is the most common. Using HUD data distorts a town’s need for
A maximum price range is then calcu- affordable-housing policies. The table below
lated for each level of AMI. The range is (Table 3) shows the price ranges of homes
usually found with a multiplier. For example, affordable to Chapel Hill residents based on
Chapel Hill’s Planning Department assumes the federal MSA and local median income
a household may pay 2.5 to 2.75 times its calculations. Once more, the disparity
annual income for housing in its published between the numbers is striking.
reports of the town’s housing market. (This

report also uses that standard.) What are the issues with inclusionary
But this acceptable price range is often zoning?
based on numbers that inaccurately reflect
reality. HUD determines the AMI for regions The legality of inclusionary zoning is
known as metropolitan statistical areas questionable: it could be a form of illegal
(MSAs). MSAs are broad geographic regions, rent control.
so the AMI can over- or underestimate the The legality of inclusionary zoning in
income of a specific town. For example, North Carolina is uncertain for two reasons.
Chapel Hill is in the Durham MSA, which First, few local governments have been given
contains Durham, Orange, Person, and specific authorization for inclusionary zon-
Chatham Counties. The Durham MSA has a ing by the North Carolina General Assembly.
2006 median family income of $61,700,6 but The two towns that have passed inclusionary-
the Chapel Hill Planning Department esti- zoning ordinances have not been challenged
mates that the town’s actual median family in court — although it is a possibility.
income is $92,1067 (see Table 2). Second, many municipalities are par-
Despite the disparity between federal cal- ticularly wary of the state’s strict ban on rent
culations and local reality, areas use federal control. As statute 42 14.1 reads: “No county
figures to study their housing market. This or city…may enact, maintain, or enforce any

Table 3: Difference between affordability based on federal and local figures

Percentage Housing Price Range Housing Price Range Average

AMI (Federal MSA) (Chapel Hill) Difference
100% $154,250 to $169,675 $230,265 to $253,292 $79,816
80% $142,625 to $156,888 $184,212 to $202,633 $43,666
50% $89,125 to $98,038 $115,133 to $126,646 $27,808
30% $53,500 to $58,850 $69,080 to $75,987 $16,359
regional brief
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ordinance or regulation which regulates the In the Triangle area — and Orange
amount of rent to be charged for privately County in particular — these providers are
owned, single-family, or multiple-unit resi- predominantly land trusts. Of these trusts,
dential or commercial rental property.”8 the most prominent is the Orange County
For these reasons Chapel Hill has been Housing and Land Trust (OCHLT), which is
slow to adopt an inclusionary-zoning ordi- heavily dependent on money it receives from
nance. Its first-draft ordinance was shelved Chapel Hill, Carrboro, and Hillsborough.
in 2001, due in part to the opinion of the OCHLT obtains homes through purchase
Town Attorney.9 Aware of being a likely “test or, more commonly, through transfer from
case,” the town has attempted to justify the a homebuilder who does not want to spend
ordinance by linking it to local government’s resources in meeting government regulation.
powers to protect the public health, safety, The problem is that land trusts give a
and general welfare.10 To support this effort, false promise of home ownership to home
it has accumulated reports on its housing “buyers.” The trusts guarantee permanent
market (using federal income figures). It will affordability because they permanently own
most likely also include a lengthy preamble the property. They sell 99-year ground leases
in the eventual ordinance that defends its (though the period can vary) to qualifying
necessity. tenants. These leases give the purchaser a
This is all an attempt to preempt a legal 99-year right to do anything except outright
challenge. Chapel Hill hopes to demonstrate own the property or sell it without OCHLT
first that providing housing is a legitimate oversight (and for an OCHLT-calculated
government objective, and second that resi- price). The resident has claim to the physical
dents face a lack of affordable homes. How- home structure; the land trust has the deed.
ever, local governments should not orches- The workings of the OCHLT illustrate
trate an end-run around state legislation that the peculiarities of this model. OCHLT
bars price-fixing simply because they favor a selects buyers after they fill out an applica-
project. tion. Pursuant with current policy, only
people who have lived or worked in Orange
Inclusionary-zoning policies provide County for at least one year are eligible. Buy-
low-income people with an illusion of ers pay property taxes and obtain a mortgage
homeownership. from a bank. They pay a nominal fee to the
Homes made affordable through volun- land trust for lease of the land. The terms of
tary affordable-housing initiatives or inclu- the agreement, though, dictate that the buyer
sionary zoning most often have a set period will only receive a limited amount of the
of affordability. For example, in Carrboro, home’s appreciation.
homebuilders must ensure affordability for The “homeowner” is then granted 1.5
100 years. This means the builder is respon- percent annual appreciation in home value
sible for “including provisions to ensure such by OCHLT, regardless of local market condi-
continued affordability in legally binding tions. If he wants to sell, he must compute
agreements” (e.g., a deed restriction) as well the sale price with an OCHLT formula;
as “arrangements to ensure that … [the] unit even then, he will receive only a portion of
is made available for sale or rent only to” a that amount. (OCHLT estimates that own-
household that does not exceed 80% AMI.11 ers receive “20 to 39 percent of the [total]
This is a daunting task — especially since it is appreciation in the home” in a sale.12)
100 years’ work. Many homebuilders do not Moreover, although the home is theoreti-
want such an administrative burden. Thus, cally the homeowner’s, OCHLT will collect a
they sell homes to government-approved “stewardship fee” from him. This money will
affordable-housing providers. be used for structural repair and improve-

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ment: “replacement of HVAC, hot water ment, the buffer is mandated to increase to
heater, roof and flooring, plus exterior paint- five acres. The rural buffer has a tremendous
ing.” effect on the housing market. As town centers
In this system, the “owner” is essentially a are built out (a major issue in Chapel Hill),
long-term renter. The entire affordable-hous- property values inside and outside the rural
ing system transfers property from the private buffer soar.
market to permanent quasi-public ownership.
The land trust is the owner, and the so-called Affordable-housing policies in dynamic
homebuyer is the permanent dependent metropolitan areas like the Triangle are
client. This is where the rent-control law not needed.
begins: by government ordinance, land trusts Dynamic metropolitan areas such as the
are offering a long-term rent (though by Triangle automatically produce affordable
another name) to citizens. housing without forcing builders to build it.
As the incomes in an area rise, people buy
A crisis in housing prices is largely a self- larger, higher-priced homes leaving behind
inflicted wound. homes that sell at affordable prices. (Just as
City officials in Chapel Hill and Carro- “affordable automobiles” are often found
boro are quick to decry housing prices that in the used-car market, affordable housing
spiral ever upward, but they ignore their is typically found in the “used home” mar-
responsibility in causing those high prices. ket.) Restrictive land-use policies, like those
Their restrictive land-use policies have adopted by Chapel Hill and Carrboro, break
decreased the amount of available land and, down this process. Their regulations increase
as a result, caused a dramatic increase in the cost of all homes, not just newly con-
home prices. A recent study determined that structed ones.
restrictive land-use regulations cause 90 per- Even so, a February 12, 2008 search of
cent of the difference between construction, a national real-estate listing
costs and home prices.13 So it is unlikely that website, showed a plethora of affordable
more government regulation is the solution homes in and around Chapel Hill (see Table
for problems created by existing regulation. 4). The search included Chapel Hill and its
In the Triangle, Chapel Hill and Car- neighbors Apex, Carrboro, Durham, and
rboro in particular have demonstrated that Hillsborough. Homes were 3+/bedrooms
they are not serious about allowing builders and 1+/bathrooms. This is because the stan-
to build low-cost (and low-priced) homes. dard AMI figures — which use multipliers
Instead, they burden homebuilders with based on family size (e.g., 30 percent AMI for
regulations, tree-protection ordinances, open- a one-person and a four-person household
space requirements, and architectural stan- are different) — are for families of four.
dards that require builders to build “aestheti- Chapel Hill is not an isolated community.
cally pleasing” buildings. These restrictions It does not need affordable homes within its
and requirements add to the price of homes boundaries for low- and moderate-income
and make them less affordable. citizens to have a place to live. The narrow
The factor that contributes most to vision adopted by town governments is both
unaffordable housing is the rural buffer. harmful and expensive — especially since
Chapel Hill and Carrboro are cushioned most of the affordability problems were
by a 37,436-acre rural buffer managed by caused by town regulation at the start.
the town governments and Orange County.
This land area — described as a “greenbelt” What is the solution?
— has a two-acre minimum lot size. After Affordable-housing advocates are pursuing
five homes have been placed in a develop- policies that produce the opposite of what

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Table 4: Available homes in Chapel Hill, according to AMI levels

Using the federal median income of $60,100, these are the homes currently available on the
market at each level of AMI:

Percentage AMI Housing Price Range Price Range No. Units
100% $154,250 to $169,675 $0 to $150,000 573
80% $142,625 to $156,888 $0 to $125,000 350
50% $89,125 to $98,038 $0 to $75,000 120
30% $53,500 to $58,850 $0 to $50,000 44

Then using the Chapel Hill median income of $92,106, these are the homes currently avail-
able on the market at each level of AMI:

Percentage AMI Housing Price Range Price Range No. Units
100% $230,265 to $253,292 $0 to $225,000 1,194
80% $184,212 to $202,633 $0 to $175,000 823
50% $115,133 to $126,646 $0 to $125,000 350
30% $69,080 to $75,987 $0 to $70,000 105

they intend. Those policies increase the price are still affordable homes in neighboring
of all housing, making the entire housing communities. Local governments should not
stock less affordable. The process is endlessly make policy as if their municipalities were
self-perpetuating. The more regulations gov- separate from all others. Even though there
ernments implement, the higher prices rise, are housing “hot spots” in the Triangle, the
and the higher prices rise, the more regula- region as a whole can offer homes afford-
tions governments implement. The result is able to low- and moderate-income families.
a dysfunctional market in which both home- Rethinking government regulation in those
builders and homebuyers lose. areas will help.
The solution to a high-priced housing If Triangle town governments continue
market cannot be more government regula- restrictive policies, they should not complain
tion. It is less. Local governments must exam- that home prices are beyond the reach of
ine their own role in creating the problem low- and moderate-income households. They
— and then change it. Chapel Hill and Carr- caused the problem. They must recognize
boro have kept the rural buffer (37,000 acres) economic realities — not force homebuild-
at extremely low densities in the name of ers and homebuyers to pay higher prices to
preserving local character, but town leaders assuage governmental guilt.
have not considered increasing housing den- Other cities in North Carolina must learn
sity in the buffer as a serious affordable-hous- this lesson. If city leaders are truly concerned
ing policy solution. Nor have they considered about the welfare of all citizens, then they
less restrictive land-use policies, which would should avoid policies that increase prices and
enable homebuilders to build more homes make housing unaffordable. If they want to
and to sell them at lower prices. help low-income people buy their own home,
More importantly, local governments they should assist them in finding an afford-
should soberly question the necessity of their able home not just in their community but
policies. Even in the Triangle’s highest-priced wherever they are located.
towns — Chapel Hill, for example — there

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End Notes

1. Benjamin Powell, Ph.D. and Edward Stringham,
Ph.D., “Do Affordable Housing Mandates Work?: 9. W. Calvin Horton, Town Manager, to the Mayor
Evidence from Los Angeles and Orange County,” and Town Council of Chapel Hill, “Review of the
Reason Foundation Policy Study 320, June 2004, www. Comprehensive Plan Affordable Housing Strategies,” April 27, 2005.
2. Carrboro Land Use Ordinance, Section 15-54.1, 10. “Summary Minutes of an Affordable Housing Work Session of the Chapel Hill Town Council,”
Chapel Hill Town Council, April 27, 2005. Such a
3. “Town of Chapel Hill – Affordable Housing
report was referred to as a “document that would pass
Overview,” Chapel Hill Planning Department, July
legal muster to show the court if necessary that the
ordinance we had passed had a rational relation to the
4. “Summary Minutes of an Affordable Housing statute that gave us the broad authority to regulate the
Work Session of the Chapel Hill Town Council,” Town” (p. 17).
Chapel Hill Town Council, April 27, 2005.
11. Carrboro Land Use Ordinance, Section 15-182.4,
5. “Housing,” 2007 Chapel Hill Data Book, Chapel
Hill Planning Department, p. 4.7.
12. “Finding a Home,” Orange County Housing and
6. “North Carolina FY 2006 Federal Income Land Trust,
Limits,” U.S. Department of Housing and Urban
13. Benjamin Powell, Ph.D. and Edward Stringham,
Ph.D., “Housing Supply and Affordability: Do
Affordable Housing Mandates Work?”, Reason
7. “Demographics,” 2007 Chapel Hill Data Book, Foundation Policy Study 318, April 2004, www.reason.
Chapel Hill Planning Department, p. 3.9. org/ps318.pdf, p33.
8. North Carolina General Statute § 42-14.1, www.

regional brief

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