We can’t afford it.
A lopsided society perched on the edge of a cliff tends to topple when the wind changes direction.
We don’t have to combat Climate Crisis.
We don’t have to uproot racism & discrimination.
We don’t have to restore the Missing Middle Class.
We don’t have to resolve our local Housing Crisis.
We don’t have to provide for those that have not.
Yet, if we don’t do what we don’t have to do… we may somehow prevail but we will not persevere. Try as you might, you cannot sustain an unsustainable society. It is time to wake up and smell the coffee. The times they are a-changin’
(Un)Affordable Housing
The traditional approach to easing runaway home prices is to build more homes and build some as “affordable housing.” This is good practice, but it is insufficient to address the runaway nature of an unconstrained market.
As long as the roof over your head is a vehicle of someone else’s wealth, there will never truly be equity in housing.
For decades, environmentalists have successfully utilized a type of deed restriction called a Conservation Easement. An alternative to acquisition, this is a means of ensuring that a given property is protected against development for conservation purposes. The property owner sells the Conservation Easement to a willing party and subsequently forgoes development potential in exchange for a financial and/or charitable alternative.
Conservation of ecological resources is critically important, especially in a naturally abundant & ecologically diverse area like Santa Cruz County. But when large-scale residential development projects are opposed by environmentalists & NIMBYs alike, in a geographically constrained region with a woefully insufficient governmental budget, while obscene wealth pours in from The Valley Over The Hill and homes are engulfed by intensifying wildfires… we have all the ingredients for a distasteful & disgraceful local Housing Crisis.
Here in America, land of the free and home of the brave, we intensely value personal liberty. But as a society we sometimes need to be reminded that we have pledged allegiance to a nation with “freedom & justice for all,” not just for some. The American Dream is dreamt on an unkept bed of Capitalism; unbounded, it has become the Modern American Nightmare. While some rest soundly in the first-class quarters of the Titanic, others are clamoring for the lifeboats. Wake the fuck up. Things aren’t just bad for the peasants & crew. Things are most assuredly bad for you too!
The Titanic was built with hubris, sailed with hubris, and sunk with hubris.
Affordability Easement
In a parallel universe, Santa Cruz County formed the Affordability Easement Agency (AEA) back in 2009. However, due to a budgetary shortfall, the agency was only able to finance a single transaction.
The lucky recipient of this rare & innovative new deed restriction was Dr. Smith, who purchased her home in 1991 for $150k. Since Dr. Smith is baller, she got rich by supporting corporate greed and then settled into a philanthropic life of community engagement.
In 2009 when she was approached by the AEA, the value of her home had risen remarkably to $550k. Shaken by the 2007 Financial Crisis, concerned by The Great Recession, and no longer employed by a capitalistic giant corporation able to pay her a high salary, she decided to accept the offer of the AEA.
The Deets
As a deed restriction, the Affordability Easement (AE) is assigned to the property in perpetuity. There are contractual conditions established that allow the AE to be voided, but it’s generally designed for that to be prohibitive. At its heart, the concept of the AE is to decouple the owner from financial risks & gains associated with home ownership. This not only lowers the risk & barrier of entry for future owners of the property, but it also provides a scalable mechanism for the AEA to strategically propagate AEs throughout the community. The net effect - placing a soft ceiling on the local housing market and an innovative new funding mechanism for a public agency tasked with fostering equity in the local housing market (pardon the pun!).
In other words, this concept is a means for local government to participate in the local housing market in order to combat runaway price appreciation.
Ok, so back to the deets. Instead of selling her home at market value of $550k in 2009 and subsequently moving out, she instead sold an AE for $400k and stayed in her home. AEA offered her this price based on the delta of 2009 fair market value (FMV) and 1991 purchase price. At this point, Dr. Smith enjoyed her realized gain of $400k (167% ROI) after 18 years in her home. She secured an annualized ROI of 5.6% during a historic period of turmoil in the housing market. She had no idea what would happen in the market, but the near-term direction was decidedly downward.
Dr. Smith and her husband were able to reap the $400k AE proceeds tax free, since the property was their primary residence and thus the transaction qualified towards their full $500k gain exclusion. They didn’t know the market was bottoming out in 2011, but at this time they decided to use $100k of the AE sale proceeds for a much needed renovation. They felt good about this, since their family was intent on making the house their “forever home".
In 2021, 10 years after their big renovation and 30 years after Dr. Smith’s initial purchase, Mrs. & Mr. Smith were ready to sell their beloved home and move into a beautiful 55+ community closer to the coast. The comps placed FMV at $1.5M, but of course the comps didn’t have an Affordability Easement. Ultimately, their home sold for $1.18M, which was still a staggering sum for Dr. Smith as she reflected on the runaway housing market of the past 30 years.
Based on the conditions of the AE, the Smiths received $327k disbursement. Since they had previously applied the $400k AE gain towards their tax exclusion, they were able to exclude an additional $100k from capital gains tax. All in all, after 30 years of owning their precious home, they enjoyed an annualized ROI of 3.6% for their real estate investment. Of course, the $400k tax-free gain they reaped in 2009 had also ballooned substantially due to investments in the stock market, but that’s a story for another day.
Upon sale of the home in 2021, the AEA received proceeds of $849k, a 6.5% annualized ROI over the 12 year course of the AE. The new owner & resident was able to purchase the property for $1.18M, substantially below market value of $1.5M. Thus, the AE succeeded in tamping down the otherwise unbounded price appreciation. This put the property within reach for a new generation of successful young people that would have otherwise been priced out. Coincidentally, the new buyer also had a PhD and also had the last name Smith, but despite her success she was unable to afford the sky-high $1.5M market-rate homes. She was thrilled to enjoy her new AE-bounded home and was unconcerned with the tamped financial gain it might provide. It allowed her to secure an incredible home without breaking the bank. And she appreciated the icing on the cake of supporting a public agency tasked with helping people like her live the American Dream.
Dr. Smith 2.0 had no desire to live an elite life of wealthy excess. She mourned the ensuing loss of The Missing Middle, and she was happy to help her community course correct. She felt okay sacrificing potential equity in her home for greater equity throughout her community.
This hypothetical parallel universe isn’t the only hypothetical parallel universe.
For example, in another universe Dr. Smith sold her home in 2009 to Mr. Jones for $550k. She walked away with the same $400k that she would’ve gotten from the AEA, but she then moved out of the home.
Mr. Jones, having purchased the home at a terrible time in the housing market, ultimately weathered The Great Recession and sold the home in 2021 for $1.5M, securing an annualized ROI of 7.2%.
In another parallel universe, Mr. Jones sold the home in 2020 due to fear of impeding recession. Mr. Kumar purchased the home for $1M in 2020 and sold it for $1.5M in 2021.