A Path to Affordability?

I was interviewed by KSBW news this week to get my thoughts on the recent housing numbers confirming Santa Cruz County as the most expensive place in the country to rent or own. And as I talked it through, it occurred to me that perhaps there is light at the end of the tunnel.

The question on the table was why rental prices have risen so much, and the obvious answer was of course inventory, but also the high price that holders of HUD vouchers are able to offer in order to be considered over competing households. The setting for our discussion was the 15-townhome subdivision of The Dwellings in Soquel, where we have sold 10 and are putting 2 of the 5 remaining up for rent in response to the dual forces of an increasing inventory of listings for sale, and a depleted inventory of places for rent. 

In order to cover the high costs of land, construction, mortgage and insurance rates, property owners and tenants alike who are weary of the pitfalls of pursuing inflated rents are driven to go for higher density. However, this is often seen as a detriment by the surrounding neighbors. 

Nowhere is this more pronounced than along the primary transportation corridors and in downtown Santa Cruz where mixed-use projects of 7 stories and higher are being approved in increasing numbers, while nearby residents complain of their pending impact on parking, sunlight and traffic. But demand has greatly outstripped the current supply in this beautiful region where land is in limited supply. And unlike more rural locations such as our Soquel townhomes, the operative thinking for developments in these higher density areas is that jobs, shopping and recreation are all within close enough proximity that residents will be less reliant on having their own cars.

Interestingly enough, many of these areas are designated for high-density use within Opportunity Zones, where if the property is held for at least 10 years, it can be sold without any capital gains tax. And as added incentive to the developer, this timeframe also puts them outside the statute of limitations for latent and patent defects, which are the subject of litigation in something like 7 out of every 10 condo developments. 

Logically these two factors together should help achieve two results: In the short run the thousands of units being built will help meet the need for more rental inventory, which will tend to bring rental prices down. And once the developers are clear of the 10-year period to qualify for their tax break, provided their units are eligible to be individually mapped and sold, they could be purchased by the residents, who would then get to cross the line into ownership so they are able to benefit from growth in wealth as their equity increases over time.

There are multiple details that will need to fall into place along the way, but it could be that it adds up in the long run to a path to affordability for more people than we have today.