The Thrive Montgomery 2050 plan casts the lack of robust housing growth as a major challenge facing the county, suggesting that it will leave people unhoused. It further suggests that job growth won’t happen unless we have more housing. The proposed solution is to increase allowed residential density in both commercial centers and single-family residential neighborhoods.
This approach wholly misunderstands both the reality of the situation and market economics. Much land is already zoned both for housing and density. According to Montgomery’s Planning Department, there are roughly 36,500 unbuilt residential units. This doesn’t even include Rockville and Gaithersburg.
In 2019, the Council of Governments (COG) released a housing target of 41,000 new units for Montgomery by 2030. We built 4,739 new units in 2019 and 2020, leaving 36,261 to be built by 2030. Even excluding all of the units built in 2021, we have already approved enough new units to meet COG’s housing target.
The ideas that there is no place to build and that insufficient housing is planned to meet expected needs are simply false. The lack of opportunities to build is not the problem, as anyone who has driven past the remains of White Flint Mall knows. Of course, sections of nearby Pike & Rose are also still being built.
But can we get even more housing built through adding density? Proponents envision developers responding to Thrive-enabled upzoning by building massive numbers of new units and thereby depressing the price, whether for rental or sale. New jobs, they say, will come to Montgomery as a result. But that’s not how the market works. Developers build in response to demand. New jobs result in new housing—not the reverse.
Developers also naturally consider many complex factors in deciding when and how much to build, especially land prices, building costs, sales prices, and likely profits. No matter how much we upzone, developers won’t dump more housing on the market. Developers look to make a profit, so they build at a rate that allows them to make money based on demand—not at a rate that results in profit-killing price declines.
This isn’t a nefarious plot to limit housing. It’s just how the economy works and assures that new housing gets built. But zoning for more housing won’t result in more housing unless there is a demand for it in that area and the economics of building it make sense. No one is going to build more if prices are going down and they can’t make money out of it.
Just because you zone it doesn’t mean that they’ll build it. Rampant increases in density may slow building because tall buildings are much more expensive to construct. But builders don’t want to lose the profits off the increased density, so they wait to build until it’s profitable. Indeed, this is the rationale behind the expensive payments to build at Grosvenor Metro even as property taxes rise.
The evidence that “smart” growth results in lower prices is thin on the ground. Neither Portland nor New York is known for affordability. But Houston, the embodiment of sprawl, is. Why? Texas is big so the city can expand outward much more easily than here. They also have no zoning, so development can be densely packed or spread out. It’s an argument for a set of policies very different from smart growth.
In short, Thrive promises a chimera. If only we increase density and allow more housing to be built, housing prices will come down and jobs will increase. Montgomery County has allowed more density repeatedly in recent years and it hasn’t happened. Thrive’s doubling down on the strategy won’t work either.
Left largely undiscussed during the debate over MoCo’s recently passed rent stabilization bill was the overall condition of the county’s rental market. Yes, Council Member Andrew Friedson brought up our recently published data showing that rents are declining in MoCo and are projected to continue falling for the rest of the year. But there’s a lot more to this issue, especially when considering the long-term needs of tenants and the associated implications for the county’s economy.
The bottom line is that MoCo is emerging as one of the most unattractive places in the D.C. area to build rental units.
Put yourself in the shoes of a regional developer, real estate investor or creditor and consider the following facts.
1. MoCo’s rental market is one of the slowest growing in the region.
This is the first sign that not all is right in the county. MoCo has a relatively affluent population, 11 Metrorail stations, a nationally recognized school system, a new light rail route (the Purple Line) under construction and is planning several bus rapid transit routes. Developers should want to build here, but disproportionately, they are not. If Downtown Bethesda were removed from the county’s unit statistics, one wonders how poorly the rest of the county would rank in the D.C. region.
2. Rents in MoCo are also growing slowly.
With the exception of Loudoun County, every other major jurisdiction in the region has seen more growth in average rent than MoCo. That’s good for tenants but not so good for investors looking for an adequate return. That is especially the case given the level of uncertainty in MoCo’s real estate market, which would normally demand higher returns to compensate investors for dealing with it. More on that in a bit.
Here is an interesting fact. Loudoun, Arlington and Howard have been the three fastest-growing large jurisdictions in the area in terms of renter occupied units. They are also three of the four slowest-growing jurisdictions in terms of rents. That’s how a market should work – rapidly expanding supply should keep prices down even with substantial demand, and Loudoun has been one of the fastest growing counties in the nation. But MoCo has seen slow growth in both construction and rents, making it an outlier.
3. No other major jurisdiction in the area has experienced a larger increase in rental vacancy since 2010 than MoCo.
You might think that with MoCo’s relatively stagnant construction demand for housing would push vacancy down. Instead, it’s gone up – by more than any other jurisdiction in the region. In 2010, MoCo’s rental vacancy rate was 2.7%, the second-lowest of 10 large area jurisdictions. In 2018, MoCo’s rental vacancy rate was 4.9%, tied for the third-highest rate. The vacancy rate gain (2.2 points) was the largest in the area. This is going to get worse as vacancy rates for Class A and Class B units are projected to approach 7% in coming years.
4. Evictions in MoCo are time consuming and expensive.
In 2018, the county’s Office of Legislative Oversight (OLO) studied evictions in MoCo and stated, “The Montgomery County Sheriff’s Office reports that on average it takes 12-13 weeks to evict a tenant for nonpayment of rent, though the process can sometimes be significantly longer.” OLO also found that the cost to evict a tenant can range from $5,700 to $16,600, landlords “are often unable to recover lost rent” and “costs and process delays discourage small property landlords from renting out.”
Landlords with lots of units and market power might be able to spread these costs to other tenants in the form of higher rents. Other landlords might choose to avoid the county altogether if they believe its procedures are more onerous than its neighbors.
5. The county executive is an open housing skeptic.
7. The county just passed temporary rent stabilization.
The council made major changes to Council Member Will Jawando’s rent control bill, allowing rent increases up to the county’s voluntary guidelines and extending the bill’s duration to 90 days after a catastrophic health emergency. The direct economic impact of the bill may be mild because it is temporary, allows small increases and takes effect in an environment in which rents are declining. But it could be extended at a later time, a possibility that adds to the uncertainty of investing in MoCo. It also has tremendous symbolic importance. Let’s remember that Takoma Park has had rent stabilization for decades and has suffered absolute losses of rental units.
Consider this. It’s hard to find two terms that are more hated by the residential rental industry than “moratoriums” and “rent stabilization.” At this moment, MoCo is the only jurisdiction in the Washington region that has both of them.
MoCo is still seeing residential construction from projects that were approved before the current downturn, before the current round of moratoriums, before the approval of rent stabilization and before the current executive took office. But after that wave (a rather small wave) of construction wraps up, what will come next?
Imagine that you are a regional developer, real estate investor or creditor and you are evaluating a jurisdiction that has had slow rent growth (and now falling rents), slow unit growth, rising vacancy, expensive and time consuming evictions, a moratorium policy, temporary rent stabilization that could be extended and a county executive who is an open skeptic of housing construction. Right next to that jurisdiction are several others with fewer or none of those drawbacks.
Given all of the above, why would anyone want to build rental units in MoCo?
Potentially, imposing more moratoriums on housing
construction!
County development rules require moratoriums on housing construction inside school clusters or individual school service areas when projected public school enrollment accounts for 120% or more of capacity five years into the future. Additionally, elementary schools must be 110 students over capacity and middle schools must be 180 students over capacity to trigger moratoriums. Projects that are already approved are not halted by moratoriums but new project approvals are not granted.
The problem with stopping residential development is that school impact taxes collected from new units can be a major source of revenue for school construction. As recently as the FY15-20 amended capital budget, school impact taxes accounted for 15% of MCPS’s school construction budget. Unfortunately, that is no longer the case.
In a memo to the Montgomery County Planning Board, planning staff noted that the county executive’s new recommended FY21-26 capital budget underfunds MCPS’s construction request by $61 million in FY21, $93 million in FY22, $93 million in FY23 and $57 million in FY24. One of the biggest reasons for the underfunding is that school impact tax receipts have fallen by more than half since FY14. The planning staff indicates that if the underfunding results in delayed projects, nine elementary school service areas (Bethesda, Clarksburg, JoAnn Leleck, Rachel Carson, Strawberry Knoll, Summit Hall, McNair, Page and Burnt Mills), one middle school service area (Parkland) and seven high school clusters (Quince Orchard, Richard Montgomery, Albert Einstein, Montgomery Blair, Blake, Northwood, Walter Johnson) may be at risk of moratoriums. For the Blake, Blair, Einstein and Walter Johnson clusters, this would be the second straight year of moratorium, threatening projects in North Bethesda and Downtown Silver Spring.
The cruel fact here is that reducing residential construction has historically had little if any impact on MCPS enrollment increases. The chart below shows MCPS enrollment (red line and left axis) and residential units permitted in Montgomery County (blue line and right axis) from 1994 through 2018. MCPS enrollment comes from the county executive’s recommended budget while permitted units comes from the U.S. Census Bureau. Over this 24 year period, housing construction has been falling while MCPS enrollment has been rising. The contrast between the two trends has been most pronounced in recent years. Housing units permitted has fallen from 3,981 in 2012 to 1,947 in 2018 while MCPS enrollment has grown from 146,497 to 161,470. It defies logic to blame school crowding on housing construction when homebuilding is in an era of decline.
And so here is the effect of MoCo’s moratorium policy. Housing construction drops, causing school impact tax payments to plummet and depriving school construction of needed funding. The county reacts by delaying school projects, triggering moratoriums. That causes housing construction to decline further and the cycle continues. None of this helps more schools get built but it definitely constrains housing supply, thereby driving up home prices and making the county even more unaffordable to live in than it already is. Another effect is that it makes the county radioactive to the real estate and investment communities, thereby pushing them into competing jurisdictions. It’s no wonder that Prince George’s County Executive Angela Alsobrooks is celebrating her county’s passing of Montgomery County in job creation.
Using residential moratoriums to prevent school crowding
is like treating lung cancer by amputating the patient’s legs. The treatment does nothing to solve the
original problem but it definitely causes new problems to arise!
If you wanted to stop economic growth and make it harder
for people to live here, it would be difficult to devise something more attuned
to such goals than MoCo’s insane moratorium policy. The county must bring it to an end.
County Executive Marc Elrich and his biggest critic, Council Member Hans Riemer, are feuding once again. This time, the subject is affordable housing. Elrich says his new recommended capital budget includes a record sum for affordable housing. Riemer says there are in fact no new resources.
Who is right?
Let’s consider the statements from each of them. First, here is Elrich.
Affordable housing is one of my top priorities. It is vital to our County’s future success. We must maintain and expand our stock of affordable housing and we are taking this critical issue head on in the capital budget. That is why I am recommending we add $132 million for affordable housing to the capital budget over the next six years.
This is a record level of funding for affordable housing projects for our capital budget. These funds will be used by the Affordable Housing Acquisition and Preservation Project to facilitate efforts to preserve existing stock and increase the number of affordable housing units in the County. But that is not all.
In this Capital budget, I am proposing a new Affordable Housing Opportunity Fund to leverage funding from other partners that will support short-term financing while affordable housing developers arrange for permanent project financing.
On affordable housing, I was initially encouraged by the Executive’s speech about increasing funding levels. Indeed, I am intrigued by his proposal to create a new housing preservation fund. However, while he claims to have added more than $132 million in the affordable housing fund, after further examination it became clear that the annual amount is unchanged at $22 million. Under the last Executive, affordable housing funding was only programmed for the first two years of the six year budget, but additional funding was always added in the subsequent years. We need to increase our affordable housing fund to at least $100 million annually. This change in accounting will not result in increased resources. In combination with his resistance to the Council’s affordable housing goals, developed with and agreed upon by all the local governments in Washington region, the County Executive’s housing policy continues to be a matter of serious concern.
These two like each other about as much as Popeye and
Bluto. (Which one is Popeye depends on
your point of view!) But how can their
statements be reconciled?
Since Fiscal Year 2001, the county’s primary affordable housing vehicle has been its Affordable Housing Acquisition and Preservation program, which appears in the county’s capital budget. The program enables the county to buy or renovate, or assist other entities to buy or renovate, affordable housing. It is financed by several sources including but not limited to loan repayments and the county’s Housing Investment Fund (which is mostly supported by recordation taxes).
The capital budget, which includes the Affordable Housing
Acquisition and Preservation program, is a six-year budget. In even years (like 2020), it is written anew
and in odd years, it is amended.
Projects in the capital budget can have up to six different years of
funding in them (with more scheduled outside of the budget’s six year
horizon). In the past, the affordable
housing program has only shown funding for the first two years of the capital
budget with zero money programmed in the last four years. But since the capital budget is rewritten
every two years with affordable housing money renewed in each successive
budget, that has not mattered.
The table below shows funding for the Affordable Housing
Acquisition and Preservation program in the last 16 capital budgets. Each budget covers six years. Budgets labeled with an “A” are amended
budgets programmed in off years.
At first glance, Elrich appears to be right. His new recommended capital budget includes
$132 million for Affordable Housing Acquisition and Preservation, which is far
higher than any previous capital budget.
But let’s remember what Riemer said about the annual amount of
spending. All the previous six-year
budgets included funding during the first two years only. Elrich’s new capital budget shows funding for
the Affordable Housing Acquisition and Preservation program in all six
years. Riemer is correct: an accounting
change caused the apparent increase in this program.
But the story doesn’t end there. Elrich created a new program in the capital budget called the Affordable Housing Opportunity Fund. This program is dedicated to acquiring affordable housing in areas at risk of rent escalation, such as those near the Purple Line and other transit corridors, and is intended to use public funds to leverage private funds in acquiring and preserving affordable housing. This new program provides $10 million in each of the new capital budget’s first two years for this purpose. That money comes from recordation tax premiums which are normally used to finance transportation projects, so it’s not “free” money. But it is more money for affordable housing.
Combining the existing Affordable Housing Acquisition and
Preservation program and Elrich’s new Affordable Housing Opportunity Fund, the
table below shows the annual expenditures for affordable housing in the capital
budget since FY05. Annual expenditures
are drawn from the first two years of every amended capital budget with FY21
and FY22 drawn from the executive’s new recommended capital budget.
Combining the two programs, Elrich recommends spending
more capital money for affordable housing in FY21 and FY22 than any annual
expenditure in the preceding published budgets.
When adjusting for inflation, Elrich’s FY21 and FY22 spending amounts
are roughly equal to the Leggett administration’s peak affordable housing years
of FY09 and FY10, so one can quibble about whether Elrich’s spending is truly a
record. But when Elrich’s new Affordable
Housing Opportunity Fund is included, the first two years of his new budget
definitely show an annual increase for affordable housing over the prior
budget.
The county’s capital budget has been shrinking due to cutbacks in general obligation bond issuances and declining projected school impact tax receipts. That’s a dire subject for another time. But given the county’s budget difficulties, Elrich’s financial commitment to affordable housing is meaningful. Friends and foes alike should give him credit for it.
Council Member Marc Elrich, who recently equated potential gentrification near the Purple Line with “ethnic cleansing,” is takingflak for his remarks and is not backing down. We will leave it to others to judge his choice of words. But what interests us is the policy proposal he has made: specifically, Elrich would like to see rent control imposed near Purple Line stations. That’s worth discussing.
Economists tend to disagree on many issues but a hugemajority of them oppose rent control. Liberal New York Times columnist Paul Krugman has written, “Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand.” A massive review of economic research on rent control found evidence that it encourages conversions of rental units into condos and leads to higher rents in non-controlled units. Rent control repeal in Cambridge, Massachusetts led to a surge in property values in both controlled and non-controlled units and a 20% increase in housing investment. Even Communists denounce rent control. In 1989, Vietnamese Foreign Minister Nguyen Co Thach told a news conference that rent control did more damage to his capital city than American bombs. “The Americans couldn’t destroy Hanoi, but we have destroyed our city by very low rents. We realized it was stupid and that we must change policy.”
One need not go to a Communist nation to observe the effects of rent control. MoCo has a good example of that policy right here at home: the City of Takoma Park, which passed a rent control law in 1981. We examined U.S. Census data to analyze how the city’s housing stock compares to the county’s. Below we show that just 10% of the city’s housing was built in 1980 or later, much lower than the county’s percentage of 47%. That’s not a fair comparison since the city is much older than the vast majority of areas in the county. However, other older areas inside the Beltway like Downtown Bethesda (27%), Chevy Chase (20%) and Downtown Silver Spring (26%) have much higher percentages of their housing built in 1980 or later than Takoma Park.
It gets worse. Takoma Park has been losing rental housing units for years. Below we show the city’s total, owner-occupied and renter-occupied housing units in 2000, 2010 and the five year period of 2011-2015. During that time, the city’s total housing units fell by 4% and its renter-occupied units fell by 18%. Owner-occupied units increased by 10% and vacancies rose by 30%. No housing policy that produces double-digit losses in rental units can be described as good for renters.
Takoma Park’s housing decline is not going to turn around soon. According to the site plans, preliminary plans and sketch plans listed on the MoCo Planning Department’s development tracking map, only two housing projects with a combined seven units are pending in Takoma Park. Those units are all single family, which are exempt from the city’s rent control law.
This extract from the Planning Department’s site plan map shows the huge contrast in development plans between Takoma Park and Downtown Silver Spring.
The implication of all this is clear: housing developers are steering clear of Takoma Park’s rent control law. These folks are not going to be any more enthusiastic about rent control near Purple Line stations. Why does that matter? When it comes to building new housing, there are basically three options. First, you can build it near transit. Second, you can build it away from transit, thereby incurring the associated congestion and environmental costs. Or third, you can try to block it from being built, and that’s one probable effect of rent control. But that won’t stop population growth – instead, it will result in overcrowded housing, unsafe living conditions and code violations. (Such phenomena are not unknown in some areas of the county.) Rent control near the Purple Line just encourages options two and three.
Finally, the Purple Line is a huge investment, costing at least $2.65 billion to construct. Only an insane society would pour billions of dollars into a transit project and then stop new housing from being built next to it. Even Vietnamese Communists would agree.
