Vanishing Automobile update #31

San Jose Case Study, Part One:
The Urban-Growth Boundary

In 1970, the microprocessor was yet to be invented; hardly anyone -- not even science fiction writers -- had imagined personal computers; and if you mentioned the World Wide Web to someone they probably would have thought you were talking about some international communist conspiracy.

Despite this huge uncertainty about the future, planners in the City of San Jose felt confident enough to write a twenty-year plan that would lock the region into ever-spiraling housing prices. As a result of their plan, within twenty-five years San Jose housing prices would increase by 930 percent, more than in any other major U.S. housing market.

San Jose is California's oldest city, but it was a sleepy town of less than 100,000 people in 1950. Under pro-growth city manager A.P. Hamann, San Jose nearly quintupled in population from 1950 through 1970, representing an incredible 8 percent annual growth rate. By comparison, Las Vegas, the fastest growing major U.S. city in the last decade, is growing at only about 6 percent per year.

Part of San Jose's growth was due to an aggressive annexation program that octupled San Jose's land area in twenty years. As a result, the city's population density declined from more than 5,600 people per square mile to less than 3,300.

Growth Controls Introduced in the 1970s

Soon after Hamann retired in 1969, however, San Jose elected a succession of mayors and city councils with a very different attitude toward growth. First, Norman Mineta was elected mayor in 1971 and served until 1974, when he was elected to Congress. Of course, Mineta is now Secretary of Transportation.

Mineta was succeeded as mayor by Janet Gray Hayes, an outspoken opponent of Hamann's growth policies, even though she herself was a beneficiary of those policies, having moved to San Jose in the 1950s. Hayes initiated a downtown revitalization program that eventually pumped nearly $1.5 billion into downtown San Jose. While downtown has several museums and tax-subsidized hotels, the retail sector remains lethargic and all but a tiny percentage of jobs are located elsewhere.

Under Mineta, the city wrote a land-use plan (known as the "General Plan") that called for curtailing growth. The plan covered not just the 136 square miles in the city limits but another 200 square miles that the city deemed to be with its "sphere of influence." With the complicity of Santa Clara County, the city conspired to limit or prevent development from taking place on this 200 square miles of land.

When the plan was written, planners estimated that 643,000 people lived within this "sphere of influence," or at least 100,000 more than in the city itself. The plan considered four alternative populations for 1990: 643,000 (zero growth), 795,000 (which the plan called moderate growth), 878,000 (which the plan called high growth), and 1,036,000 (which the plan called maximum growth).

The "high" and "maximum" alternatives, however, were considered "undesirable" because they would be "too costly in terms of environmental quality and public facilities." Even the high growth alternative, said the plan, would be bad because "the densities required to house the population . . . would be appreciably higher than current typical densities" -- unless, of course, growth were allowed to spill over into the area that the city did not want to see developed.

The twin goals of the plan, then, were to keep growth within an urban-growth boundary and to keep the density of housing within that boundary from growing "appreciably higher than current typical densities." Of course, the plan did not say how it would keep population growth from exceeding "desirable" rates or what would happen if the city were forced to choose between expanding the boundary and appreciably increasing densities within the boundary.

The boundary (which wasn't originally called an urban-growth boundary) excluded the hills around San Jose above the "15-percent-slope" line. It also excluded certain areas of valley bottom, notably the Coyote Valley and South Almaden Valley.

Actual Growth Outstrips Planned Growth

By 1990, San Jose's population had grown to 782,000. If 100,000 more people still lived outside the city but within its "sphere of influence," then the region's population had grown at the undesirably "high growth" rate.

While San Jose might have limited growth within its sphere of influence, it couldn't stop Santa Clara County from growing by nearly half a million people between 1970 and 1990. The Census Bureau says that more than 400,000 of those people moved into the San Jose urbanized area. By coincidence, the Census Bureau's urbanized area is almost exactly the same size as San Jose's sphere of influence. The urbanized area, however, includes a number of cities that had incorporated in the 1950s and 1960s to escape from being annexed by San Jose.

The growth limits imposed by San Jose combined with pressures to grow faster than San Jose deemed "desirable" led to rapidly inflating home prices. According to the Department of Housing and Urban Development, between 1976 and 1990, the price of a typical home grew by 365 percent. This was about three times as much as in Portland (122%), Denver (126%), Atlanta (114%), or Dallas (117%).

Despite the growing unaffordability of housing, the city wrote a new General Plan in the 1990s that basically affirmed the growth boundary (which it now formally called the urban-growth boundary). The basic excuses for not expanding the boundary were that it would lead people to drive too much and pose high urban-service costs on the city.

The 1994 General Plan classified the Coyote and South Almaden valleys as "urban reserves." These areas would be added to the boundary, said the plan, only under certain strict conditions: * Enough new jobs were available in those areas to allow new residents to minimize commuting; * Funding was available to pay for all the capital costs of new urban services; and * The city's future budget was considered "stable" enough to pay for operations and maintenance of those urban services for at least five years.

Note that these "triggers," as the plan calls them, have nothing to do with housing prices. Despite the fact that housing continued to become less affordable every month, the city refused to permit development of these areas. Cisco Systems wanted to build a new factory in the Coyote Valley, and homebuilders were more than happy to pay for construction of all necessary infrastructure. But the city argued that its finances weren't stable enough to insure that it could maintain that infrastructure.

The Nation's Fastest Rising Housing Costs

So housing prices continued to grow, nearly doubling in the 1990s. In the twenty-five years preceding the middle of 2001, San Jose housing prices had grown by 936 percent, more than any other major urban area. During the same period, housing prices grew by 821 percent in San Francisco, 584 percent in Seattle, 398 percent in Portland, and just 138 percent in Houston.

Today, a fifty-year-old, two-bedroom house that would be considered a "starter home" in most cities sells for around $400,000 in San Jose. In October, 2002, the average sale price of a single-family detatched home in Santa Clara County was $641,000, while the average condo or townhouse sold for $372,000.

According to Coldwell Banker, a 2,200-square-foot, four-bedroom home that would cost $160,000 to $180,000 in Las Vegas or Houston costs nearly $630,000 in San Jose and even more in other Silicon Valley communities. This suggests that land-use planning has more than tripled the cost of San Jose housing. While San Jose is only the 25th (out of 317) most expensive city on Coldwell Banker's list, most of the top twenty-four cities are also in the San Jose, San Francisco-Oakland, or Los Angeles urban areas and thus suffer from many of the same growth restrictions.

Vanishing Auto update #29 suggests that two sorts of government policies are largely responsible for unaffordable housing: urban-growth boundaries that drive up the cost of land and land-use regulations that make subdivisions more time-consuming and expensive. San Jose suffers from both problems. In the Hamann era, subdivisions could be approved in a few months; today, it takes years. This delay is certainly a partial cause of high housing prices.

But the urban-growth boundary bears the brunt of responsibility. Because of the boundary, an acre of land suitable for housing can cost well over a million dollars, or roughly 40 to 50 times as much as in many cities without such boundaries. The City of San Jose recently paid $1.7 million an acre for five acres of land, located about 2.5 miles from downtown, on which it proposes to build affordable housing.

One response to high land costs has been an appreciable increase in residential densities. Census data indicate that the City of San Jose's population density has risen from under 3,300 people per square mile in 1970 to more than 5,100 in 2000. The San Jose urbanized area is denser still, with more than 5,900 people per square mile.

Housing Subsidies for the Upper-Middle Class

Predictably, San Jose has also responded to high housing prices by either subsidizing "affordable housing" or requiring developers to provide a certain number of "below-cost" housing units as a condition of getting a permit to build at all.

The San Jose Housing Department proudly lists on its web site 72 housing projects built in the 1990s that provide just under 6,000 units of low-income housing. These are mostly apartments but include some condominiums and even a few single-family homes.

The web site reveals that San Jose has spent nearly $180 million subsidizing this housing, not to mention tens of millions in city-backed, tax-exempt bonds, below-market land sales, and other indirect subsidies. The direct subsidies alone amount to $30,000 per dwelling unit. In many projects, these subsidies are matched by support from churches and other charitable organizations.

On a per unit basis, the most heavily subsidized project was thirty-five single-family homes on 3,500-square-foot lots "located in the desirable Almaden Valley." San Jose provided $142,000 per home to make these houses available to "moderate income families." This presumably reduced the price of these homes -- for less than three dozen lucky families -- from nearly $500,000 to around $350,000.

Of course, everything is distorted in Silicon Valley, including the definition of very low, low, and moderate incomes. The average income for a family of four in Santa Clara County is $96,000. Even at today's low interest rates, with a ten percent down payment, this is barely enough to afford a $400,000 house -- and, as noted, such homes are rare in San Jose. The National Association of Home Builders says that a median income family can afford to buy only 20 percent of the homes available for sale in San Jose.

The San Jose Housing Department thus defines "moderate income" for a family of four as up to $96,000 a year. "Low income" is up to $74,000 a year and "very low income" is up to $48,000 a year for a family of four.

Even the moderate income definition leaves out many who are hurt by high housing costs. To qualify for a loan, even at today's low interest rates, someone wanting to purchase an average home in San Jose, with a ten-percent down payment and thirty-year payoff, would have to earn more than $120,000 a year.

Many of the cash subsidies provided by the city come from the federal government, which leads to an interesting irony. Nationwide, the median income for a family of four is about $62,000. This means that many taxpayers outside of San Jose are paying to subsidize housing for San Jose families who earn more than the people subsidizing them.

This irony, however, is less important than the fact that San Jose's efforts to subsidize affordable housing are a drop in the proverbial bucket. San Jose has about 280,000 households, half of whom (by definition) earn less than median income. This means that the 6,000 units of subsidized housing help just 4 percent of those people. And in most cases, this doesn't represent much help, since the subsidies average just 20 percent of the cost of homes or apartments that are priced more than three times too high.

The inconsequential nature of housing subsidies is even more apparent when comparing the value of San Jose housing with those subsidies. If the average single-family home is worth $640,000 and the average multi-family home is worth $370,000, and 60 percent of San Jose dwelling units are single-family, then the total value of San Jose housing is nearly $150 billion. Since (compared with relatively free-market cities such as Las Vegas or Houston), San Jose housing is priced more than three times too high, about $100 billion of this value is caused by land-use regulation and the urban-growth boundary. Spending $180 million in a decade on "affordable housing" will not do much to mitigate this cost.

Fixing San Jose's problems won't be easy. The biggest beneficiaries are people who owned land or housing before the 1974 General Plan. Since San Jose's population has nearly doubled since then, and less than two-thirds of San Jose families were homeowners in 1974, more people have been harmed than helped. Yet 62 percent of San Jose families own homes today, and they aren't going to want to see the drop in home values that would result from eliminating the urban-growth boundary or relaxing land-use regulations.

So it is not surprising that there continues to be strong opposition to opening the Coyote and South Almaden valleys to development. Opponents are brash enough to claim that developing these areas would lead to "increased gridlock, worsening air quality, and soaring home prices," when in fact the opposite is true. Former Mayor Janet Gray Hayes even called a plan to develop Coyote Valley "the Los Angelization of San Jose". In fact, it is her densification and congestification that are turning San Jose into Los Angeles, the densest and most congested urban area in America.

Part two of the San Jose case study looks at San Jose's light-rail system.

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