Island Guardian

Sunday, March 19th

WE ARE FACING A CRISIS IN AFFORDABLE HOUSING

A Series Of Articles By Paul Losleben Of The Orcas Research Group

In May, we will vote to authorize a 0.5% sales tax on every real estate sale to provide funds for a San Juan County Affordable Housing Program.
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PART FIVE

Crisis in Affordable Housing: Looking to the Future

By Paul Losleben, Orcas Research Group*

We would like to thank the Guardian for allowing us to publish this series of articles. The issue is complex and we are grateful for the flexibility to describe the problem and what is being done to solve it in some detail. We would also like to thank the readers for their patience and careful consideration of the issue. Finally, we would like to thank those who wrote letters to add their voices.

Briefly, we established in the first article that we have a serious problem. In the second article we established that the problem could not be solved using only private financing and that public financing would be needed. In the third article we examined alternatives in public policy and taxation. Finally, in the fourth article, we described the Housing Bank, how it will operate and how funds are to be spent.

It would be foolish to claim that we have solutions for all the problems of affordable housing in San Juan County. The future holds a great many uncertainties. Will the real estate market continue to appreciate at a high rate? How high will interest rates climb? To what extent will our aging population increase demands for services? What relationships can be built with other organizations?

While the issue is complex, we are fortunate that this is not rocket science. There are no immutable laws of economics that prevent us from taking charge of our own affairs to make changes as they are needed. Rather, the mathematics of compound interest rates, even given the great variety of mortgage options, is well understood. Given our demographics and probable growth rate, we can project the scope of the problem. There are successful approaches that have been used in other communities that can serve as a guide. In the work that the Orcas Research Group has done over the last two years we have set to the side politics, ideology, and emotion in an effort to get to the bottom line. We argue that ultimately, it is the numbers that define the problem and the solution. Like a business, the numbers have to make sense. Like a business, it is the organization that is put in place and the skills of the individuals who staff that organization who will pay attention to the numbers and successfully adapt to a changing world.

Also like a business, we cannot agonize over decisions forever. We have 17 years experience in these islands in affordable housing. The County conducted a housing needs assessment in 2000 indicating that the problem was already severe. The State Legislature passed enabling legislation in 2002 to allow San Juan County to help fund a solution. The Community Land Trust Alliance of the San Juan Islands completed another survey in 2003 indicating that the need had become more severe. The Orcas Research Group did a survey of infrastructure employers in 2004/2005 that projected a shortfall of skilled workers in the next 5 years. There have been studies paid for by the County and studies done by volunteer organizations. There have been workshops, forums, summits, and public meetings of all forms.

Now, it is time to act before it is too late. San Juan County has not yet reached the condition of other destination communities where desperate measures are belatedly being attempted with limited success. It is now time for your voice to be heard.

You will receive a special ballot in early May. Please take the time to be informed and vote before May 16th.

For more information and detail, please go to: www.SanJuanHousingBank.org

*The Orcas Research Group is a private non-profit organization that is dedicated to preserving island values through projects focused on producing a stable island economy. The Group accepts no grants or donations and all work is accomplished by volunteers.

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PART FOUR

Crisis in Affordable Housing: What is the Housing Bank and how will it work?

By Paul Losleben, Orcas Research Group*

We established in the third article of this series that potential changes in public policy might help, but that among the possible sources of public support, the proposed real estate excise tax is the best alternative available to us. In this article we will examine how the Housing Bank was selected to administer affordable housing funds including the proposed real estate excise tax, what legal constraints it will operate under and what priorities it will place on how the funds are to be spent.

What is the Housing Bank? Nearly a year ago we came to the conclusion that an efficient, effective, and innovative organization would be needed to administer county-wide financing of affordable housing, especially if public funds were involved. Across the nation, there are many different kinds of affordable housing organizations, the most notable being non-profits, Housing Advisory Councils, Housing Authorities, and Public Development Authorities. Each of these presented significant challenges to our use in San Juan County. We were strongly opposed to government ownership of housing and wanted an organization that minimized government bureaucracy and overhead so that the maximum amount of these funds would reach organizations that would put these funds to use.

San Juan County has the authority to establish organizations called Commissions. One such organization already existed in the form of the Affordable Housing Fund Commission and we proposed to the County Council that they modify that organization to address a broader responsibility. Four key criteria influenced this decision:

First and foremost, while it represents the county government, the Housing Bank Commission is the least bureaucratic approach that we have found. It consists of seven commissioners who are not county employees, but citizens who volunteer their time and expertise to lead the Housing Bank.

Second, the Housing Bank Commission can accept tax deductible donations of money or land.

Third, the County can issue tax exempt bonds on behalf of the Housing Bank Commission to provide an important source of low interest money that is needed for a complete financial strategy.

Fourth, in Washington State, there are strict regulations as to what organizations can act as an agent of the government in making spending decisions. A county commission is one such organization, subject only to approval by the County Council.

On February 28th, the County Council approved an ordinance establishing the Housing Bank, consolidating several existing programs and providing authority to address the problem of affordable housing across the full spectrum of incomes up to and including moderate and middle income.

How will the Housing Bank Operate? There are a number of legal constraints on how the Housing Bank can operate to assure that public funds are spent for the public benefit. County Code 2.27 as modified by Ordinance 3-2006 specifies how the Housing Bank will operate and Ordinance 2-2006 specifies how the real estate excise tax revenue will be spent.

Specifically, "…the County, through the Housing Bank will not directly develop, own or operate affordable housing units." Rather, the Housing Bank "…shall solicit the cooperation of state and federal agencies, other local governments, for profit builders and developers, non profit organizations, non profit organizations providing affordable housing or housing-related services in the County, and similar agencies and organizations." Through competitive grants and loans, the Housing Bank will assure that all funds are applied in a manner that is consistent with local, state and federal law. For the first time, San Juan County will have a cohesive plan for addressing this critical problem with local organizations implementing housing to meet local needs.

How will the Housing Bank be Funded? It will be funded by a variety of different sources--some public and some private. The ordinance establishing the Housing Bank consolidates under this one Commission a number of existing modest funds addressing low income and below. In addition, a one half of one percent real estate excise tax is being proposed to provide more substantial funding to extend coverage through the moderate level ($48,000 to $57,000 for a family of four). Jobs within this income range include such vital public functions such as law enforcement officers, fire fighters, teachers, medical personnel and other such public service functions.

A myriad of other funds will also be sought through other private and public sources to extend coverage across the full spectrum of need including middle income families. For example, the Washington State Affordable Housing Finance Commission provides low interest construction loans and mortgage programs for income levels up to and including middle income ($72,000 for a family of four).

How will funds be spent? The mechanics of how the funds will be spent is specified by law. The Housing Bank must use a competitive solicitation process in which programs are publicly advertised and grants and loans are awarded to eligible and qualified recipients. The Housing Bank Commission selects projects to be funded and final approval is made by the San Juan County Council. The Housing Bank is required to implement appropriate management and financial controls to assure that statutory limitations are met and that all supported projects reflect sound financial management. Further, the Housing Bank is required to report to the public on both the current assessment of need and the progress in meeting that need.

How will the Housing Bank be staffed? Finally, the most essential element of good management is attracting qualified individuals to staff the Commission. We are fortunate to live in a county with a wealth of highly skilled and experienced individuals who are willing to donate their time as Housing Bank Commissioners. The County Council advertises for vacancies and appoints commissioners. In anticipation of successful passage of the real estate excise tax, the County Council will review candidates with qualifications in finance, the private mortgage market, project management, legal issues relating to housing and property, architecture and construction, affordable housing, grant writing, and public administration. A salaried Executive Director will provide continuity, additional expertise, and support to the Commission.

Beyond these requirements there are a number of priorities that will be pursued:

Economic benefit: The County shall place a high priority on programs and projects that benefit residents of the County; that provide housing for employees to diversify the County's economic base and provide a more balanced, year-round economy.

Needs of individual islands: The Commission shall seek to balance the affordable housing units developed through its programs among the various islands based on their population and needs.

Mixed income communities: The Housing Bank will give priority to projects that utilize both public and private funds to build homes for families across the spectrum of income including moderate and middle income.

Perpetual Affordability: To maximize the effectiveness of affordable housing programs and to minimize cost in the long term, the Housing Bank has a responsibility to safeguard the community investment by giving priority to approaches that assure that future residents will be able to afford these homes.

Use of local contractors: In order to sustain the local economy and promote the development of a continuing local capability to construct affordable housing, the Commission shall encourage local developers, local builders, local subcontractors, local suppliers, and local workers to participate in competitive projects.

Housing appropriate to the islands: Housing Bank will place priority on projects that conserve energy and water and are modest and friendly to the environment. Our island culture and climate encourage the construction of homes that reduce costs to the homeowner in the long term. These savings allow more homeowners to qualify for improved mortgage terms through programs like Energy Efficient Mortgages.

Durable, high quality homes: Because we are investing in the long term, the Housing Bank will place priority on design, materials, and construction techniques that result in homes that are low maintenance and will serve residents for a very long time.

These are bold objectives and it is important that we act while there is still time to meet the affordable housing needs of our community.

WE MUST ACT NOW! The Housing Bank is positioned for success: the enabling legislation been passed by the County Council, a plan has been developed on how the Housing Bank will operate, and we have the authority to assemble the volunteer staff. All that is needed now is your support: your vote will provide key funding necessary to address the need for affordable homes in our communities.

You will receive a special ballot in early May. Please take the time to be informed and vote before May 16th.

For more information and detail, please go to: www.SanJuanHousingBank.org

*The Orcas Research Group is a private non-profit organization that is dedicated to preserving island values through projects focused on producing a stable island economy. The Group accepts no grants or donations and all work is accomplished by volunteers.

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PART THREE

Crisis in Affordable Housing: Search for Financial Solutions
By Paul Losleben, Orcas Research Group*

We have established in the second article of this series that using private financing alone will not solve the problem and that public support for moderate income households and below is needed. This is not the entire story since there are also non-financial possibilities to consider. In this article, we will examine potential changes in public policy that might help and finally also consider tax alternatives.

Zoning has been a hotly contested issue over the last 15 years resulting in a controversial down zoning of potential housing density in San Juan County. Would easing zoning restrictions to permit higher density by increasing the supply of buildable parcels solve the problem? Unfortunately there are examples of other communities where this was attempted with undesirable results. A most tragic example is the Bitterroot Valley in Montana. The people of this naturally beautiful region opposed zoning restrictions. When the region was discovered by "outside money", the newcomers divided the land into ever smaller parcels at ever increasing prices. Today, the original residents believe that the beauty and serenity of the region has been destroyed. They have the same problem that we do; working families cannot afford to live in the community and there is increasing tension over growth. A change in zoning might increase supply and reduce prices in the short term, but the long term cost is unacceptable. A recent article in the Missoula Independent is a striking dialog on what could happen in the San Juans.

Use of public land is an important consideration for the Housing Bank. Nantucket Island, with a problem much worse than ours, has recently completed 12 rental units, built on school land, that are being made available to teachers. This project was made possible through a low interest loan from the Massachusetts Development Finance Agency which raises funds through tax exempt bonds. This project, however, illustrates the difficulty of providing affordable housing in a destination community. Even with the low interest loan and "free land" the rental prices of the units are exceeding HUD guidelines. We are hopeful that there is still time for this approach to work. The School Board on Lopez Island is considering such an option for teachers, and land might also be made available on Orcas and San Juan Islands. We know that use of public land can be an important part of the solution, but we also know that it will only be a part of the solution.

The Land Bank is often brought up as a potential solution to affordable housing, either suggesting the use of land acquired by the Land Bank or suggesting that the real estate excise tax supporting the Land Bank be reduced in favor of an equivalent tax to support the Housing Bank. Neither is a viable option. The properties owned by the Land Bank are restricted to conservation purposes by the enabling legislation. Surplus property may be sold for any purpose including affordable housing, but must be sold at market value, so there is no cost savings. On the second point, the Land Bank is a valuable and highly popular program which was approved for a term ending in 2014 with a vote of 73% approval. To suggest that we should choose between the mission of the Land Bank and the mission of the Housing Bank implies that we can only afford one or the other. Both are important to our residents and, with real estate sales at an all time high, we can afford both if we choose to.

Alternative sources of tax revenue were carefully examined once we reached the conclusion that the problem could only be solved with partial support from public funds. Washington State ranks 24th in the nation on overall state tax burden according to the Tax Foundation, with no tax on personal income and no tax on interest, dividends, or capital gains. While there are many different taxes in Washington State, the four largest, as a percentage of revenue, are sales and use (55.6%), business and occupation (18%), property (11.9%), and excise (6.7%).

Sales tax is imposed on almost everything that we buy including both goods and most services. In San Juan County, we pay 7.7% of which 6.5% goes to the state and 1.2% is a tax to support local government. There is no local option available to us at this time to increase our local sales tax, but we could introduce legislation at the state level, much as King County did to pay for their new stadium. It would require an additional 0.5% tax to bring in the roughly $1.2M to $1.6M per year that we estimate is needed and it would take 2 to 3 years to implement the legislation before we could bring it to a vote. Sales tax is generally considered to be regressive and is especially so in Washington State where many exclusions exist. For example, while we pay sales tax on most blue collar services, other services such as finance, insurance and real estate are exempt. Even if we could afford the delay, we conclude that a sales tax would have very strong grass roots opposition and would not pass.

The Business and Occupation tax is imposed on gross receipts of businesses and is unique to Washington State. This B&O tax is a highly unpopular tax in the business community and is a quagmire of exemptions, deductions and deferrals. There are presently extensive efforts underway to reform the taxes on businesses at the state level and it is highly improbable that a B&O tax to support affordable housing could be introduced in today's political climate.

Property taxes are the oldest form of taxation in Washington, predating statehood and are relatively low compared with the rest of the Nation. San Juan County has the lowest property tax rate in the state averaging 0.613% of assessed value, a situation tempered somewhat by the fact that we have the highest assessed value. There are a number of caps placed on property taxes at both the state and local level, the most severe of which is the 1% limitation on annual tax increases implemented in 2002. With real estate prices increasing by an average of 10% per year over the last 10 years and doubling over the last three years, the legal limitations on property taxes preclude it as a viable solution.

Excise taxes are essentially a sales tax on a specific item, in this case on the purchase of real estate. The San Juan County Council adopted an ordinance to be approved by the voters in May that will charge 0.5% on the sale of real property to provide grants and loans for the development of affordable housing. Real estate sales in a small county like San Juan are unpredictable, but the proposed tax has the benefit of tracking increased prices and thereby balancing the problem with the solution. There are three principle arguments that are raised in opposition. First, it is argued that this tax punishes those at the margin who we are attempting to help. As we pointed out in a previous article, it is now the disparity between home price and income that is the primary difficulty and not closing costs. Realistically speaking, there are already programs in place to assist low income families with closing costs and down payment if needed. Second, it is argued that those who will pay this tax do not get to vote. This is no different than any of the local real estate taxes which are voted on by current residents and not by future property owners. In this case, it is a one-time tax and thereby less intrusive. Third, it is argued that it is unfair since it is paid by a few for the benefit of everyone. This argument does not hold up since we pay sales tax on nearly every product and service with the notable exception of real estate and real estate commissions. If a buyer paid sales tax on real estate commissions it would raise nearly the same amount of money as the proposed excise tax.

Conclusion: The problem of providing affordable homes to working families in San Juan County is very complex and we have already waited too long to implement solutions. We believe that we have done a thorough job of examining alternatives and have assembled a "tool box" of approaches and sources of financing that we believe will address the full spectrum of need. The proposed excise tax is an important part of the solution and we conclude that it is not only necessary, but the best alternative available to us. We welcome suggestions and help to find other solutions, but in the short term at least, this is our best option.

For more information and detail, please go to: www.SanJuanHousingBank.org

*The Orcas Research Group is a private non-profit organization that is dedicated to preserving island values through projects focused on producing a stable island economy. The Group accepts no grants or donations and all work is accomplished by volunteers.

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PART TWO

While most people agree that we have a serious problem, taking the next step to look for serious solutions is much more difficult. People have shared lots of ideas with us, but the best response came from local builders who said, "The most constructive thing you can do is to find ways to finance affordable homes." We have taken that advice to heart.

This second article in a series of five will delve into defining the limits of what is possible using private financing and when public financing becomes necessary. In what follows, we attempt to strike a balance between what is reasonable for investors and what is fair to homeowners. We use the income guidelines defined by the Department of Housing and Urban Development (HUD) to define income ranges:

In 2006, median family income for a family of four for San Juan County is $60,300.
• Low income is defined as $30,150 to $48,240.
• Moderate income is defined as $48,240 to $57,285.
• Middle income is defined as $57,285 to $72,360.
Slightly lower or higher ranges are defined for smaller or larger families.

Our local affordable housing organizations are finding it increasingly difficult to finance projects due to cuts in federal programs and increasing competition for state grants. Even with their best efforts, nearly all homes provided by these groups are restricted to low income and below. The result is situations where families with moderate and middle income cannot qualify for these homes, but still cannot afford homes in the islands.

The role of the Housing Bank as recently approved by the County Council is to serve as a financial organization that will address the full spectrum of need including moderate and middle income. The Housing Bank will build no homes, but will pull together sources of financing including both private and public funds to be used by existing and future local organizations to assure long term availability of affordable homes. As such, the Housing Bank and these local organizations will apply these funds within the constraints imposed by the funding sources. For example, the proposed real estate excise tax is constrained to moderate income and below.

There are literally hundreds of approaches to financing and there is only limited space in this article for detail. We will use a baseline home price of $300,000 for what follows. Practically speaking, we cannot expect to attract and/or retain skilled workers with homes less expensive than this. For those who are interested, we would be pleased to provide additional detail to support our conclusions.

What we know won't work:

With conventional 30 year fixed rate mortgages now at 6.125%, with a 10% down payment it would take a family income of over $75,000 to qualify for a mortgage to purchase a $300,000 house—an income well above middle income. Likewise, Adjustable Rate Mortgages (ARMs) at 5.875% only reduce qualifying income by about $2,000, still above middle income. In today's climate of increasing interest rates, even with a cap, ARMs can spell financial trouble for families in the 3-5 year time frame and we do not encourage their use at this time.

Shared equity is an approach that has been used in commercial real estate and has become popular in residential real estate in the last 15 years. Basically, a third party investor becomes a co-owner of the property with the goal of refinancing or selling after 5 to 7 years so that the homeowner can buy out the investor. Both the homeowner and the investor benefit from significant tax breaks. On the surface, this sounds like a great idea, but the devil is in the details. Once annual real estate appreciation rates reach levels of approximately 10%, well below our current rate of 27% for 2005, the homeowner never catches up. This is especially true when increasing interest rates inhibit refinancing. For our example, the homeowner would have to increase family income by at least 50% to afford to refinance if the same interest rates as today were available. More typically, the homeowner would be forced to sell and would not have accumulated enough equity to purchase an equivalent home.

What might work:

Longer term mortgages might help. 40 year mortgages at 6.125% bring the income requirement for that $300,000 house down to $70,000, just within the middle income range, but still far above moderate income.

Second mortgages might help. We have proposed and hope to form a local investment group to help solve the problem of affordability. The strategy is simple. Our islands are blessed with a high percentage of investment income, most of which leaves the islands. For those who would be willing to invest locally, we can offer a modest income, reduce risk to the primary lender and reduce the composite interest rate paid by the homeowner. For example, offering a 4% return on 40% of the loan amount would result in an effective composite rate of 5.275%. This would reduce the qualifying income to $57,853, well within the range of middle income families. If this investment pool were made through tax exempt bonds, the rate of return to the investor would be competitive with other forms of investment.

Private land leaseholds where ownership of the land is retained by an investor and leased to the homeowner are now only marginally profitable because of the cost of land. While the purchase price of the structure may be reduced by one third to one half, the cost of the landlease including infrastructure maintenance, taxes, insurance and a modest return to the investor push the qualifying income for the homeowner up to the high moderate to low middle income range.

What is tested and proven to work:

Donations have been the mainstay of many affordable housing programs, especially at the lower income levels. We are fortunate to live in a county where we benefit from the generosity of our neighbors in the form of financial assistance and donations of their time and skills. We are grateful for this assistance, but are also realistic about the limits of this source of revenue.

Community Land Trusts are similar to private land leaseholds except that they acquire the land through either grants or donated funds. The land is owned by the non-profit trust in perpetuity and typically leased to the homeowner for 99 years or more for a token amount, typically $1. In return, the homeowner agrees to a resale formula that assures that the home will always be affordable to families at this same economic level. There are over 200 CLTs in the nation including four in San Juan County. It is falsely believed by many that CLTs remove land from the tax rolls. This is not true. Residents pay property tax on their home plus the value of the land at fair market value.

Sweat Equity has received considerable publicity through the success of Habitat for Humanity which relies on donations, volunteer labor and sweat equity to build low and very low income homes. Using the slogan, "A hand up, not a hand out," the group emphasizes community action, often faith based, and a heavy dose of homeowner participation both through 500 hours labor and demonstrated financial responsibility. In San Juan County, Homes for Islanders is a countywide non-profit organization based on a similar strategy with partial support from the U.S. Department of Agriculture. As much as 40% of the cost of the structure can be saved using this approach.

Life Cycle Costing and Value Engineering addresses the total cost of the home including not only construction, but maintenance and repair costs over the expected life of the home. Value engineering weighs the value of all the major components of a home against their cost including their life cycle cost. Value engineering asks important questions like, "Do you really need that?" as well as, "How much will it cost to replace that when it fails?" Both questions are important to our community investment in building an inventory of perpetually affordable homes for our island residents. Energy efficient mortgages are one example of how reducing the expected cost to the homeowner over the life of the home can be used to get favorable financing terms.

In conclusion, the Orcas Research Group has found that no single approach will solve the affordable housing problem by itself and it is only through the careful combination of approaches that we can hope to make progress. It is most important that we provide a continuum of solutions so that we can eliminate the problem of economic stratification of our community by putting all the low income people in an isolated development. By using combinations of public and private funding we look forward to a day when we can build mixed income communities. We can accomplish this by using creative private funding for middle income, by using the real estate excise tax to lower costs for moderate income and below and by using existing federal and state funding for low income and below.

The Housing Bank will serve as an important focus for this objective and the real estate excise tax provides a critical part of the funding that is not available from any other source.

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PART ONE

As a community we are facing a crisis in affordable housing. The word "crisis" is bandied about a lot lately and we would like to begin this series of articles with an emphasis on accuracy. We will begin with why we believe that our community is facing a crisis. We then expect to proceed in subsequent articles to address why it is urgent to address this problem now, what approaches have been investigated, what approaches work in other communities, why public support is needed and what the role of the newly established Housing Bank will be.

The Orcas Research Group started work on this issue about three years ago. Our primary focus up to that time had been projects to improve stability in the island economy. We came to the conclusion that our goal of creating stable year-round businesses employing local residents would not work. The rapid increases and high cost of island living result in labor costs that inhibit competition with mainland businesses. We found it very difficult to identify business opportunities where the new business had a competitive advantage that would bring mainland dollars to the islands. Even with salaries that are competitive with the mainland, we found that we could not retain or attract workers with essential skills. This led us to examine the problem and possible solutions.

Some demographics are now well known. We are losing our young working families. In the 1990 census our population aged 25 to 44 represented about 30 percent of our population. This is similar to demographics for Washington State and for the USA. For us, that was just over 3,000 people. Ten years later in the 2000 census this age group had dropped to 22 percent and the 2003 Washington State Data book reports that it had dropped further to 20%. We now have fewer than 3,000 residents in this age group while the population overall has increased by nearly 50%. This is a serious symptom of a problem, but does not clearly identify why our young families are leaving.

In 2005 the Orcas Research Group surveyed employers who offer our county's best and most stable jobs—those hiring our teachers, law officers, fire fighters, medical workers, and other service sector employees. The results were uniformly alarming. All employers reported an aging work force with extensive retirements of key personnel over the next five years and difficulty hiring and retaining workers with skills that are essential to maintaining the island infrastructure. All expressed the opinion that the cost of housing was a major problem.

Based on this information, we set about verifying that the problem of attracting and retaining skilled workers was real and that the cost of housing was the most serious contributor to the problem. We are all aware that inflation still exists and that the cost of nearly everything is higher in the islands. We become alarmed at increases in ferry fares, increased cost of energy, increased cost of water and the whole spectrum of products and services that we accept as essential to island living. But, these all pale in comparison to the rapidly increasing cost of housing, now nearly twice any other budget item for families in the Northwest according to the Bureau of Labor Statistics.

This takes us to the basic issue of housing affordability. The National Association of Realtors established the affordability index in 1970 and it is the commonly accepted standard. Locally, the Washington Center for Real Estate Research publishes the index for all counties in Washington State. A score of 100 means that a median income family can afford a median income home. This index takes into account the several factors that contribute to affordability. Salaries are higher, interest rates are lower than 25 years ago, a larger variety of financing options are now available, and costs of taxes and insurance are taken into account. Considering all of this, our islands are among the least affordable communities across the Nation, worse than King County (80) and much worse than neighboring communities in Island (87), Skagit (98) and Whatcom (83) Counties. Homes in San Juan County today are less affordable than they were when interest rates peaked at an unbelievable 18.5% in 1981 when the national index reached an all time low of 65. Today, the local index in San Juan County is much worse at 51! First time home buyers face an even lower index of 30. This will only continue to deteriorate as both prices and interest rates increase.

The reality of today's real estate market in the San Juans is that most working families cannot afford to purchase a home, no matter how hard they work or save. This claim flies in the face of what most of us would like to believe; that if you manage your debt, live modestly and work hard that you will be able to participate in the American dream of home ownership. Home ownership is an important investment in economic—and day-to-day—security for families. Unfortunately, it is now out of reach for many of our residents.

There was a time when the down payment and closing costs were the most serious difficulties to be overcome. Today, with the median price of homes at $462,500, few families can afford the down payment, but it is family income that is the major barrier to home ownership. In our Bulletin #10 posted on www.SanJuanHousingBank.org entitled Home Ownership we presented the numbers. Assuming a purchase price of $250,000 (there are only three manufactured homes available in the current multiple listing service in that price range) it would require an income of $62,000 with a 10% down payment, 6% fixed rate 30 year mortgage. Saving for an extra year to increase the down payment from 10% to 20% only reduces the qualifying income needed for a mortgage by 1%. Saving more doesn't help much when the increasing cost of housing exceeds any reasonably expected growth in family income or savings.

Supply and demand would seem to address this problem except that two thirds of home purchases are made by non-residents as evidenced by real estate sales registered with the County last fall. Our housing market is dominated by outside economic forces. Prices are now so far beyond the reach of local salaries that conventional economics do not apply. Salaries can no longer be increased to the point that local residents can afford housing since local businesses would no longer be able to compete. Further, local public service providers don't have the legal flexibility to increase salaries to the point needed to afford housing. We are forced to acknowledge that the problem cannot be solved by just increasing salaries.

Basically, we are victims of living in a beautiful and desirable area. Demand has driven prices up to the point that our residents can no longer afford to purchase homes. Unless we do something soon, we will no longer be able to provide essential services to our residents. There is presently a serious shortage of nurses on San Juan Island. Our fire departments are having difficulty finding both volunteer and paid staff. Sheriff deputies are increasingly under financial pressure and cannot afford to purchase homes. Our public works department is losing people with key knowledge and is unable to find replacements. Half of the faculty in San Juan Island schools are retiring within the next 5 years. The list goes on. If these are our best jobs, what does that say about the rest of our work force? What does it say about our ability to sustain our community? It is a crisis in any sense of the word.

For more information and detail, please go to: www.SanJuanHousingBank.org

(*The Orcas Research Group is a private non-profit organization that is dedicated to preserving island values through projects focused on producing a stable island economy. The Group accepts no grants or donations and all work is accomplished by volunteers.)
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A DISCUSSION OF AFFORDABLE HOUSING MYTHS

A Five Part Discussion By Albert Hall

In May, we will vote to authorize a 0.5% sales tax on every real estate sale to provide funds for a San Juan County Affordable Housing Program.

The following will set forth and discuss a total of 12 myths. In most cases these myths summarize actual talking points of the affordable housing program proponents. -Albert Hall
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PART FIVE

A DISCUSSION OF AFFORDABLE HOUSING MYTHS

This is the last of five articles in opposition to the proposed San Juan County Affordable Housing Program and the 0.5% tax on property sales. It discusses whether norms should be forced by government and the general affects of an affordable housing program.

MYTH 10: When working people are priced out of the housing market, the whole community suffers.

The market has not failed; rather, it has forced hardships on particular individuals. The more interesting consideration is whether the market will insure the provision of the desired services and whether an affordable housing program can provide outcomes superior to what the market would otherwise provide. The proven record is that the market WILL provide, and will do so with greater efficacy. Conversely, the proven record is strewn with the wreckage of failed public housing programs – and with no substantiation that our proposed affordable housing program will accomplish its intended purposes without similarly serious unintended consequences.

We might decide that we want "more" inexpensive houses in our housing stock, and we might decide that this intention is good policy. It is incorrect, though, to base this intention on the belief that some particular services will not be provided unless such housing is provided.

If we accept the socialistic principle that taxes should be committed to help a select few among us, why not support classical musicians, or Olympic athletes, or those with high IQ's? There are surely lots of social or economic qualities whose increase would enhance our community more than the encouragement of people that otherwise cannot afford to live here. The answer to these questions explain why socialism generally fails to deliver – and will certainly fail with this affordable housing tax.

Myth 11: Subsidizing or ameliorating the cost of housing is the best or preferred method to insure that these service providers will be here to provide their needed services.

If the intention is to ameliorate problems associated with whether low wage service providers can afford to live here, then why is it preferable to target housing costs and not wages. If public funds are to be used, perhaps it would be more efficacious to simply subsidize wages (or even to mandate a higher minimum wage).

Where has publicly funded "affordable housing" actually worked over a period of years? At a minimum, our voters need to see what the rest of the nation has experienced; and especially to see actual results after several decades. There is no disputing that particular individuals can benefit from tax-subsidizes; what is needed (and has not been cited) is an example of the overall economic circumstances in a community that has employed them over a long period of time.

Myth 12: Our local community is diminished if we do not attain demographic "norms" of age or income. This is expressed as regret that young families (aged 24-44) are moving away (presumably because housing costs are increasing).

We are essentially a retirement community. To claim that there are fewer young families is to state an obvious and well understood fact. Whether this is a problem – and particularly, whether this requires a tax to support deliberate government action – is another matter.

One obvious consideration is that most of the cited services – and especially teaching, health care, and most public employees (excepting perhaps police and firemen) – can quite competently be performed by the older or retired residents.

A retired general contractor and licensed architect, Albert Hall's political affiliation is a free market capitalist.

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PART FOUR

A DISCUSSION OF AFFORDABLE HOUSING MYTHS This is the forth in a series of five articles in opposition to the proposed San Juan County Affordable Housing Program and the 0.5% tax on property sales. It discusses the role of government in providing or ameliorating the price housing or the cost of mortgages.

MYTH 8: County government has a positive role in ameliorating high housing costs.

The demand to live in our wonderful islands far outstrips the availability of island property. This, more than anything else causes our housing prices to be high. In new construction, we must pay a premium to offset the costs of having to bring most components by ferry. We also occasion higher costs on account of development code compliance, permit fees and property taxes.

As recently as 40 years ago there was widespread acceptance that government should set standards and administer a permit process for the purpose of insuring health and safety. Building codes accomplished this and all accepted that costs associated with inspection and compliance were appropriate and reasonable. These codes have morphed into development codes that seek compliance for goals that extend considerably beyond mere health and safety. Even some long-established (and reasonable) tools such as reserving some land for front and side yard setbacks or for the sake of "preserving the natural environment" are now in San Juan County requiring (without compensation) over 60% of a parcel's land area be left "undeveloped".

In the early 1990's San Juan County was persuaded to be a part of Growth Management Act process and in 1996 adopted a Comprehensive Development Plan. These activities and subsequent normal administration have occasioned numerous decision points for which our county commissioners have cast votes that affected land use and property values. Excepting that they have periodically dismissed or otherwise reduced the number planning or permitting employees, no action taken by our county leaders has served to reduce the cost of housing. Although some actions were "forced" on them by GMA litigants, a great many of their actions occasioned considerable direct costs to taxpayers as well as indirect costs that individual property owners had to absorb.

With their actual track record, the obvious question is why we should expect that the same county government that contributed so much to causing ever higher housing costs should now be asked to fix it. Yet affordable housing proponents propose precisely this! The affordable housing program envisions that certain provisions of the development code be waived or fees lowered to the benefit of low cost housing projects. Voters need to evaluate just how fair or appropriate it is to require the bulk of us to abide by such rules – and to pay a special tax upon sale; while concurrently encouraging a few to benefit by such waivers and taxes. Only within a socialistic world view can this be explained as "beneficial."

MYTH 9: Local government should levee taxes and administer an affordable housing program.

That government should undertake an activity normally arises under the presumption that the activity is not adequately provided by the marketplace. Since there is no evidence that high housing prices cause a diminishment or lack of service; affordable housing proponents are left only with concerns about high prices, criticism and distrust of wealth and "we gotta do something to help the poor." Action directed primarily by class consciousness is socialism – and has no place in a county whose Vision Statement asserts that "independence, privacy and personal freedom are prized values" and that "we foster a sense of neighborliness, of self-sufficiency."

Since WWII, the provision of housing has been undertaken at various levels of government – and most all such efforts have been costly failures. Public housing projects in St Louis, Dallas, and parts of Chicago (just to mention a few) have drawn widespread publicity for their costly failures. While these dramatize the worst examples, the truth is that public housing is universally accompanied by problems and unintended consequences that on balance are more negative and costly than whatever good is obtained.

Tax supported affordable housing programs are in reality little more than a repackaging of the same urges that motivated public housing programs – and over time will likely result is similar failures.

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PART THREE

A DISCUSSION OF AFFORDABLE HOUSING MYTHS
This is the third in a series of five articles in opposition to the proposed San Juan County Affordable Housing Program and the 0.5% tax on property sales.

The affordable housing program rests on claims that younger, "moderate income" families cannot afford to live here, and that this is a problem that needs government intervention.

MYTH 6: Hard working wage-earners can't afford to buy a home here.

The contention is that moderate income families ($48-$57,000 per year for a family of four) do not qualify for a conventional mortgage. What is unstated is that there are many sources of mortgages other than "conventional mortgages". In fact, non-traditional mortgage options are so numerous and so widely utilized that they have been the object of concern in recent Federal Reserve pronouncements.
An anecdote is instructive. The average cost of housing in Santa Barbara is much higher than here. This writer's daughter chose to work in Santa Barbara – and bought a house with a mortgage and resided there quite successfully for several years. Her income (and wealth) was median and certainly did not qualify for a conventional mortgage, and would not otherwise justify a lender to normally grant her a mortgage on the pricy condo she purchased. She was able to afford it via an unconventional mortgage that included some guarantees from her employer.

Mortgage offerings are diverse in a free market, and many have been developed in specific response to disproportionately high priced homes. The claim that taxes need to be levied and a public program needs to be initiated simply because conventional mortgages won't work here is a stretch.

MYTH 7: Prospective home buyers will be the prime beneficiaries of doing something about the "affordability gap" between the mortgage amount that a median income family can afford and the high price of the house.

In the conventional mortgage market barely-qualified borrowers normally must pay an interest rate that is one to two percent higher than "best rate." Additionally these marginal mortgages occasion fess and points that add a further one to three points or closing fees to the purchase price. Just how these normally occurring higher mortgage costs are held down by what voters are asked to approve is not explained.

From a macro-economic view, the affordable housing concept is that we'll impose a 0.5% tax in order to encourage the granting of conventional mortgages whose combined interest-plus-points might range up to 4% or 5% higher than a best rate conventional mortgage. The net effect is to drive up overall housing costs for everybody and to do so on two fronts: first by the imposition of the tax, and secondly by mortgage costs that are higher.

If one "follows the money" some interesting facts emerge. Local bankers participate in the traditional mortgage market. When they do grant a mortgage to those that barely qualify, they usually require the aforementioned higher interest rate and more points to compensate for the increased risk. And this, of course, can be a profitable activity. What is less profitable is to compete with the big national mortgage companies and those that offer non-traditional mortgages at more competitive rates and with considerably less points. It is not surprising to find local bank officials among the boosters of affordable programs that subsidize conventional mortgages.

Even if we agree that a median wage won't qualify for a conventional mortgage, do we really want these tax funds to enrich mortgage lenders? The Housing Bank's web site states that these "public funds will be used to close the affordability gap by providing ‘capstone funding'". In other words, the funds will be "used to inspire other lenders or grantors to provide necessary funds at favorable terms for a project."

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PART TWO

A DISCUSSION OF AFFORDABLE HOUSING MYTHS

This is the second in a series of five articles in opposition to the proposed San Juan County Affordable Housing Program and the 0.5% tax on property sales.

Supporters of the affordable housing tax contend that there is a negative relationship between the price of housing and the relative availability of services, and that if something is not done we'll end up not having or being unable to afford these services.

MYTH 4: High housing costs cause a diminishment in services.

SOME service providers are rendered unable to afford home ownership here. The more important fact is that increasing wealth IS ALWAYS accompanied by increasing availability of services. Rising home prices, increased permit applications and increases in construction costs attest to an increasingly wealthy community; and here in the San Juans we are witnessing an ever increasing variety of services being provided by an increasing number of service providers.

Where these service providers are living, or their respective living circumstance might be of interest. What is demonstrated is that the market is functioning; that demand for services is being amply met by people willing to provide these services. More important, since this is wrought by an agreement between willing buyers and willing sellers, the price is fair.

The difficultly of finding and retaining teachers, firemen and policemen is the strongest argument in favor of affordable housing. However, it is not persuasive. If, for instance, we want to subsidize teachers, then why establish a community-wide program open to everyone? Why not let the school district establish their own affordable housing program? Similarly with fire and police.

While some prospective employees might decide that they are unwilling or unable to afford our high housing costs, this fact does not mean that there are not other prospective employees who can, or that renting or other arrangements can not be made. The truth is that among America's best teachers, there are probably thousands (perhaps tens of thousands) that would welcome the opportunity to work in the San Juans AND are possessed with the wherewithal (whether in cash or living preferences) to not be bothered by the high cost of local housing. (Housing costs in numerous communities – Nantucket and Santa Barbara being two - are so significantly higher that we might expect some of their teachers to welcome the opportunity to sell out and re-establish in a lesser-priced home in the San Juans).

MYTH 5: Service providers will end up having to commute to the San Juan

Affordable housing advocates are quick to point out that service providers must commute daily to the Cape Cod Islands (Nantucket and Martha's Vineyard). The implication is that these service providers cannot afford the high housing prices and therefore have had to move away. This observation and simplistic conclusion do not fairly characterize what is actually happening.

a. There has been no demonstration that the number of locally-residing tradesmen have moved away. What may be happening is that these Cape Cod communities' demand for construction/remodeling has outstripped the capacity of locally-residing providers; and this, coupled with customers' unwillingness to wait for services, leaves a supply-demand gap that is eagerly filled with high-priced off-island providers.

b. Gardeners, maids and grocery sackers might be in short supply here in the San Juans, but no one has observed such service employees commuting by ferry. Nor, especially, has there been a demonstration that the need for such services goes unfulfilled.

c. An anecdote demonstrates how the market actually works to positively include off-island service providers. The Bellingham construction firm that recently built Friday Harbor Center daily transported workers by air. Although the transportation costs added several dollars per hour per employee, this firm found it more efficacious to use long-trusted employees and overall construction costs were considerably less than the bids of other (local) firms.

d. Most construction tradesmen command relatively high wages and their annual earnings would likely be too high for them to qualify for affordable housing subsidies.
We have a relatively small population and the demand for some services is insufficient to offset the costs of living here (as would be the case even if housing costs were not relatively high). Just as we don't see any problem with not having a locally-residing heart surgeon, we need not be concerned that we need to "import" some tradesmen, nor that this is related to the cost of housing.

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PART ONE

MYTH 1: High housing costs are undesirable. As recently as the early 1990's a widely held view was that San Juan County had too many "inexpensive houses". Many were do-it-yourself cabins-in-the-woods; and many were vacation or second homes intended only to provide minimal accommodation. Many of these homes have been remodeled and expanded as their owners retire and choose to reside here full time.

The inconvenient truth is that most islanders are quite pleased with the fact that their property values are increasing. Although they don't like the accompanying increases in property taxes, there is a general consensus that increasing wealth brings much good. For one thing, the cost of moving here is increased and this of itself serves to moderate growth and perhaps cause such growth to be relatively more desirable than otherwise.

Myth 2: Affordable housing programs are an overall good for a community. Two questions poignantly highlight the issue. Readers can answer these questions for themselves; and supporters of the affordable housing program ought to provide their respective answer.

1. Why do we want to encourage the presence of people that cannot afford to live here?
2. What do we say to the vast majority of service providers (not to mention ordinary home owners) that have managed to live and work here all these years without the benefit of an affordable housing program?

Tax-supported affordable housing programs add to overall housing costs, lower the overall valuation of the housing stock, end up putting money into the pockets of mortgage lenders and developers (that could not otherwise be earned in free market transactions), and create yet another burdensome bureaucracy.

Myth 3: We need a county-sponsored Affordable Housing Program and its associated 0.5% property sales tax. There are several ongoing and successful affordable housing programs operating in San Juan County. We need to support and encourage them. At least one is subsidized with federal tax dollars from the Department of Agriculture. We do not need another program, and especially, we don't need to empower county government to collect another tax and administer an even bigger program.

The proposed Real Estate tax will most probably conform to Gresham's Law (debased money drives out good money): not only will it likely cause would-be donors to cease supporting the on-going private programs, but the private programs will likely wither.
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Wednesday, March 15th

Getting Tough On Allowing Guest Houses

As advertised, the CC held their first work session on the PC (Planning Commission) draft of the ADU (Accessory Dwelling Unit) ordinance, but all that was accomplished was for the CC to give a good impression of where they may be headed once they spend some time reviewing it, and coming up with a final draft to present to the public for comment.

All three Councilmen praised the work of the PC, Ranker calling it a "very thorough job" and stating that while "the PC is a diverse group, they came together with a very strict ordinance", to which Myhr said "this is closer to where we want to be in this county, while still allowing ADUs". Both Myhr and Ranker may have been unaware that the Planning Commission vote was split, and that they "came together" by the majority out voting the minority, on a majority of the motions.

Chairman Lichter asked the staff if the PC presented their work as a solution to protecting the SJC environment, and meeting the orders of the GMB (Growth Management Board) order, and was told by staff that since the draft prohibited free-standing ADUs except in urban and activity centers, it should be acceptable to the GMB. Ranker opined that the PC position is "much stricter than what the County Council put forth". And indeed it is, going beyond what was required by a GMB order, which simply required the County to address free-standing ADUs in the rural areas, and on those lands that have been designated as resource lands. Lichter said that he "admired the work done by the PC, and that he agreed with the comments made by his fellow Councilmen.

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Monday, March 13th

PW Director On Sustainability In SJC

(Shannon addressing the San Juan County Green Party)

The Green Party held their monthly meeting on Saturday and heard featured guest speaker Jon Shannon, Director of SJC Public Works present a talk entitled "Toward a sustainable San Juan County. Shannon told the group that he was not speaking for San Juan County, and then worked the group though a model of sustainability in the negative, a model of a community that would have a low sustainability score, a model that, coincidently appeared to look a lot like San Juan County.

Shannon told the group that all systems have in-flow and out-flow, and as an engineer, if he wanted to develop a community that was not in balance in the in-and-out flow rates, there are a number of things that he would do. Some examples that count against having a balance, he said, would be to have a community isolated as much as possible; it would be a suburban area, and not primarily rural or urban, and if the community was divided by natural barriers, like water, then it would be even more out of balance. In other words, a place like San Juan County.

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Wednesday, March 8th

CC Wants to Extend Timelines For ADUs

In what some are saying was confusion on the part of the County Council on what date the Court of Appeals Stay of Proceedings expired, the CC realized that they will not have time to past an ordinance on where, and how large, a guest house can be; and if they follow the Planning Commission's recommendations, they will drastically redefine and tighten up guest house regulations (see story below)

County Prosecutor Randy Gaylord presented the Council with a time-line of dates that set out what has to be done, and when. Based on comments made by the Council, it appeared they had confused the April 17th date that comments are due to the GHB (Growth Hearings Board), with the expiration date of the Stay of Proceedings that they had requested from the Court of Appeals

Gaylord then began to give arguments against asking for the extension of the stay from the Court of Appeals, repeating his previously presented arguments that to have the case settled by the court would end the on-going litigations, and would also be of value to other counties, who are awaiting the outcome of the case, to see how it will effect them. He also pointed out that to let the court decide the issue would be the most cost effective approach, since it would give clear guidance as to what the County could, and could not do, with respect to allowing guest houses.

At this point he was interrupted by Councilman Lichter, who informed him the Council had already came to an agreement at a Council Staff Meeting and Work Session on Monday, and that he "wanted to move forward with this in discussion now". Gaylord appeared to be momentarily taken by surprise by the news that the Council had already entered into discussion at a staff and work session. He said he would be glad to answer any questions the Council might have as they now discussed the matter.

Ranker asked Gaylord if they could continue working on compliance after the expired date, and Gaylord responded that they needed to have completed the process prior to expiration dates.

After a brief discussion, the Council voted to ask for an additional 180 day stay, and to also request an extension from the GHB. If granted, the County can proceed with the course they have chosen of passing an ordinance that they hope will be acceptable to the GHB. But because it will not have been tested in Court, the whole process of appeals can start all over again, and at some point may very well end up in court anyway.

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Sunday, March 5th

PC Splits On ADUs

(Planning Commission plays to an empty house)
In a Council room devoid of members of the public, the Planning Commission held their last meeting on a draft ordinance to limit the construction and location of guest houses (aka ADUs). After having rejected most of the proposed ordinance that was sent to them by the County Council for their review, the Commissions played around with the idea of allowing ADUs (Accessory Dwelling Units) to be attached to a house or to an accessory building (e.g., a garage, barn, shop, etc) as has been done in some other counties, or, should they limit them to being attached only to one allowed primary residence.

But in the end, a majority of the PC rejected the idea of adopting the same solution as used by some other rural counties, stating that to allow them would be to run the risk of having them "pop-up everywhere", and San Juan County is not as "rural" as those counties that allow them to be attached to out buildings. What seemed to push a couple of the members who had, from time-to-time, seemed to be leaning toward allowing guest houses to be constructed as long as they were attached to out buildings, was the simple fact that if they allowed them, they might actually be built.

Rather than retaining the controls that are now in the regulations, and adding additional restrictions to mitigate the visual impacts of allowing small 800 square foot attached guest houses, (which is what the Superion Court had called "structural density") they simply said that if attached to a main house, it was okay, but if attached to an out building, that was not okay.

The approach taken by the PC will not solve the concerns of those who do not want any form of guest house, and it goes well beyond what the Growth Management Board has required of the County to bring it into compliance. And while it will not increase the size of outbuildings, it will increase the size of homes that opt to have guest houses attached to them; but given the requirements to have one, it is unlikely that they will "increase the supply of an affordable, flexible and independent housing for a variety of households at all income levels" as is envisioned by the Housing Policy Act;

One rather odd provision of an adopted finding by the PC, is a requirement that if one should decide to attach a guesthouse to the house by the use of a hallway (which they want to call a "breeze way" but in fact is not) then that space will also be counted against the allowed square footage of the guesthouse. Attach the guesthouse by a three foot hallway ten feet long, and your guesthouse just got thirty square feet smaller.

The three Commissioners who argued that the impact of a house with an attached guest house is not any different than the impact on a garage, or a barn, when a guesthouse is attached to it, found their logic and arguments did not carry the day.

The Facts and Findings of the PC will be passed on to the County Council, who will conduct their own hearing, and decide how much of their original proposed ordinance they will want to retain, and what, if any, of the PC Facts and Findings they may want to add, to further tighten up on allowing guest houses in San Juan County.

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