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Lost Opportunities -the Real Cost of City's Legal Fight

By Jeffrey Rous, PhD

The economic theory is clear, city government's actions can be evaluated in terms of their impact on local property values. Regardless of what some may argue, this is the only way to evaluate a local government policy. At the same time, it could be argued that the real goal with our housing ordinance is to stabilize property values by prohibiting landlords from renting to a class of people who are perceived as being undesirable by a majority of the voters. The strongest evidence of this motivation is the fact that the ordinances do not propose any penalties to employers who hire undocumented workers, only landlords who rent to them.

So assuming the goal is to make Farmers Branch a more desirable place to live, it is worthwhile to ask how such a policy should be evaluated. First, we can try to estimate what effect the housing ordinance has had on property values. Have property values risen by $3.2 million as a result of the ordinance's failure in the courts? Even if we could be assured of victory at a cost of $5 million, could the ordinance be considered a success? The answer is only if it raises property values by more than the next best policy the city could have adopted instead. To the extent that undocumented immigrants are the high bidders for apartments in the city, property values will probably fall if they are driven out. None-the-less, it is worthwhile thinking about what could have been done in the city with a free $3.2 million already spent.

Given my earlier article on Four Corners, I think the best use of $3.2 million would be creating a dynamic public space designed to generate social energy at that location in order to stimulate economic development. But there are other good ideas too.

One of the biggest problems that inner ring suburbs like Farmers Branch face is their depreciating housing stock. As new suburbs like Frisco and Flower Mound attract young families and demand for housing in Farmers Branch falls, some houses depreciate rapidly. Once a tipping point of low valued houses is reached, neighborhood property values can collapse quickly leading other neighborhoods to collapse as well. A perpetual question for local governments is how to avoid this fate. The goal should never be to replace all current residents with new affluent families in new houses, but to stabilize housing values so that current residents do not feel the need to leave. Luckily, Farmers Branch is ideally situated to achieve this modest goal.

Economic theory on land use suggests that if there were 100 acres of farm land remaining in Farmers Branch, housing developers would snap it up to build $300,000-$400,000 houses. The reason is that Farmers Branch is centrally located in the continually expanding Metroplex. For a very local example, check out the Valley View Estates development built about a decade ago. The reason the city's least valuable neighborhoods do not see this type of wholesale redevelopment is because the current houses, even low valued ones, are worth less to developers as buildable lots than they are as livable houses. A developer may be willing to pay $40,000 for a lot, but the same lot with a 1400 square foot house on it is worth $120,000 to a landlord who can rent the house out. Second, one new 2,500 square foot house in a neighborhood of 1,400 square foot houses that are 60 years old is not nearly as valuable as the same new house in a neighborhood of new houses.

The idea typified by Branch Crossing is basically to solve this problem by buying up the oldest and least sound houses in a neighborhood and then selling them to developers. The goal is twofold. First, the houses that do the most to bring down property values nearby are taken off the market and second, enough lots can be sold to developers so that each developer and future home buyer knows that their nice new house will not be alone in a neighborhood. This concept is working reasonably well in Branch Crossing and would be similarly successful if the same idea were taken to other neighborhoods.

Currently, the city has several housing incentive programs, but they average out to be about a 1%-4% subsidy for remodeling or rebuilding. These modest incentives are likely to have a minimal impact overall and are likely to largely go into subsidizing projects that would have been undertaken anyway. That is, if for every twenty applications for a $400 renovation subsidy (requiring an overall expenditure of $10,000) only one would not have occurred without the subsidy, it means the each extra remodel the city gained as a result of the subsidy cost the city $9,500. It would be tough to consider spending $9,500 for one extra $10,000 renovation a success.

So what is the bottom line? Say the city were to target three of the most depreciated neighborhoods in the city and then offer that within those neighborhoods, the city would buy up 50 houses. Owners could submit sealed bids to the city and the 50 lowest price bids would be accepted. This is what economists call a reverse auction. Given property values in the city, I expect that the bids on the 50 winning houses would average $100,000, or $5 million, to purchase. After acquiring the 50 houses and scraping the lots for an additional $200,000, the city would auction the lots off to home builders required to get a house built within two years. Given property values in Farmers Branch, the vacant lots would sell for about $40,000 on average, raising $2 million. For a total cost of $3.2 million, the city could have 50 new houses strategically placed to stem the tide of depreciation and stabilize property values in the city. Using a standard builders' rule of thumb, the resulting houses would be about 1,800 square feet and sell for under $220,000. Nice, but not McMansions either.

To the extent that property values would increase or additional houses were either renovated or replaced, higher tax revenue would begin to defray the cost of the program. To the extent that new residents have higher incomes than those that are replaced, developers would have more reason to look more favorably at Four Corners and other locations in town.

Yes, it is an important question whether such a program would mean $3.2 million in property values in the entire city over what we would see if nothing had been done. How about this, if on average 300 houses gained $10,000 in value as a result of this housing policy instead of losing $10,000 in value, the total gain would be $6 million. That sounds like a great deal to me. And I can promise you this, even if half that size, the benefit would be far in excess to the negligible benefit created by our losing battle in the courts defending the ordinances as well as all the bad publicity that has gone along with it. And just think, if such a program had started three years ago, the new houses would already be in place.