Enlightened Capitalism

Essays about how to harness people's natural desire to create wealth and improve their quality of life to solve global problems such as war and poverty.

Friday, April 29, 2005


"Affordability" is a very slippery concept.

Some government agencies define "affordable" as "housing that can be purchased by people who earn the median income for the region."

There are a few problems with this definition, which render it all but useless. First, the word "housing" is not defined fully. For instance, mobile homes qualify as housing, as do condominiums, artist's lofts, hilltop mansions, duplexes...even four houses on one lot. These items are not comparable. The actual square footage of the living space and the yard area should be specified, including what constitutes a kitchen, bathroom, closet, door, window, garage, peace and quiet, safety, and all the other things that go into making a place habitable.

Second, "can be purchased" is problematic. When I bought my first home many people were saying it couldn't be done. Every one of the 26 people I helped buy properties in Oakland had been confident that this was impossible. The government will point to a so called industry standard acceptable debt to income ratio, and half the lenders out there have made up their own standard. There are a million ways to buy a house.

Next we have "the median income". In neighborhoods with significant underground and cash economies the median income is way underreported. But even if it were correct, last year's "income" only tells a small part of the story. This year's income is more important, and credit is even more important than that, because anyone with good credit can get a loan where they don't have to document their income at all. And of course, assets matter too, because someone with $100,000 equity in their house will have no trouble buying a $200,000 house, putting 50% down.

But what about the monthly payment? Well, the government makes the assumption that the purchaser is going to pay the whole thing. When in fact, millions of homeowners rent out part of their property to others who help with the payment. A $1 million fourplex is affordable to anyone, if the rent from three of the units pays the entire mortgage.

And finally, "the region". Why do we use a different measure for people in Santa Monica vs those in San Bernardino? Does everyone have a right to live where they are born, regardless of what they do? If so, then why is that right only protected in a few places?

Here is another way to look at this whole issue. There are places where lots of people want to be, and places where only a few people want to be. The former will be expensive, and the latter will be cheap. So everyone gets to choose how important it is for them to live in their favorite place. There are activities which produce lots of wealth, and activities which don't produce any wealth. Everyone gets to choose which activities they pursue.

There is a problem here, though. Most people do not know that they have this choice. They are not aware of the incredible opportunities for rapid wealth creation that are all around them. But it is fun to educate people about this. Whereas it isn't as fun (at least from my point of view) to try to derail the real estate market, in order to protect people from having to pay a market price for the privilege of living where lots of other people want to live.


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