MICHAEL L. MEYER : Fording the Affordable Stream : Real Estate Expert Sees Ways to Build Lower-Cost Homes
It’s a long way from Omaha to Laguna Beach, where he has made his home for 14 years on the waterfront, but like many of his contemporaries, Michael L. Meyer fled the harsh climate of his birthplace for temperate Southern California in the early 1960s and found Orange County to be the perfect place to enjoy the sun and sea.
Meyer, a certified public accountant with a degree from the University of Iowa, opened the Newport Beach office of Kenneth Leventhal & Co. in 1974. He has headed the accounting and consulting firm’s county operation ever since, guiding its growth from a dozen to 155 employees and developing it into a respected specialist in real estate and financial industry services.
In his role as a real estate and finance specialist in the county, Meyer has for several years lobbied within the industry for a greater commitment to lower-cost housing, citing both the potential financial rewards and the need for a mix of housing prices to help keep the region’s economy healthy.
Meyer, 50, writes a regular column for Southern California Builder, a regional journal for the construction trades and has also written for the National Real Estate Investor and California Builder. He has spoken on regional housing issues at many meetings and seminars, including the USC Real Estate Conference and the Pacific Coast Builders Conference.
In a recent interview with Times staff writer John O’Dell, Meyer discussed lower-cost housing in the county and the programs being considered in Washington to assist first-time home buyers.
Q. Why are you concerned about lower-cost housing? A. Well, our concern comes in working with the home builders and land developers and commercial and industrial developers in the county. And their concern is to be able to provide a product that is affordable to the people who are their customers and to try to create a balance of housing and jobs. Among other things, the more of a balance you can create, the fewer the social and transportation problems that are created. Q. We’ve all watched--some with horror and some with glee--the price of housing in the county increase dramatically in the last few years. The latest median price figures have homes in the county running from $230,000 for resale single-family homes to $293,500 for new detached homes, and just 16% of the families that live here can qualify to buy the median-priced resale home. Does all this mean that affordable housing is a pipe dream? A. Well, of course, it depends what you define as affordable. I think we’re reaching a point where the single-family detached home with a nice-size yard, a living room, den, a couple of fireplaces and three bedrooms and three bathrooms is not affordable to the median-income family. But you have to keep in mind that these affordability indexes have a tendency to exaggerate the problem. First of all, you’re talking about median income, so half the homes are priced lower than that. And when the statistics are about single-family detached, then that’s really only about a third of the housing stock that’s available. And the Realtors who report sales from Orange County almost all are from the southern and coastal areas--the higher-priced areas. Q. In all the talk about affordable housing, is there any generally agreed-upon figure, for income or for price, as to what is meant by “affordable?” A. Well, there is no generally agreed figure, but the (county’s) median household income is something like $45,000 a year. So you could back down from that and, presuming the median family has no other sources of income and no significant savings, an affordable home would be in the range of $130,000 to $150,000. Q. If we use a $150,000 selling price as a cutoff, is there such a thing as affordable housing in the county today? A. If we use that kind of a guideline, then there’s not very much affordable housing. And the affordable housing that you do find will be attached--townhouses or condominiums and rental units. Q. If rentals should be included in discussions of affordable housing, then aren’t we facing new problems there? Hasn’t there been a rather substantial change in tax law--a change that many say is going to kill off the rental construction business? A. Yes. Starting with the Tax Reform Act of 1986, the federal government has deterred some investment in rental housing across the country because the benefits of depreciation write-offs have been diminished and the losses from rental operations aren’t fully deductible anymore. Also, the tax act greatly diminished a tax-exempt bond program, where developers of apartments could get lower interest rates and pass them on as lower rents. So, around the country, that has created a slowdown in apartment construction. But Orange County was one of two markets in the country that had an increase in apartment construction in 1987, although construction dropped in 1988 because of higher land costs. Q. If financial incentives for building rental units were reduced in ‘86, why did rental construction stay relatively healthy here? A. Well, the activity comes largely from local developers who have seen the demand for rental units rise as the price of housing has escalated. The spread between the cost of renting and the cost of homeownership has widened, and the general feeling has been that even though there’s not a very good immediate return to an owner of an apartment building, the rents will steadily increase in the future. Q. And keep on spiraling until we end up with unaffordable apartments as well? A. Well, yeah. There will be a tendency toward the more affordable apartments being the older apartments. Q. You said your interest is in representing builders and developers who are concerned about having a salable product. Commercial and industrial developers are not building housing, so what is their concern? Is it the availability of a labor force that can afford to live here? A. That’s one of the concerns. It’s a big problem. Both the immediate availability of the lower-income type workers and the costs of relocating higher-income workers to the county--where housing prices are higher than they were paying--are major concerns. Q. And where does that lead us? A. As with the cost of land for housing, the cost of land for industrial and commercial uses has moved up. So we won’t have very many more warehouses or factories built in Orange County. Instead, what we’ll have are research and development companies, a lot of medical research facilities and more upgraded office buildings--the types of uses that call upon the pool of higher-income people more than the lower-income people. So it does have a tendency to balance itself out that way. Q. You have called repeatedly for Congress to take actions to spur construction of lower-cost housing. What is going on in Washington on that front? A. There is a Senate housing subcommittee that has been holding hearings on a National Affordable Housing Act. That’s been headed by (Sens.) Alan Cranston (D-Calif.) and Alfonse M. D’Amato (R-N.Y.). One of the biggest problems across the country is that lower-income people have trouble raising money for a down payment. So one part of the proposal is to allow them to borrow from their IRA accounts to get a down payment. Another (proposal) raises the Federal Housing Administration limit for mortgage insurance, to allow people to get bigger loans with lower down payments. The act would also provide funds for a program for state and local governments to encourage private-public partnerships in affordable housing construction and rehabilitation. Q. Builders tend to be free-market advocates, so turning to government to provide lower-cost housing hasn’t been met with much enthusiasm. What is the difference between programs in the past and what’s being talked about now? A. Well, I think there are certain things the government does have a proper role in. Few people would argue that providing the basic infrastructure--the interstate highway system--was not an appropriate role for the federal government. Government also should be involved in developing schools and providing clean water and sewage facilities and just keeping America’s infrastructure developed and maintained. Other areas, like tax-exempt bonds, or even taxable bonds issued by governmental agencies, are a means of providing lower-interest-rate financing, and of limiting the mortgages that are provided to the lower-income families. So that is a good role for government in the housing market. Q. In other words, providing or finding ways of obtaining lower-cost financing is appropriate for government, but not actually building and regulating who can rent and sell and buy? A. Yes. When the government gets involved in the details of either building or controlling the building, then everything goes afoul. But some sort of a partnership of local governments, developers, employers, and the general populace, with leadership and incentives from the federal government--that makes sense. And in Orange County, the major employers hopefully will start to take more interest in the issue of providing housing their workers can afford. Q. Does that mean nothing is happening along that line now? A. Right. But it is being talked about more. The large employers in the county are taking more interest in all of the problems of the county, which includes the transportation problems and the housing and social-welfare issues. And you know there is a tremendous amount that a coalition of employers together with developers and environmental agencies and other interest groups could do if they put their minds to it. The 1986 tax act brought in tax credits against your federal income tax if you invest in affordable housing. And that program makes a lot of sense, but it was very slow to be accepted because of the complex rules for claiming the credits. But now, some of the large investment bankers are syndicating the credits to enable individuals and corporations to buy shares. Builders would get the proceeds and do joint ventures with the syndications to build apartment projects that are affordable. Q. Do we have any of that development going on in Orange County? A. It’s not very prevalent. But we’ve been talking with a lot of our clients about going into that program. The clients we’ve talked to are corporations. None have moved into the program, but some are looking into the opportunities to combine funding from the tax credit program, with assistance from local redevelopment agencies. It is just not profitable in Orange County to build moderate-income apartments without assistance. I can’t identify any of the clients we’ve talked to because of our confidentiality agreements, but what is being explored is acquiring less desireable land at reasonable prices in redevelopment areas and then building apartment units that could be rented by moderate-income families. They are looking to the redevelopment agencies to either write down the cost of the land or to assist by putting in streets and other site developments. That, with the added funds from the tax-credit syndications, would make these projects viable. Q. Anything else that you see on the horizon to spur construction of lower-cost housing? A. I think we will see more taxable bond issues by municipalities. And we may see some nonprofit organizations being put together in the county to issue bonds to finance housing on a limited scale. State law also requires 20% of the tax-increment funds captured by redevelopment agencies to be used for affordable housing. But other than that, the help we’re seeing from local government is more indirect. Transportation improvements like the widening of the 55 (Costa Mesa) Freeway. And transportation corridors. The San Joaquin Hills Transportation Corridor is one that will be funded largely by builder fees, with tolls and federal and state funds helping out. All of that just starts to take a burden off of the home buyer, and helps out in providing these necessary services. The other thing is that those roads are making areas more accessible, and that provides people an opportunity to live in a more affordable house and still be able to get to work. So all of the improvements that go into making this a county where people can move around and be educated and have a good life style and are paid for by somebody other than the homeowner helps the home builder make a more affordable house. Q. Much of the available raw land in the county is held in relatively few hands. Does that have anything to do with costs? Do landowners now phase land sales over time to keep prices up? A. Well, I think that having the large land developers in the county has resulted in beautiful, planned communities with all kinds of nice amenities. And that planning process has developed communities that are so much above the standard communities in America that it has driven the prices up in those communities. But the landowners and developers are not holding land off the market to try to drive the price up. Believe me, they try as hard as they can to get the land approved and processed and developed. And they, above everyone else, would prefer to see the problems of having an inadequate supply of housing solved. They’re concerned about the balance of the cost of housing--versus what’s affordable to the workers--just as much as the community is concerned about it. Still, it is true that a big part of the reason the cost of building a house has gone up so much over the years is the cost of land. And the reason land has gone up so much is because of the shrinkage of the supply of land. A lot of the shrinkage is because of requirements for open space by governmental authorities. And the cost of getting government approval to build has stretched out over the years, so a developer or a landowner has significant costs just to hold onto his land and plan it out. And then there is the cost of the public facilities. The costs of schools, streets, sewers, parks all have been passed onto the developers, when the costs previously were paid for by the general community through the property tax system. All of that adds on to the costs of building and ends up increasing the cost of a house. Q. How much do government costs add to the price of a home? A. A 1987 survey by the Building Industry Assn. showed that the average costs in Orange County were $7,500. But it ran much higher in some areas. San Juan Capistrano was highest, with government-required fees and land dedications adding $21,000 to the cost of each new home. Q. But builders just pass on the costs, and so far there has not seemed to be a lack of buyers. So what is the builders’ concern? A. I don’t think they’re concerned about pricing themselves out of being a viable community. But the proven formula of having a nice balance is a lot more comfortable than projecting out what the development of the county will be if every house is $500,000. The question is always just how many people are there that can afford a $500,000 home. Q. Where is that money coming from? A. Nobody can do a sophisticated analysis. But people obviously have a lot of built-in equity in their existing house and in other properties. And there are second- and third-generation people here that have had savings over the years. And the economy’s been good, so jobs are paying fairly well. And people are optimistic about their future ability to pay off their debt. So they come through with the money to buy the houses. But it’s speculative to guess how much further that could go. I believe that we’ll be seeing a more urban type of development here. Q. Multistory apartments and condos? A. In most urban areas, like New York or San Francisco, and more and more so in Los Angeles, the chosen life style for the up-and-coming young executives, secretaries and newlyweds is to live in a rental house near the places where they work and shop. Retired people and empty-nesters have the tendency to live in that type of environment too. It’s only when they start to raise a family, after they’ve been working for some years and saved some money, that urban people move out into the suburban areas to buy a house. And then, as they make their way through life and can afford to move up into a more upscale house, they do that. And I think we’ll just see more of a trend toward Orange County developing into that type of highly desirable urban area. Q. How optimistic are you that we are really going to see more efforts to provide more lower-cost housing in the county in the next decade than in the past? A. Well, the optimism is only that we’ll continue to see higher-density developments, smaller houses, smaller rental units, or higher-density projects in terms of high-rise or mid-rise construction. We’ll also see redevelopment of the older mixed-use downtown areas. Orange County is getting older, and now that we have some of these 20-, 30- and 40-year-old sites, we’ll see some of them redeveloped as urban villages, with retail and commercial and decent and more affordable housing. Q. We’ve also got a lot of 20- and 30-year-old residential tracts in the central and northern cities. Is there talk of redevelopment in those areas? A. Individual houses are remodeled and upgraded over a period of time, some with the help of government programs. But to think of a developer compiling 100 houses to tear down and redevelop into a new housing tract, that’s just too prohibitive. But there will be rezoning of single-family property to multifamily. And developers will buy six or eight houses and build a three-story apartment on the property. That type of ongoing upgrading of an older neighborhood to what’s now considered a better use will continue to happen.
