Tapping the Shadow Housing Market

The Wall Street Journal , March 13, 1987

Americans are in the midst of a well-publicized housing shortage, a squeeze be­tween rising prices and falling incomes. Thirty years ago, a third of the nation’s renters paid more than the recommended fourth of their incomes for housing; by 1980, half were doing so. The lack of affordable housing is particularly acute (and well-known) among poorer families, espe­cially those relying on one income, be­cause as household income goes down, the percentage devoted to housing rises. Yet traditional government remedies—housing projects, subsidies—have largely failed, tearing down neighborhoods, uprooting the elderly, creating ghettos of age or class, and costing far more per unit than quality can justify or political realities will al­ low.

Meanwhile, more and more homeowners are, in a sense, '‘overhoused”—liv­ing in single-family homes designed for large families but now occupied by only one or two people. Census data indicate that more than half the homes with five or more rooms are occupied by people over 65, an age group in which the average household contains fewer than two peo­ple.

The alternative to government pro­grams is not abandonment of the poor. Taking advantage of changing demo­graphics, we can go a long way toward im­proving American housing by encouraging more efficient use of existing buildings—at a savings of a third or more over the cost of new construction. In many cases, this encouragement need consist simply of loos­ening land-use regulations or freeing up unused government-owned buildings.

The key is tapping what William C. Baer, an urban and regional planning pro­fessor at the University of Southern Cali­fornia, has dubbed “the shadow market.” This market includes previously uninhabi­table units that have been restored, for­merly nonresidential space (industrial lofts, schools), former group quarters (sorority houses, convents), and units created by subdividing or adding to existing dwellings.

Using census data that include many of the illegal units missed by counting build­ing permits and other signs of red tape. Prof. Baer calculates that this market ac­ counted for 21% of all additions to housing stock from 1973 to 1980, including half of low-cost rental units and a third of low-cost units occupied by owners. And 85% of these new units were created without sub­sidies, while the same percentage of newly built low-income units were created with subsidies.

Consider the following examples:

• When the school-age population dwin­ dled in Kettering, Mich., the school board sold the former Oak Terrace School to a private, for-profit developer for 5225,000. Built in 1964, the one-story school was ideal for older residents, and each classroom could be turned into two studio apartments or one large, one-bedroom apartment with­ out major restructuring. The school now contains 71 apartments and a dining hall (the former cafeteria/gymnasium). Total cost to the developer: $3 million.

• On New York’s Lower East Side, the Christian group Habitat for Humanity pur­chased a six-story abandoned building from the city for $19,000. The building, says the project’s executive director Rob DeRocker, “had been vacant for five years, except for junkies and homeless people. Even the rats had moved out.” Using donations and volunteer labor, the group renovated the building to produce 19 units that will be sold at no profit through 30-year, no-interest mortgages. Ironically, Habitat originally had planned to renovate a smaller, formerly church-owned build­ing. But two days after Habitat signed the contract to take it over, the city con­demned the building to make way for pub­lic housing.

• From 1973 to 1983, the city of Balti­more sold about 600 city-owned or feder­ ally owned houses to individuals form$I each, with the condition that the buyers bring the buildings up to code and live in them for several years. This “urban home­ steading” program, which has been discon­tinued, attracted international attention and is now being emulated in a number of smaller cities.

• In Centerville, Ohio, St. Leonard Cen­ter, a seminary for Franciscan priests, closed because of declining enrollments. After raising money from local Catholic or­ders, a nonprofit lay group adapted the fa­cility for use as housing for the elderly. The center now houses almost 100 resi­dents, some of whom receive rent assis­tance from the parish.

• In Babylon, N.Y., a blue-collar com­munity on Long Island, financially strapped homeowners began to construct separate, illegal rental units on their prop­erties. By the late ’70s, about 10% of the township’s 40,000 single-family homes had such illegal apartments, which were par­ticularly popular with the increasing num­ber of older homeowners. Finally, in 1980, the town council passed an ordinance per­mitting such accessory apartments while enforcing building codes.

To encourage such “shadow” develop­ment, the best thing local governments can do is get out of the way. In many cases, this means establishing procedures, such as urban-homesteading programs, for rapidly turning over abandoned or unused city-owned buildings to the private sector for rehabilitation or conversion. More of­ten, however, it means reforming land-use and building codes. Given the obstacles erected by city and state regulations, it is a wonder the shadow market produces as many homes as it does.

In many places, for example, accessory apartments are completely illegal under single-family zoning restrictions. Yet the density of such neighborhoods is often less—even with additional tenants—than the zoning code originally called for, be­cause the number of residents has shrunk as children have moved away. An alterna­tive system that limited only density, with­out regard to living arrangements, might eliminate the specter of giant apartment complexes while allowing homeowners to decide whether to divide their houses into two, or perhaps three, units.

Although such life-style-neutral zoning has yet to catch on, more and more cities are realizing the value of accessory apart­ments. Today, as many as 40% of the na­tion’s municipalities permit such apart­ments, up from a “minimal” number 10 or 15 years ago, estimates Lea Dobkin of the American Association of Retired Persons.

Despite such zoning changes, however, many of these apartments still violate building codes. In the Babylon, N.Y., case, for example, only 1,500 of the town’s 4,000 previously illegal accessory apartments met building codes two years after the city changed its zoning ordinance—a fairly typical result. The reason: building codes that are extremely insensitive to the economic and structural realities of installing apart­ments in single-family homes.

Most basements, for example, have no more than eight feet between floor and ceiling. Add an insulated floor and a fin­ished ceiling, and you’ve broken the stan­dard building code, which calls for a mini­mum height of 7 feet 6 inches. Similarly, meeting window-space requirements in a converted basement apartment often re­quires adding a large sliding glass door at a cost of $1,000 or more—an expense many homeowners would rather forgo in favor of a few windows at $100 each.

Throw in the additional off-street park­ ing places that many local regulations (in­cluding Babylon’s) require, and you may hike the conversion cost by as much as $10,000, according to estimates by Martin G. Gellen, who conducted several studies of accessory apartments when at the Univer­sity of California at Berkeley’s Institute for Urban and Regional Development. Parking requirements, like zoning restrictions, may be responses to neighborhood concerns. But, like single-family zoning, they use lifestyle rather than density as a criterion. A home occupied by two elderly owners and a tenant is unlikely to add more cars to the neighborhood than one with two parents and one or two teen-age drivers.

The shadow market can flourish without massive federal programs, without the de­struction of existing neighborhoods, and without red tape. Communities need only make relatively modest changes in their zoning and building codes—to help people who already live in their neighborhoods do things they already want to do. How will­ ing local governments are to loosen their controls will provide an excellent measure of the nation’s true concern about the much-discussed housing crisis.