More Housing = More Affordability

Palo Alto Forward believes in abundant Homes for Everyone? YES!, right here in our neighborhoods. Poor and rich. Renters and owners. Newcomers and old-timers. 

Palo Alto’s housing policy must center the needs of people with lower-to-moderate incomes, to affirmatively further fair housing, overcome our city’s lingering patterns of segregation, meet our city’s equity goals, and support local businesses. So new infill developments should include homes that cost less than market-rate (sometimes called affordable homes) for people who earn less than the area median income (AMI). Also, government must increase its subsidies to build affordable homes and to assist low-income renters. Further, renters need more protection from displacement. All these policies work together to create a more diverse, interesting, and economically vibrant community.

Palo Alto also must build more market-rate homes. Not just because market-rate projects include 15% to 20% below-market rate (BMR) units – a significant portion of our affordable commitment – but also because our city should welcome people at all income levels.

Further, state law requires Palo Alto to make plans to allow 2,261 new homes for people earning above AMI (in addition to 3,465 homes for people earning at or below AMI). New market-rate homes, by increasing the supply of our community’s housing stock, reduce the cost of homes at all price levels. That’s not just common sense. It’s also the overwhelming recent social science evidence and economic research, as explained below.

The Virtuous Cycle

Some defenders of the status quo (i.e., our current housing crisis) erroneously assert a contradiction between market-rate homes and affordable homes. For example, in the State of the City address in 2023, our then Mayor claimed that recent state laws that allow construction of more homes do nothing for “genuine affordable housing.” Our current Mayor doubled down on these falsehoods in 2024, “What the city is facing is not a housing crisis but an affordability crisis.” 

This is a false narrative unsupported by recent data. 

When a new market-rate home gets built in Palo Alto, its initial resident will often have already been living in Palo Alto. For example, a local couple living near their parents may need an additional bedroom because they are expecting a child, or a local worker may want to upgrade because they earned a raise. When such Palo Altans move into their new home, that creates a vacancy in their old home. Because that second home is often smaller or older, it will probably be less expensive. At that point, another Palo Altan may move in, creating a vacancy in a third home, which will probably be less expensive than the second. As this virtuous cycle continues, it increases the supply of homes at all price points, which reduces the cost of homes at all price points.

Researchers have found that this process, known as “filtering”, quickly reaches into lower-income neighborhoods. “For each 100 new, centrally located market-rate units, roughly 60 units are created in the bottom half of neighborhood income distribution through vacancies.” Even more remarkable, 29 vacancies are created in neighborhoods in the bottom quintile of the income distribution.

Our Vicious Cycle - Constrained Supply & Higher Prices

Today, Palo Alto suffers from a vicious cycle in which artificial scarcity increases the cost of homes at all price points. Our local zoning suppresses construction of new market-rate homes, so demand for these homes exceeds supply, which drives up the price. A person who didn’t get the new home they wanted will instead find an older home, driving up the price for that home too. This vicious cycle repeats, until what had been more-affordable homes for lower-income people become more-expensive homes for higher-income people. Those with lower-incomes suffer the greatest burden of this created scarcity.

Follow the Science

A report from the Federal Reserve compiled several recent empirical studies of the impact of new market-rate homes on the supply of affordable homes. The report concludes: “new market-rate apartments … help keep current prices down for everyone by opening up new opportunities for low- and moderate-income renters over a few short years through a chain of residential moves.” The Fed relied on the following studies, among others:

• In 2023, Evan Mast examined the effect of 686 large new market-rate buildings in 12 large U.S. cities. He tracked 52,000 of these buildings’ residents to their previous homes, and repeated that tracking for five more rounds of moves. He found that 40% of the homes vacated in the final round were in areas with below-median income. 

• In 2021, Liyi Liu examined a million U.S. homes with multiple sales, and the buyers’ incomes. On average, a new buyer had 3% less income than the prior buyer – showing homes generally become more affordable as they age. But this varied with an area’s limits on home construction. In areas with fewer limits, household incomes declined between sales. But in areas with more limits, they increased. Five of the ten areas with the largest increases were in California.

Many other recent empirical studies reach similar conclusions. For example:

• In 2023, Gabriella Kindstrom examined a quarter century of data on the entire Swedish population, allowing her to track residential movement, personal income, and home age and price. She found: “While primarily rich people move into new homes, poor people are overrepresented among in-movers to vacated homes.” She also found: “in municipalities with higher construction rates, every income group gets better access to newer housing and housing space.”

• In 2023, Darrell Owens reported that our neighbors in Berkeley are simultaneously enjoying both (1) a boom in construction of new rental apartment buildings, and (2) a stabilization, and sometimes a drop, in the rent of older apartments. He explains: “The swell of new rentals downtown is pulling thousands of people away from the older housing stock.”

• In 2023, Brian Asquith examined data from eleven U.S. cities on the impact of new, large, market-rate apartment buildings on rents in nearby low-income neighborhoods. He found: “New buildings decrease rents in nearby units by about 6% relative to units slightly farther away …”  

• In 2021, Kate Pennington found that in San Francisco, new market-rate home construction led, for incumbent renters in the immediate area, to lower rents and reduced likelihood of displacement to a lower-income neighborhood.

• In 2021, Cristina Bratu examined Helsinki’s new market-rate homes. She found: “the moving chains triggered by these new units reach middle- and low-income neighborhoods quickly, within a year or two.” A 2024 report by Vicki Been compiles additional research with similar findings.

Moving FORWARD Together

Sound policy follows the evidence. And the evidence overwhelmingly demonstrates that, through a virtuous cycle, new market-rate homes increase the supply of affordable homes. So let’s build them! These new homes are also good for the environment/climate, seniors, schools, and retailers.

Again, to center the needs of lower-to-middle income people, we need an “all of the above” approach. This includes government subsidies, renter protections, and new affordable BMR units. And as explained above, to increase our supply of affordable homes, we also need to build market-rate homes.

What else can we do to lower the price of renting or buying a home in Palo Alto? We can build infill homes that are smaller and denser, and thus cost less than a detached single-family house. This includes ADUs, duplexes, fourplexes, townhomes, and apartments. Palo Alto Forward offers a blueprint to do this: we must raise limits on building height and size (a.k.a. floor area ratio); eliminate density limits and one-size-fits-all parking mandates; reduce impact fees; and speed up permit timelines.

If we want a better, more affordable, more sustainable, more equitable Palo Alto - we need to start with MORE housing!