Page Six

THE MICHIGAN DAILY

Saturday, May_28; 1977

The economics of housing supply

By ELAINE FLETCHER
Fnrt ot a two part magazine series
THERE WAS A TIME in the midsix-
ties when bankers, realtors and de-
velopers referred to the central city
housing area as the "golden circle" and
to the nine and twelve unit apartment
buildings sprouting up all over the city
as "cash registers". That was a time
when a modern apar'ment could go for
twenty bucks a month in the summer-
time. Students were happy because there
was plenty of cheap housing. Builders
were happy because there was -money
to be made in building. Landlords were
happy because the students didn't make
much noise. So the story goes.
But the Ann Arbor housing market
has changed drastically since that time.
The demand for central city housing has
steadily increased yet the supply of new-
ly built housing has failed to keep pace
in a market plagued by problems which
range from high construction costs, the
city's myriad of zoning regulations and
planning bureaucracy. At the same time
rents on existing housing have contin-
ued to skyrocket for reasons quite inde-
pendent of the construction decline. The
end result has been an increasingly tight
housing market where students com-

values and rlabor costs have combined
to make the most of central city resi-
dential construction greater than even
rents in Ann Arbor will support.
"Interest rates have more than dou-
bled in the past ten years," says Teich,
"and that makes a difference when
you're building an apartment. In addi-
tion I've seen estimates that urban land
has gone up something like 500% in the
past 20 years"
Bill Martin is a major local develop-
er whose corporation, Ist Martin Inc.
is currently constructing a commercial
project downtown on Liberty St. Next
door to it, on another vacant lot, he has
plans to put up a residential mid-rise
apartment project. But right now he will
have to wait to build because he has
no way of financing the project and
keeping the rents within market limits.
"If I were to duplicate Tower Plaza to-
day, for example, my rents would have
to be on the order of 25% higher to make
the project break even - why? Because
of the total construction costs, also the
cost of financing a new building. If my
interest rates are higher I'm going to
have to reflect that in rents."
While construction costs generally
have soared, the financing of both low
and high rise projects in the city has

The
Saturday
Magazine

town residential investment, a number
of smaller, so-called "private" land-
lords are equally sure that when it comes
to finding mortgage money for the
building or rehabilitation of more modest
units, bankers and savings and loan of-
ficials are far from being enthusiastic.
Our landlord who has been in the
business here for almost a decade de-
scribes it this way: "The banks not
wanting to get involved in the financing
prevents people from remodeling. You
go to an Ann Arbor Bank and try to
borrow money to fix up income proper-
ty (rental property) and you're out of
luck. They say hell no, they'd rather
lend it on a car. They know me so I've
been able to get loans but it's based on
whether they know you, whether you can
force 'em into doing it, not on whether
you'll be able to pay. Say you're a
little old lady and you want a loan, want
to add some units to your property -
no chance."
Another landloard and developer com-
plains that Savings and Loan institutions
are reluctant to lend on multiple hous-
ing in the city. "The fact that it (an _
institution) will not lend on multiple
housing if someone wants to buy and
fix up is a lamentable thing."
Although in reality both local savings
and loans as well as commercial banks
do carry mortgages on some multi-unit
housing, such financing is not a number
one priority at either type of institution.
And both claim that the financing of such
property falls more into the realm of the
other's responsibility.
Said one commercial bank official
who incidentally happens to be a land-
lord, "Multiunit financing is not a large
portion of our business. Typically speak-
ing, your savings and loan corporations
are more involved in real estate financing
on both single and multiple family hous-
ing. We divide up our' assets where
they're using 90'0 of theirs for real es-
tate. We have the options for other types
of financing which a Savings and Loan,
by charter cannot do."
But figures and statements given by
officials at Ann Arbor Federal Savings
and Loan, the city's major real estate
lending institution, contradict the com-
mercial bank official's assumptions. Ac-
cording to Ann Arbor Federal's 1976
mortgage loan disclosure statements, it
holds only 10 loans amounting to $3,351,-
600 in the Ann Arbor census tract area.
Less than half of that money is invest-
ed in the city's eight central census
tracts where most student housing is lo-
cated. At the same time the corporation's
statements showed over $35.5 million in-
vested in more than a thousand single
family home mortgages in the Ann Ar-
bor area.
Hazel Proctor a vice-president of Ann
Arbor Federal defends these figures say-
ing, "We invest in very few apartments
- that's rental property - something
that belongs more to the commercial
banks. We invest in home ownership."

plain of abomidably high rents, low va-
cancy rates and poor maintenance con-
ditions; developers complain about lack
of financing, high taxes and little va-
cant land; and landlords complain about
students who make "unrealistic de-
mands".
In 1975 the mayor's office, recogniz-
ing the dimension of the housing prob-
lem brought those frequently adversarial
groups together in a "Blue Ribbon Com-
mittee on Housing Fair Rental Prac-
tices". That committee in turn commis-
sioned the Institute of Social Research
to do a $39,000 study on rental housing
conditions in Ann Arbor. The results of
that study more or less confirmed tenant
complaints of unfair rents, poor living
conditions and housing shortages. The
committee produced a number of interim
recommendations, which the mayor plans
to bring soon before City Council.
Although the mayor's report focused
a good deal of attention on the manifes-
tations of the housing crisis - the rents,
the cockroaches - little attention has
been focused on the economic conditions
which have plagued the housing market
in the past decade. Though those condi-
tions remain a matter of some de-
bate among landlords, tenants, develop-
ers and city officials, one thing is be-
coming painfully clear to all those in-
volved. The housing "problem" will not
go away until the housing shortage is
resolved - and that will take more than
a $39,000 survey to accomplish.
It's construction costs . . it's the
banks. . it's the city. -.
rIlE PROBLEMS Ann Arbor faces in
its housing shortage are in some ways
reflective of those faced by cities all
over the country according to Paul Teich,
an attorney and one of the coordinators
of the MSA Housing Law Reform Proj-
ect. High mortgage interest rates, land
E-lzi'ou- Flencshr is Sunday magacine edi-
for durin /iA Ahoo/ ear.

been a particular problem according to
local realtors. Until the mid-sixties both
local banks and larger lending institu-
tions lent freely to the area.
But that led to an the eventual over-
supply of housing which, coupled with
a growing dislike and mistrust of the
activist-student community prompted
bankers to look for what they considered
"lower risk" investments elsewhere.
"The people that finance high rises
are primarily institutional investors,"
asserts Martin, "And the most import-
ant set of tools a developer needs is
kneepads when he has to beg to these
companies." His attitude towards the
smaller local banks and loan companies
is less caustic. "Five years ago the lo-
cal financial institutions were not in-
terested in financing downtown Ann Ar-
bor. But now I thing they are all aware
of the need for new housing and would
be climbing all over each other if a
realistic plan was presented to them."
While the city's larger developers and
realtors -may believe that local banks
are becoming interested again in down-

The result of this attitude is that while
single family loans, commercial busi-
ness loans, car loans, all have well-de-
fined places in the investment market, lo-
cal institutions have failed to make mul-
tiunit housing an appropriate priority.
Concludes William Tyler, a vice-pres-
ident for McKinley Properties, "There
isn't the interest in refinancing existing
student building. Perhaps the social value
of getting a single family home is con-
sidered greater than that of helping a
guy refinance his ten unit building."
. The high costs of construction along
with the special difficulties of financing
new multi-unit projects provide the fore-
most obstacle to new housing develop-
ment in the central city. But they re-
main only two factors among a host of
others, which though varied in import-
ance can perhaps be manipulated in at-
tempts to open up the market.
Building codes, zoning, parking, . .
city bureaucracy . . vacant land . .
WHAT DO THE abovementioned items
have in common? They are all
named and blamed more or less fre-
quently as obstacles to new construc-
tion in the central city, although the
relative importance of each depends on
just who you talk to.
Paul Teich believes that city mechan-
isms which review building proposals
2ind zoning change requests are particu-
larly slow and unweildy locally. His views
are supported by certain other landlords.
Sand one, "There's a long term problem
of getting a building approved by the
city and by that time your mortgage
money may have dried up. In any ma-
jor project you have to go before the
board, (zoning). And you have a group
of people in this town who don't want
anything to change.- -
However Leslie Morris a member of
the Mayor's Fair Rental Housing Prac-
tices' Committee disagreds. "The idea
that it take things longer to get ap-
proved here is a bunch of hogwash. The
time that an average project takes is
no different than what it is in any other
city." Morris does concede however that
In Ann Arbor, "when there's something
controversial, a typical ploy is to beat
it to death."
Zoning regulations which, since the
sixties have been revised to require ad-
ditional "greenspace" or parking for
new apartments, have put unrealistic
demands on the already sparse supply
of vacant land, in the opinion of many.
Says one landlord, "'64 and '65 were
building booms. What happened after
that is that new setback requirements
forced a 25% reduction in housing square
footage in relation to land. Where you
could build nine units before, now you
could only build about six."
Such zoning restrictions become an
even bigger burden in the opinion of Bill
Martin, because publically subsidized
housing programs financed by HUD or
See HOUSING, Page 9