Loosening the Markets

In the first of two responses to Brent Cebul and Michael Glass, Chelsea Kirk writes about affordable housing in Los Angeles today.

The guiding logic of contemporary housing policy is disarmingly simple: if we just build more, prices will fall. Expanding supply—by deregulating and streamlining approvals, eliminating rent control, expanding tax credits, and abandoning deed-restricted affordable housing—will entice private developers to build at scale and, in so doing, lower rents for all. It’s a logic that depends, in part, on what economists call “filtering,” meaning that today’s luxury apartments will age into tomorrow’s middle-income rentals, and that yesterday’s middle income rentals will eventually house the working class. A simple and persuasive narrative, it nonetheless fails entirely to account for the role of corporate landlords, financial speculation, and political influence in shaping how housing is built and occupied.

Deregulation of the market has done nothing to lower rents. Far from delivering affordability, efforts to accelerate private development have done far more to fuel speculation, inflate land values, and displace tenants.

Los Angeles embodies this contradiction. Its market has been loosened in an effort to, supposedly, fix the housing affordability crisis by increasing supply. In practice, one of the most visible outcomes has been the sale of private, long-inhabited buildings to developers (often registered under a faceless shell company) who in turn evict tenants, many of whom have been resident for ten, twenty, or thirty years. Buildings are demolished in order to make way for higher-density development, which is designed to maximize profits and returns on investment. Often, a handful of “affordable” units will be granted in exchange for permission to build taller than zoning would normally allow.

For their part, the former tenants must now search for housing in a city where affordable options are scarce. Until recently, they could put their names on a voucher waitlist that runs twenty years, but as of this year, that list has closed due to funding constraints. What usually happens is that people are forced to move farther away, lengthening their commutes, or giving up their jobs altogether. This involves uprooting children from their schools, sometimes from grandparents who provide childcare; it means finding new churches and doctors, making new friends and neighbors.

New urbanism in Los Angeles

What economists and supply-side urbanists, i.e. YIMBYs, call filtering never takes place. Instead, units at low rents are torn down to make way for more units at higher, market-rate rents. Because the State of California prohibits municipalities from controlling rents between leases—stabilized rents resetting to market between leases—the units left behind by the new, higher-income tenants are not affordable to a working class household. Paradoxically, as we see, the new density—so celebrated by these supply-side urbanists—has actually eroded existing affordability, replacing it with expensive market-rate apartments all while delivering windfall profits to developers.

In the case of Los Angeles, new developments almost always undermine working-class neighborhoods—like Koreatown, West Adams, and Westlake—where relatively dense, rent-stabilized multi-family housing already exists. In contrast, resource rich, low-density areas like Brentwood, dominated by affluent homeowners, are largely spared, despite being ideal candidates for the kind of dense development that supply-side advocates claim to support. The developer’s rationale is not hard to understand: it’s far easier and more profitable to demolish rent-stabilized buildings in working-class areas where land is cheaper and political resistance is weak than it is to challenge the political clout of single-family homeowners or acquire their costly land. The return on investment in working-class neighborhoods is higher and, for private developers, that is the only metric that matters.

The legal mechanism that enables this erosion of affordable rent-stabilized housing—the best defense tenants have against predatory landlords—has been the Ellis Act (1985). This California law allows landlords to “exit” the rental business, and demolition itself has come to count as one such exit. Since 2001, landlords have invoked the Ellis Act to remove more than 30,000 rent-stabilized homes in Los Angeles. Where replacement has occurred, it has overwhelmingly taken the form of market-rate housing, and where it’s been rent-restricted as “affordable,” rents remain far above what displaced tenants can pay.

Here it is worth pausing to explain what “affordable housing” means in the US. By tradition, a unit is considered “affordable” if rent and utilities cost less than a third of one’s household income. Beginning in the New Deal era, affordability was ensured through public housing, constructed, owned, and operated by local housing authorities with federal support. In periods of high inflation, such as World War II and the Korean War, the federal government also protected affordability through extending price controls to private rents, which local governments have continued—Los Angeles’s municipal Rent Stabilization Ordinance dates to the high-inflation year 1979. Rents in public housing, meanwhile, were tied to tenants’ own incomes.1A 1969 amendment to the Housing Act capped rents in public housing at 25 percent of a tenants’ income, a limit that was raised to 30 percent in 1981. For private rents, the history of regulation has been toward vacancy decontrol, eroding affordability of rent-stabilized housing. Since the 1970s, however, the US has shifted away from producing public housing and regulating private rents, and the meaning of affordability has shifted too, into a market category. Now, the government outsources production to private developers through the Low Income Housing Tax Credit Program (LIHTC, pronounced lie-tech) by giving out $13.5 billion a year in federal tax credits to developers in exchange for building housing based on income limits tied to an area’s median income, not the actual incomes of tenants.

The LIHTC program has produced about 3.7 million units thus far—roughly 2.5 percent of the national housing stock—but rent levels are no longer set according to household income. Instead, they are set by income limits derived from an entire area’s median income (AMI), with the price system ostensibly “filtering” where tenants live. But in an unequal city like Los Angeles, with a high proportion of wealthy houses, the AMI is inflated. Because rent stabilization allows rents to rise to market between leases, the only places the price system leaves for displaced tenants to “filter” to are often outside the city altogether. LA County’s AMI is $106,600; most recent LIHTC units are reserved for households earning 80 percent of that figure, or $84,280 per annum—an incredibly high income to act as a threshold to affordability. Those eligible for the scheme can be asked to pay $2,121 per month in rent.

Affordable housing in action

To make matters worse, because LIHTC is mostly a private enterprise, with only 20 percent of units produced and operated by nonprofit developers, rents are typically raised each year by the allowable maximum increase of up to 10 percent. Corporate landlords such as Blackstone now participate in the program, and once the affordability covenants on these units expire in thirty to fifty-five years, rents will reset to market rates.

The proponents of deregulation, so-called “YIMBY” urbanists, argue that the loss of rent-stabilized housing is an acceptable trade-off for increased net housing production. A recent study shows that demolitions under the Ellis Act have resulted in a 195 percent net gain in housing units (39,761 added versus 13,455 lost). But this statistic masks that the units destroyed were the city’s most affordable homes, often occupied for decades by working-class families.

Politically, city leaders present deregulation as proof of urgency and pragmatism; cutting red tape, they claim, will deliver the housing Los Angeles so badly needs. Tenant advocates—and displaced tenants themselves—push back, pointing to developer profits and asking the obvious question: who is this new housing—a studio apartment priced at $2,500 per month, for example—for? But when deregulation is tethered to the slippery concept of “affordable housing,” opposition is perceived as NIMBYism, and support becomes the only acceptable position.

A recent effort in Los Angeles to increase affordable housing production has only accelerated the loss of rent-stabilized units. Just four days after taking office, Mayor Karen Bass unveiled Executive Directive 1 (ED1), a plan to fast track the approval of projects that are, according to the jargon, 100 percent affordable. Under ED1, new projects must be earmarked either exclusively for households earning up to 80 percent of AMI, or otherwise be mixed-use projects in which up to 20 percent of units can be rented to households earning as much as 120 percent of AMI. This means that a one-bedroom household costs $3,636 per month to rent, and is made available to households earning $145,450.

Within weeks of ED1’s rollout, working-class tenants across Los Angeles began receiving eviction notices that their homes were being demolished to make way for “affordable housing.” The promise of streamlined approvals and guaranteed profit attracted a flood of opportunistic developers, many with no experience in affordable-housing development. Among the celebrity investors were former NBA players Terry and Tobias Harris, who are spearheading ED1 projects in Echo Park. By July 2024, tenant groups had pressured Bass to issue a revision of ED1, which exempted properties with twelve or more occupied rent-stabilized units.

Perhaps the most egregious feature of ED1 is that it explicitly excludes single-family zoned neighborhoods from eligibility. The program acknowledges the urgency of affordability—only so long as it does not disrupt the preservation of these single-family zoned districts, which make up 75 percent of all residential land in Los Angeles. Homeowners perhaps remain a more politically powerful constituency than developers, at least in this instance, and the result is that the burden of ED1 has fallen on working-class tenants rather than on the affluent neighborhoods best positioned to absorb new housing.

Landlords as an interest group

Yet it would be a mistake to assume that the political influence of real-estate developers has been weakened because single-family homeowners have successfully insulated their neighborhoods. On the contrary, their power operates differently but no less decisively, as the case of Barrington Plaza shows. Originally built through Section 608 FHA financing, the 712-unit complex became the site of Los Angeles’s largest eviction in recent history, when in 2023 the owner, Douglas Emmett, Inc., issued Ellis Act notices to more than 700 households under the pretext of sprinkler retrofits—a blatant misuse of the Ellis Act. The real estate company contributed $400,000 to an independent expenditure supporting the incoming councilmember Traci Park, with employees adding nearly $10,000 more directly to her campaign. After Park took office, and the evictions were issued, no meaningful intervention came from the city. It took two years of private litigation to rule the evictions illegal, but by then the majority of the 522 households who had occupied Barrington Plaza had already moved out.

The story Cebul and Glass tell about FHA Section 608 is, undeniably, one of egregious profiteering. Developers manipulated cost estimates, inflated land values, and exploited legal loopholes to pocket millions, often with the approval or direct collaboration of FHA officials. The scale of dishonesty and greed was staggering. But the deeper failure wasn’t just the behavior of these builders, as the historians show. It was the political decision to entrust the provision of affordable housing to private actors driven by profit. As Cebul and Glass recognize, this wasn’t a case of a few bad apples; it was a structurally flawed system designed to produce precisely these outcomes.

If the development and operation of this housing had been carried out by public actors much of this may have been avoided. Policies that rely on profit-seeking developers will always be compromised by the incentive to extract value rather than provide it. Real-estate greed cannot be regulated out of existence so long as private landlords and developers remain central to the system. Section 608 failed not only because some developers acted dishonestly, but because it was built on the flawed premise that private actors, if properly incentivized, would serve the public good. That premise was wrong then, and it remains wrong today.

A serious response to the housing crisis requires more than tweaks to financing tools or incentives. It demands a departure from the private market system altogether. This means taking on the political power of both homeowner and developer interests, so that governments can be properly pressured to invest in new meaningfully affordable housing.