San Jose Case Study, Part One: The Urban-Growth Boundary

Randal O'Toole The Thoreau Institute
rot@ti.org
http://www.ti.org

12/6/02

In 1970, the microprocessor was yet to be invented; hardly anyone --
not even science fiction writers -- had imagined personal computers;
and if you mentioned the World Wide Web to someone they probably
would have thought you were talking about some international
communist conspiracy.

Despite this huge uncertainty about the future, planners in the City
of San Jose felt confident enough to write a twenty-year plan that
would lock the region into ever-spiraling housing prices. As a result
of their plan, within twenty-five years San Jose housing prices would
increase by 930 percent, more than in any other major U.S. housing
market.

San Jose is California's oldest city, but it was a sleepy town of
less than 100,000 people in 1950. Under pro-growth city manager A.P.
Hamann, San Jose nearly quintupled in population from 1950 through
1970, representing an incredible 8 percent annual growth rate. By
comparison, Las Vegas, the fastest growing major U.S. city in the
last decade, is growing at only about 6 percent per year.

Part of San Jose's growth was due to an aggressive annexation program
that octupled San Jose's land area in twenty years. As a result, the
city's population density declined from more than 5,600 people per
square mile to less than 3,300.

Growth Controls Introduced in the 1970s

Soon after Hamann retired in 1969, however, San Jose elected a
succession of mayors and city councils with a very different attitude
toward growth. First, Norman Mineta was elected mayor in 1971 and
served until 1974, when he was elected to Congress. Of course, Mineta
is now Secretary of Transportation.

Mineta was succeeded as mayor by Janet Gray Hayes, an outspoken
opponent of Hamann's growth policies, even though she herself was a
beneficiary of those policies, having moved to San Jose in the 1950s.
Hayes initiated a downtown revitalization program that eventually
pumped nearly $1.5 billion into downtown San Jose. While downtown has
several museums and tax-subsidized hotels, the retail sector remains
lethargic and all but a tiny percentage of jobs are located elsewhere.

Under Mineta, the city wrote a land-use plan (known as the "General
Plan") that called for curtailing growth. The plan covered not just
the 136 square miles in the city limits but another 200 square miles
that the city deemed to be with its "sphere of influence." With the
complicity of Santa Clara County, the city conspired to limit or
prevent development from taking place on this 200 square miles of
land.

When the plan was written, planners estimated that 643,000 people
lived within this "sphere of influence," or at least 100,000 more
than in the city itself. The plan considered four alternative
populations for 1990: 643,000 (zero growth), 795,000 (which the plan
called moderate growth), 878,000 (which the plan called high growth),
and 1,036,000 (which the plan called maximum growth).

The "high" and "maximum" alternatives, however, were considered
"undesirable" because they would be "too costly in terms of
environmental quality and public facilities." Even the high growth
alternative, said the plan, would be bad because "the densities
required to house the population . . . would be appreciably higher
than current typical densities" -- unless, of course, growth were
allowed to spill over into the area that the city did not want to see
developed.

The twin goals of the plan, then, were to keep growth within an
urban-growth boundary and to keep the density of housing within that
boundary from growing "appreciably higher than current typical
densities." Of course, the plan did not say how it would keep
population growth from exceeding "desirable" rates or what would
happen if the city were forced to choose between expanding the
boundary and appreciably increasing densities within the boundary.

The boundary (which wasn't originally called an urban-growth
boundary) excluded the hills around San Jose above the
"15-percent-slope" line. It also excluded certain areas of valley
bottom, notably the Coyote Valley and South Almaden Valley.

Actual Growth Outstrips Planned Growth

By 1990, San Jose's population had grown to 782,000. If 100,000 more
people still lived outside the city but within its "sphere of
influence," then the region's population had grown at the undesirably
"high growth" rate.

While San Jose might have limited growth within its sphere of
influence, it couldn't stop Santa Clara County from growing by nearly
half a million people between 1970 and 1990. The Census Bureau says
that more than 400,000 of those people moved into the San Jose
urbanized area. By coincidence, the Census Bureau's urbanized area is
almost exactly the same size as San Jose's sphere of influence. The
urbanized area, however, includes a number of cities that had
incorporated in the 1950s and 1960s to escape from being annexed by
San Jose.

The growth limits imposed by San Jose combined with pressures to grow
faster than San Jose deemed "desirable" led to rapidly inflating home
prices. According to the Department of Housing and Urban Development,
between 1976 and 1990, the price of a typical home grew by 365
percent (http://www.ofheo.gov/house/3q02hpi_msa.txt). This was about
three times as much as in Portland (122%), Denver (126%), Atlanta
(114%), or Dallas (117%).

Despite the growing unaffordability of housing, the city wrote a new
General Plan in the 1990s that basically affirmed the growth boundary
(which it now formally called the urban-growth boundary). The basic
excuses for not expanding the boundary were that it would lead people
to drive too much and pose high urban-service costs on the city.

The 1994 General Plan classified the Coyote and South Almaden valleys
as "urban reserves." These areas would be added to the boundary, said
the plan, only under certain strict conditions:
* Enough new jobs were available in those areas to allow new
residents to minimize commuting;
* Funding was available to pay for all the capital costs of new
urban services; and
* The city's future budget was considered "stable" enough to pay for
operations and maintenance of those urban services for at least five
years.

Note that these "triggers," as the plan calls them, have nothing to
do with housing prices. Despite the fact that housing continued to
become less affordable every month, the city refused to permit
development of these areas. Cisco Systems wanted to build a new
factory in the Coyote Valley, and homebuilders were more than happy
to pay for construction of all necessary infrastructure. But the city
argued that its finances weren't stable enough to insure that it
could maintain that infrastructure.

The Nation's Fastest Rising Housing Costs

So housing prices continued to grow, nearly doubling in the 1990s. In
the twenty-five years preceding the middle of 2001, San Jose housing
prices had grown by 936 percent, more than any other major urban
area. During the same period, housing prices grew by 821 percent in
San Francisco, 584 percent in Seattle, 398 percent in Portland, and
just 138 percent in Houston.

Today, a fifty-year-old, two-bedroom house that would be considered a
"starter home" in most cities sells for around $400,000 in San Jose.
In October, 2002, the average sale price of a single-family detatched
home in Santa Clara County was $641,000, while the average condo or
townhouse sold for $372,000.

According to Coldwell Banker
(http://www.coldwellbanker.com/html/HPCITable.htm), a
2,200-square-foot, four-bedroom home that would cost $160,000 to
$180,000 in Las Vegas or Houston costs nearly $630,000 in San Jose
and even more in other Silicon Valley communities. This suggests that
land-use planning has more than tripled the cost of San Jose housing.
While San Jose is only the 25th (out of 317) most expensive city on
Coldwell Banker's list, most of the top twenty-four cities are also
in the San Jose, San Francisco-Oakland, or Los Angeles urban areas
and thus suffer from many of the same growth restrictions.

Vanishing Auto update #29 (http://www.ti.org/vaupdate29.html)
suggests that two sorts of government policies are largely
responsible for unaffordable housing: urban-growth boundaries that
drive up the cost of land and land-use regulations that make
subdivisions more time-consuming and expensive. San Jose suffers from
both problems. In the Hamann era, subdivisions could be approved in a
few months; today, it takes years. This delay is certainly a partial
cause of high housing prices.

But the urban-growth boundary bears the brunt of responsibility.
Because of the boundary, an acre of land suitable for housing can
cost well over a million dollars, or roughly 40 to 50 times as much
as in many cities without such boundaries. The City of San Jose
recently paid $1.7 million an acre for five acres of land, located
about 2.5 miles from downtown, on which it proposes to build
affordable housing.

One response to high land costs has been an appreciable increase in
residential densities. Census data indicate that the City of San
Jose's population density has risen from under 3,300 people per
square mile in 1970 to more than 5,100 in 2000. The San Jose
urbanized area is denser still, with more than 5,900 people per
square mile.

Housing Subsidies for the Upper-Middle Class

Predictably, San Jose has also responded to high housing prices by
either subsidizing "affordable housing" or requiring developers to
provide a certain number of "below-cost" housing units as a condition
of getting a permit to build at all.

The San Jose Housing Department proudly lists on its web site 72
housing projects built in the 1990s that provide just under 6,000
units of low-income housing
(http://www.sjhousing.org/project/listproj.html). These are mostly
apartments but include some condominiums and even a few single-family
homes.

The web site reveals that San Jose has spent nearly $180 million
subsidizing this housing, not to mention tens of millions in
city-backed, tax-exempt bonds, below-market land sales, and other
indirect subsidies. The direct subsidies alone amount to $30,000 per
dwelling unit. In many projects, these subsidies are matched by
support from churches and other charitable organizations.

On a per unit basis, the most heavily subsidized project was
thirty-five single-family homes on 3,500-square-foot lots "located in
the desirable Almaden Valley." San Jose provided $142,000 per home to
make these houses available to "moderate income families." This
presumably reduced the price of these homes -- for less than three
dozen lucky families -- from nearly $500,000 to around $350,000.

Of course, everything is distorted in Silicon Valley, including the
definition of very low, low, and moderate incomes. The average income
for a family of four in Santa Clara County is $96,000. Even at
today's low interest rates, with a ten percent down payment, this is
barely enough to afford a $400,000 house -- and, as noted, such homes
are rare in San Jose. The National Association of Home Builders says
that a median income family can afford to buy only 20 percent of the
homes available for sale in San Jose.

The San Jose Housing Department thus defines "moderate income" for a
family of four as up to $96,000 a year
(http://www.sjhousing.org/data/eligible.html). "Low income" is up to
$74,000 a year and "very low income" is up to $48,000 a year for a
family of four.

Even the moderate income definition leaves out many who are hurt by
high housing costs. To qualify for a loan, even at today's low
interest rates, someone wanting to purchase an average home in San
Jose, with a ten-percent down payment and thirty-year payoff, would
have to earn more than $120,000 a year.

Many of the cash subsidies provided by the city come from the federal
government, which leads to an interesting irony. Nationwide, the
median income for a family of four is about $62,000. This means that
many taxpayers outside of San Jose are paying to subsidize housing
for San Jose families who earn more than the people subsidizing them.

This irony, however, is less important than the fact that San Jose's
efforts to subsidize affordable housing are a drop in the proverbial
bucket. San Jose has about 280,000 households, half of whom (by
definition) earn less than median income. This means that the 6,000
units of subsidized housing help just 4 percent of those people. And
in most cases, this doesn't represent much help, since the subsidies
average just 20 percent of the cost of homes or apartments that are
priced more than three times too high.

The inconsequential nature of housing subsidies is even more apparent
when comparing the value of San Jose housing with those subsidies. If
the average single-family home is worth $640,000 and the average
multi-family home is worth $370,000, and 60 percent of San Jose
dwelling units are single-family, then the total value of San Jose
housing is nearly $150 billion. Since (compared with relatively
free-market cities such as Las Vegas or Houston), San Jose housing is
priced more than three times too high, about $100 billion of this
value is caused by land-use regulation and the urban-growth boundary.
Spending $180 million in a decade on "affordable housing" will not do
much to mitigate this cost.

Fixing San Jose's problems won't be easy. The biggest beneficiaries
are people who owned land or housing before the 1974 General Plan.
Since San Jose's population has nearly doubled since then, and less
than two-thirds of San Jose families were homeowners in 1974, more
people have been harmed than helped. Yet 62 percent of San Jose
families own homes today, and they aren't going to want to see the
drop in home values that would result from eliminating the
urban-growth boundary or relaxing land-use regulations.

So it is not surprising that there continues to be strong opposition
to opening the Coyote and South Almaden valleys to development.
Opponents are brash enough to claim that developing these areas would
lead to "increased gridlock, worsening air quality, and soaring home
prices," when in fact the opposite is true. Former Mayor Janet Gray
Hayes even called a plan to develop Coyote Valley "the Los
Angelization of San Jose" (both quotes from
http://www.savecoyotevalley.org/press_conf2.html). In fact, it is her
densification and congestification that is turning San Jose into Los
Angeles, the densest and most congested urban area in America.

Part two of the San Jose case study will look at San Jose's
light-rail system in Vanishing Automobile update #32.
_________________________________________________________

Randal O'Toole The Thoreau Institute
rot@ti.org http://www.ti.org

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You can learn more about maintaining affordable housing by attending
"Preserving the American Dream of Mobility and Homeownership," a
national conference that will be held in Washington, DC, on February
23-25, 2003. For more information, see http://www.ti.org/amdream.html.

Most back issues of Vanishing Automobile updates are posted at
http://www.ti.org/vaupdates.html. Also see
http://www.ti.org/urban.html for articles and op eds and
http://www.ti.org/urbanmobility.html for other analyses of urban
issues.