Declining home prices lowering costs for affordable housing units.

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Falling housing prices are narrowing the price gap between market rate homes and affordable housing units set aside for low-income buyers. As a result, some developers report slower sales of affordable units in their projects.

Affordable housing units can only be purchased and resold to people who qualify for the program, which is persuading some potential owners to buy market rate units, which cost a little more but have no deed restrictions, said Reese Jarrett, a principal with Carter Reese & Associates, which developed the mixed-use Renaissance Center in North Park. "It's made it more difficult to sell (affordable units) because there's only a narrow band that can qualify income-wise," said Jarrett.

"People have more options. Rather than get into a restricted affordable unit, they can buy unrestricted and pay a little more for less product."

The Renaissance project on El Cajon Boulevard contains 24 market rate units, 14 affordable housing units for sale and 98 senior apartment rentals.

All of the 24 market rate units were sold out by March, but three of the affordable housing units remain unfilled.

The developer, which originally set out to develop the old Aztec bowling alley site for market rate homes, was approached by city officials about building a larger scale project. "We felt it was the right thing to do m terms of improving the neighborhood," Jarrett said.

Nearly $19 million of the $32 million project came from public sources, including the San Diego Redevelopment Agency, San Diego Housing Commission and state and federal tax credits.

Housing Needs

The city of San Diego mandates that developers set aside a percentage of their units for affordable housing or pay in-lieu fees, equal to $5.01 per square foot of market rate units into the Housing Commission's Affordable Housing Trust Fund, said Erika Rooks, Housing Commission spokeswoman.

Many developers choose to pay the fees because it's cheaper and easier, but some will add an affordable component into their projects--the mandate for which is 20 percent above Highway 56 and 10 percent elsewhere in San Diego. In exchange, developers can receive a density bonus as high as 35 percent, depending on the area of town, said Rooks.

"They can build a project 35 percent larger. That's a huge incentive," said Eri Kameyama, associate project manager with the Centre City Development Corp. "This is very high compared to the state density bonus."

Developer DR Horton, for example, typically includes affordable housing in its urban projects, said Josh Miller, who markets DR Horton homes at its three projects: La Boheme in North Park, Esperanza in Encanto and Atlas in Hillcrest.

In two of those projects the only remaining openings are affordable units because the market rate prices have fallen, allowing the regular-rate units to be snatched up.

At La Boheme, the 214 market rate units were sold months ago, but two of the 45 affordable housing units remain open, priced $50,000 below market rate units, according to Miller. La Boheme also received a $3.9 million subsidy from two city redevelopment agencies.

At the 29-unit Esperanza townhome project, all 26 market rate homes have sold, but two of the three affordable housing units in the project are still for sale, at 30 percent below the market rate homes.

But at Atlas, the project's six affordable housing units are priced 50 percent below market value. All of them have sold, whereas 12 market rate homes in the 63-home project are still available. The affordable units, priced from $170,000 to $190,000, are well below the market rate unit prices, which are $338,000 to $644,000. They also have fewer restrictions. They can become market rate units in 15 years instead of the typical 45-year restriction, Miller said. That means after 15 years, the owner does not have to resell to a qualified buyer and does not have to split any profit with the city.

Questionable Policy

Affordable housing has its share of critics, who say it increases housing costs for everyone as developers pass on sunken costs to buyers.

"It's an awful policy. It makes no sense on virtually every test except the social feel-good test--and even then it fails in my mind," said Gary London, principal of the London Group in San Diego. "It makes the feasibility of projects more narrow; profitability goes down because you have that much inventory of non-profitable units; and it therefore limits the opportunity to go forward with projects, certainly in a down market."

The price of an affordable housing unit is pegged to area median income--which is currently $72,100 for a family of four. In a perfect world, they would pay only a third of their monthly income on housing.

That same family could qualify for a four-bedroom, $240,000 home in the all fordable housing program.

However, some market rate units are getting close to that price in a few neighborhoods. At Carter Reese's Encanto Urban Village, eight market rate units still available in the 26-unit complex are now priced at $240,000, which is $6,000 less than the affordable units sold for back in May 2006, said Jarrett.

"We've been dropping prices as the market continues to deteriorate," he said.

First-Time Buyers

While such tales are eye-catching, they are the exception, says Jason Luker, development services director for The London Group.

"That's a small percentage. The affordable housing demand will never be supported by market rate units," said Luker, who said there are 150,000 San Diegans who should qualify for affordable housing--but only hundreds of units are built a year. In 2007, 795 affordable rental units were created, and 74 affordable homes were purchased, according to the Housing Commission.

Luker added that some affordable housing programs are ironically enhanced by the falling market.

Prices are now within range of city programs to assist first-time homebuyers he said.

And while prices on market rate homes are falling, they are also more difficult to finance now. Affordable housing programs allow qualified buyers to put down three percent, compared with 10 to 20 percent down-payment requirements by private lenders.

Such is the case at Smart Corner, the downtown 301-unit tower developed by Lankford & Associates Inc. Its affordable housing units, which are all studios, are outselling their market rate counterparts, even though they aren't that much cheaper, said sales agent Ewuld Gruber.

Twelve of the 27 affordable units have sold. They are priced at two tiers: $168,000 and $224,900. But only 25 units have sold among the 69 market rate condos, which start at $246,000 and increase by $5,000 each story higher, said Gruber.

"Anything you want to purchase requires a minimum requirement of 10 percent down if you have stellar credit. If not, you have to come up with 20 percent," Gruber said.

He added, "We have a lot of buyers that have come in and would like to purchase, but then when you start qualifying them through the bank, that's where the issues are."