The Most Destructive Housing Form


By Jean Simonian

The latest round of debate on the rezoning of Bloomington’s core has focused a lot of attention on the proposal to allow development of large multiplex apartment structures in core neighborhoods now zoned for single-family houses. That’s understandable; quadplexes would be big and conspicuous, towering over most of their neighbors, and each one would swell the population of the neighborhood, a dozen bedrooms at a time. And the City’s incomprehensible proposal to cram the largest plexes onto some of Bloomington’s smallest lots has baffled residents.

But the controversy isn’t only about the big plexes. The Planning & Transportation Department’s proposal would eliminate single-family zoning altogether (ostensibly citywide), imposing duplexes, triplexes and quads by right throughout core neighborhoods. The bigger structures stand out, but for dense neighborhoods, the most destructive housing form envisioned isn’t the quadplex — it’s the duplex. 

The permitting of these structures is an invitation to corporate developers to buy up Bloomington’s dwindling supply of single-family homes (especially the older, smaller ones on small lots that still can be bought for owner occupation relatively inexpensively in core neighborhoods) and convert them to rental housing. Once corporate developers and their investors see a final, approved zoning ordinance, and have certainty about what they can and can’t do in Bloomington, they are likely to accelerate their investments in ownership-to-rental conversions here. The opportunity to convert a single stream of rent revenue to as many as six streams in a duplex will be irresistible.

We know this already is happening to a degree in single-family neighborhoods; in multiple public input sessions on the zoning map and UDO amendments introduced last fall, Planning staffer Jackie Scanlan acknowledged this readily, and admitted it was driving up home prices (and land values, and increasing property tax assessments). 

Big national residential real estate investors have enormous capital resources. They will be able to outbid even local developers (to say nothing of individual prospective homeowners) for properties, as they have in many inland Midwestern markets. At that point, buying for conversion won’t be piecemeal — it will transform entire neighborhoods, because big, private equity-backed developers can buy homes essentially in bulk.

But what makes duplexes the most dangerous housing form?

In a word, velocity. Duplexes can proliferate fast. They’re relatively cheap to develop. They bring the investor all the financial benefits of rental conversion (and the neighborhood all the negative effects of rentrification) without requiring the developer to make the commercial-grade investment (fire-control sprinklers, HVAC, etc.) a triplex or quadplex would require. 

Some of Bloomington’s core neighborhoods are historically designated districts with neighborhood-specific design guidelines that can restrict construction of the largest plexes (e.g., through height restrictions) and limit teardowns of historic houses. Duplexes, however, can’t be contained by historic preservation guidelines because they don’t have to be big and a lot of them can be built without teardowns.

In many neighborhoods, the chief worry is the rapid conversion of stable homes occupied by permanent residents who invest in their upkeep to over-occupied rentals marketed to transient students. Farther from campus, the main concern is simply the loss of naturally occurring affordable housing for ownership.

Either way, duplex conversion is a more urgent concern than large plex development because it consumes the owner-occupied housing inventory much faster. Development of four units of rental housing via duplexing will take out two existing single-family houses — a fourplex would only take out one.

The trouble with rentals

So what’s wrong with more rental in the neighborhoods? Bloomington’s rentals already account for at least 66% of all residential property. One reason that home prices remain higher than most would like is because there are relatively few of them available to buy. And of those that are available, the pricing is artificially increased due to the potential for rental income earned. 

While core neighborhood homes, on average, are less expensive to buy than suburban homes, too many cannot afford them on low Bloomington wages. The result has been that many who work in Bloomington choose to buy homes in surrounding areas where pricing is far more reasonable because there is no upward pressure from rental demand.

It would be nice to think that duplexing would help with affordability. Shouldn’t half a house be less expensive than a whole house? It seems intuitive, but there’s very little about Real Estate that is intuitive!

Builders tell us that duplexing an existing house is a relatively inexpensive task in most cases. So if halves could be offered for sale, why wouldn’t each be half the whole house cost?

About half the value of a single family property in a Bloomington core neighborhood is embedded in the land cost. (It varies by neighborhood; consult your own property’s assessment to get a sense of it in your own case. But in core neighborhoods, 50% is a rough guide.) Land cost is key to understanding the way housing prices will trend.

As Christopher Herbert, Director of the Harvard Joint Center on Housing Studies, notes: Although the cost of the land under a duplex is divided into two halves on paper, as soon as an area is upzoned to allow duplexing, the value of the land rises.

The same increased costs would be likely for a newly constructed duplex, but as with all new construction, pricing would reflect increased materials and labor costs. Mortgage and insurance costs also tend to be higher for duplex structures than for single family structures (since there are two risk profiles to consider instead of one).

Increases in land value and the increased prices paid for comparable neighboring houses that are now producing rental income streams also increase land assessments and property taxes, which will be reflected in both sales prices and rent of units. In Real Estate math, 1⁄2 plus 1⁄2 equals more than 1.

Halves of duplexed houses would rarely be available for sale, anyway. In a demand rental environment, they are simply too lucrative as rental properties to be offered for sale. 

Value-added investment

Because duplexing increases both sales and rental pricing, it also contributes to increased wealth inequality. The more home sales pricing and rental pricing increase, the more expensive it is to purchase or to rent a house. Duplexing and rental conversion results in displacement for tenants who cannot afford the post-duplexing increases in rent. This happens after any rental structure undergoes renovation. 

In financial industry jargon, this strategy is called “value-added investment.” In this context it refers to the renovation of an older structure placed back onto the market generally at a 20% increase in rental pricing.

As older houses in the core neighborhoods already provide some of the lowest rental pricing in Bloomington, there is no cheaper housing to replace it, unless the tenant displaced by the duplex conversion qualifies for rent subsidies on an apartment in the few areas of Bloomington where such subsidized housing exists. Displacement will mean that increased density through duplexing will result in less affordability for those who need it most.

Once again, for the owners, higher assessments mean higher property taxes. Let’s remember that families are juggling mortgage and child care expenses already, and often it’s a precarious balance. It is not beneficial to the community at large for families to lose their homes. For most elderly homeowners, their home is their primary financial asset and source of stability. The more they can age in place, the better for them and the community at large — but that will become difficult if their properties become too expensive to be maintained. Displacement can happen to both renters and owners.

The Bloomington context

Bloomington’s core neighborhoods are high demand rental areas because of the expansion of Indiana University and the continual shifting of the student housing burden to the City. The basic objective for a rental property owner is to maximize rental income, and duplexing offers an easy way to do so. 

We’ve seen this before in Bloomington. In the 1970s and ’80s, the City saw rapid over-occupation of older homes in core neighborhoods to provide housing for students. Every square foot of space was utilized to provide more and more bedrooms: Porches were enclosed, living rooms split in half, box additions attached to the backs of houses. In Green Acres, a neighborhood adjacent to the IU campus, home ownership declined 20% from 1980 to 2000.

Single family zoning and occupancy limits in the 1990s under Mayor Tomilea Allison cut down on the destructive neglect of houses, stopped the overcrowding of spaces, and stabilized neighborhoods (although many of those houses’ higher occupancy limits are grandfathered to this day in the form of existing plexes). As profit-motivated excesses were curbed, the rapid subdividing and conversion of houses for profit slowed. 

For a time, ownership opportunities grew because buyers weren’t forced to compete with speculators. But few of those converted houses ever reverted to owner occupancy, because they proved too valuable a source of rental income. Once a house in this kind of market is duplexed, it is lost to owner occupancy. As new construction is more expensive than existing structures, its affordability is lost as well.

The City keeps telling us that we must “build more” by any means so that supply will overcome density’s negative effects on affordability. But this too is contrary to Real Estate math. “A lot of cities are saying let’s open the spigots, we’ll build so much housing we’ll get to the point where we get vacancies,” Christopher Herbert writes. “But If developers see vacancies rise they will stop building…It’s the nature of our capitalist system.”

Herbert cites Matthew Desmond’s book Evicted, from which he extracts the maxim, “The rent eats first.”

“As long as you have that primacy of housing in terms of the pecking order of expenses, it will push rents higher,” Herbert writes.

The truth is, we have the tools to achieve additional density in Bloomington without upzoning. An owner-occupant might subdivide his or her house and rent the other half, but in terms of Bloomington ordinance, that’s not actually a duplex. It’s an accessory dwelling unit (ADU), and it’s already legal and welcome anywhere in the city where it isn’t expressly prohibited by the developer’s covenant.

A covenant is a private agreement between the homeowners in a subdivision and the developer or the homeowners’ association — e.g., prohibiting duplexing of houses. Under Indiana state law, such a covenant generally supersedes city ordinance. In the core neighborhoods, which grew organically, there are few existing covenants — none on the West Side. So ADUs already can be built with no change in zoning needed and no unintended side-effects.

Do we really want to see Bloomington at 90+% rental occupancy? Looking into the future, does anyone honestly believe that the vision of Bloomington should be of a city where only the top income tier of residents can afford to buy a home? Do we want feudalism to be our way of life?

Indiana University will be happy to further expand and let the City continue to take responsibility for its students’ housing; the City will be happy to collect the higher tax revenues provided by rental properties: and those who build and/or own rental property will be happy to collect the ever-increasing rents.

Who will be unhappy? Any resident of middle class means who is trying to buy a home; those trying to get on with living and aging in place; and those just trying to pay the rent.

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