The Age of Subsidized Rental Housing

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The massive Dodd-Frank bill has only a little to say about the housing market. It offers no substantial solutions for the problems of Fannie Mae and Freddie Mac and makes only minor modifications to the home mortgage business.

But don't look at Dodd-Frank and conclude that the Obama Administration doesn't have big changes in mind for the government's role in housing. Indeed, earlier this year the Secretary of Housing and Urban Development, Shaun Donovan, signaled what's to come when he told a roomful of nonprofit housing advocates that they should take inspiration from the notion that "a crisis is a terrible thing to waste."

Given that Donovan's own extensive background is largely in nonprofit, subsidized housing, the direction for housing policy that's starting to emerge in the administration is hardly surprising. It intends to pull back from the notion that the feds should be supporting home buying at any cost (a good thing surely), but will put more of an emphasis on government subsidies for ‘affordable' rental housing.

Donovan earned his credibility as a candidate for the HUD job by serving for four years as housing commissioner in New York City, a place that has essentially socialized its housing market with policies like rent control, which discourage housing investment, and with elaborate zoning and building restrictions which drive up the cost of housing, creating what SUNY Professor Peter Salins has dubbed "scarcity by design." The city's answer to that scarcity is an elaborate policy of subsidies to build middle-class housing and a massive network of 340 low-income projects encompassing 2,600 buildings over 2,500 acres of what Manhattan Institute housing expert Howard Husock calls a gigantic "frozen city," where the normal turnover in housing doesn't occur because government policies encourage people to live in these Soviet-style projects for their entire lives.

The world that Donovan knows, in other words, is the world of perpetual government housing intervention to build and operate many kinds of housing. In the 1980s, New York City government embarked on a $6 billion program to construct and rehabilitate 100,000 units of housing, and when the massive program was done the city still had a housing shortage. The Bloomberg administration fashioned another gigantic ‘affordable' housing program administered for a time by Donovan, to build a 165,000 units. When it is done New York will still have a housing shortage, because government and the housing nonprofits it supports can't build housing fast enough.

But the federal government under the Obama administration will surely try. Donovan managed to get private developers to build affordable housing in New York using what's known as ‘inclusionary zoning,' which is a fancy phrase for a process whereby government allows a builder an exemption from onerous building regulations if he agrees to use it to include in his project a certain number of affordable units, defined as reasonably priced to those earning 80 percent of local median household income. In other words, government creates the restrictions that drive up the cost of housing and then grants favored builders the right to forego some of them, but only to build what government wants built.

There's a certain self-sustaining nature to this system, because it has helped to create a vast network of nonprofit and specialized for-profit building and housing groups in thrall to municipal, state and federal policies. Our new federal housing policy will nourish ever more of these groups. Earlier this month, for instance, Donovan touted a new program that gives first dibs on properties foreclosed by the Federal Housing Administration to community and faith-based groups, who get to see and buy this stuff before it is opened up to investors, at 10 percent below appraised value. If the folks who run these groups have any brains about them, they will of course snap up the best properties (the ones that investors would be more likely to bid up) before the bidding starts, thanks to federal generosity.

At the same time the Obama administration is working on a plan that would pump billions of investor dollars into public housing, using tax credits and maybe a little bit of political leverage to rehabilitate and sustain a system that can no longer support itself.

The original notion of public housing was that government would build these projects and they would afterward be self-sustaining, using rents for upkeep. But over time federal and local policies demanded less and less of a contribution from public housing tenants so that the projects could no longer get by on rents. Many have fallen into disrepair, with some $30 billion in deferred maintenance.

In March, the administration signaled its intentions when it bailed out 21 New York City housing projects with a deal that made them eligible for a $200 million ‘investment' from Citibank in the form of bonds that the bank purchased in order to earn credits toward fulfilling its Community Reinvestment Act obligations. For those of you wondering what a virtually insolvent bank is doing using precious capital in this way, it's worth remembering who actually controls Citibank these days - the federal government. In addition, the feds included billions of dollars in the stimulus bill to pay for more deferred maintenance around the country. As an example, New York's housing authority got some $423 million to pay for work that rents can no longer support.

Now the administration is looking at aiming real money toward public housing. Earlier this month it introduced the Preservation, Enhancement and Transformation of Rental Assistance Act, which would allow public housing projects to convert to a pseudo-private status so that they could qualify for federal vouchers for rent subsidies, which they could then leverage to attract private capital. The housing projects wouldn't actually be privatized; that would be revolutionary. They'd remain in public hands with even greater subsidies and with private financing attracted by federal credits.

There are revolutionary things happening in rental housing, but just not by the people in the Obama administration. Atlanta, for instance, knocked down its public housing projects and got private developers to replace them with mixed middle income-low income properties. Able-bodied residents who live in the low-income units must have a job and be working toward graduating out of the subsidized housing. That's in sharp contrast to policies in most public housing projects, where the nature of the rent subsidy encourages residents not to better themselves lest they risk no longer being qualified for public housing.

But what Atlanta is doing undermines decades of federal rental housing policy which sees the poor as victims of an unjust economic order stuck forever in poverty. Such innovations also threaten the web of nonprofit housing groups living off current policies. The housing whizzes in the Obama Administration didn't go to Washington to do that.


Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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