Transparency is the gold standard of the day. In any public or private venture, the ordinary citizen is supposed to be able to understand what the issue is, who’s in charge, what the cost will be, and who is paying. This standard is rarely met, but almost nowhere is it less apparent than in housing programs. Not since the New Deal, with the 1937 legislation establishing public housing, have our political leaders been willing to confront directly the actual cost of developing and maintaining affordable housing.
Political reality simply gets in the way of good housing policy. Politicians from high cost areas are reluctant to admit how much it costs to finance, build and maintain modest housing. Government agencies impose unrealistic cost limits that are popular politically, but they do not work, especially when enacted in statutes that are hard to amend. The result has been a consistent effort to mask the true costs by providing a maze of shallow subsidies, soft second loans and tax incentives. Motivated developers, with an army of lawyers and accountants, have learned how to navigate this maze. The typical development pro-forma now easily includes as many as six sources of capital. Often 40% of the funds pay for non-construction costs. The process of putting the deals together is time consuming and ultimately more costly than necessary, although nobody really knows by how much.
The maze, often called creative financing or leveraging, has other inherent problems. The various programs have different requirements, the subsidy terms don’t match the financing terms, and the affordable housing projects are often left in jeopardy.
So let’s forget about realism and at least start out by advocating simpler, transparent, permanently-affordable housing programs. There are examples of success to be replicated.
Federal Housing Administration (FHA) insurance with project-based Section 8 programs worked well until attacked by the Reagan administration as a budget breaker. The attackers used deceptive calculations and cited a few failed projects to end the program. The Reagan math, actually invented in prior administrations, involved adding up the entire twenty years of a subsidy contract and crying “shame”, with claims of sticker shock. When the Section 8 contracts expired, many owners converted to market-rate housing. Others marked “to-market” a program conjured up by the Clinton administration.
A new administration should let good regional administrators set realistic cost guidelines, with reasonable incentives. Tax incentives, especially when “as of right,” have proven an effective way to encourage production. Families should pay twenty-five percent of gross income or thirty percent of income net of taxes as rent. If they do not pay, they should face eviction. A maintenance budget should be prescribed for local operating costs, and whatever is left from rental income should be available to pay debt service on a mortgage. With workable FHA insurance and contractual rent subsidies, banks could start lending again.
There are many variations on the theme. Britain and the Netherlands have funded very large nonprofit organizations that have taken over public housing and created new schemes to satisfy “customers.” Sweden has no income limits for public housing, which is very well maintained. The families who cannot afford the rent receive housing allowances. Singapore lets families buy their high rise apartments with twenty percent of their retirement savings, and after five years in residence, can sell the apartments on the open market.
Whatever the budget predicament, affordable housing is still an excellent stimulus, with a great multiplier effect to boost the economy. Young people, poor people and middle income families still cannot find decent housing within their means in many cities. In areas with a glut, rent allowances could make vacant units affordable. In areas with low or no vacancies and high costs, we still need new, government-supported housing. And we know that families who feel safe in their housing become more productive citizens.
We would like to avoid complex creative financing and build permanently affordable housing that would become a source of pride for America, as opposed to a maze of financial subterfuges that takes thousands of accountants to unravel.
Carol Lamberg is the executive director for the Settlement Housing Fund and co-chair of the New York Housing Conference. She also serves on the executive committee as the regional affiliate representative for the National Housing Conference.
Anne H. Lindgren currently serves as vice president of the Michaels Development Company. Ms. Lindgren is chair of the Lantern Group and has served on the executive committees for the Settlement Housing Fund and National Housing Conference.