Tuesday, March 1, 2016

Government should buy low, not high, in affordable housing

What we're building 
by Ethan Handelman, National Housing Conference 


The old saw about investments is to buy low and sell high. But when it comes to affordable housing, government at all levels has an impressive track record of buying high, and then sometimes selling low. If, however, government could invest the resources to secure long-term affordable housing when markets cycle down, it could more efficiently provide affordable housing when markets cycle up. In other words, government can play the long game to win in affordable housing.

First, a definition: I use “buy” as shorthand for government investing resources to secure real estate for affordable housing. There are lots of means to do this, many of which do not involve government actually owning real estate but rather partnering with private sector capital sources and developers. Loans, grants, equity investments, land use restrictions and rent subsidy agreements are all ways to secure a property as affordable housing, either temporarily or permanently. Even purchase options or rights of first refusal can give government the ability to create affordable housing in the future without actually owning real estate. Buying affordability can therefore take many forms with different durations and effects: a rental housing voucher, a public housing property, a Low Income Housing Tax Credit equity investment, a community land trust.

When does government usually buy affordable housing? When housing quality, rents or home prices are at levels outrageous enough to capture public attention. A dramatic historical example is the Great Society programs in the 1960s that created much of the regulated affordable rental housing we have today in response to widespread unrest in cities. A more recent example at smaller scale is the city of Denver’s Revolving Affordable Housing Loan Fund (RAHLF, perhaps my favorite recent affordable housing acronym). It’s a laudable example of a locality putting up its own funds to finance affordable housing, and it is clearly driven by the rapidly rising rents in Denver.

Denver’s action is also an example of buying high. Rising rents are capturing public attention. Multifamily property prices are rising just as rents are rising, so government subsidy has to stretch further. There are certainly other examples of buying high:

  • Homeownership assistance. Down payment assistance loans or grants can help low-wealth buyers step into homeownership for the first time. These effective programs are most common, however, in places like Massachusetts, New York and California, where home prices are high and rising. The higher the home price, the more it costs to fill the gap between first-time homebuyer savings and the cost of a down payment. And if homeownership assistance does not capture some of the equity gain or secure affordability for the next buyer, government has not only bought high but also sold low.
  • Preventing conversion of affordable rentals to market-rate use. When a subsidized affordable housing property reaches the end of a long-term use restriction, public pressure and resident organizing often generate political will to preserve the property as affordable housing, which usually means either buying it from the current owner or paying the owner to maintain affordability. Stuyvesant Town-Peter Cooper Village is a recent $5.3 billion example (although it wasn’t the very top of the market). Preservation is a high priority, and in our current policy environment, it is cost-effective compared to new construction. But because political will to deploy resources occurs especially when properties are at risk, preservation is often forced to buy high. 

For most participants in the housing market, buying high is entirely understandable. A first-time homebuyer buys a house at a specific time because life demands it via children, maturity and a need for stability. A developer buys land at the market price using whatever financing is available, because doing deals is an ongoing necessity. Lenders lend to the maximum their underwriting will support in order to make loans before their competitors do. Market necessities force them all to have short time horizons.

But government can have a long time horizon. It can borrow inexpensively, even deficit-spend during down cycles, and won’t go out of business or get evicted (at least not literally). So government should use those advantages to buy low, during down cycles when real estate is cheap and most market participants lack the patience to anticipate the upswing. Government has many mechanisms to do so, many of which involve private capital sources and development, and all of which will be much cheaper for government during a down cycle:
  • Renovation of existing rental housing with use restrictions.
  • Gap financing through soft loans for construction of rental housing.
  • Land banks.
  • Community land trusts and shared equity homeownership.
  • Long-term, renewable use restrictions in exchange for capital investment.
  • Renewable rental assistance contracts.
  • Rights of first refusal or first offer for preservation of affordable housing. 

Government can also be far-sighted in its real estate choices during both up and down cycles. Instead of selling land quickly at low costs just to stimulate economic activity, land banks could offer long-term ground leases that preserve the option for public use far into the future. Government could limit unilateral termination rights for owners when creating new rental assistance contracts. Public housing authorities can tap into equity in their portfolios through financing rather than through sale transactions. Capital subsidies for new rental housing can plan larger reserves and periodic refinancing for future capital needs while requiring much longer use restrictions.

These strategies are hard to implement, notably because they require government to invest much more up front and then to pay attention over the long term to make sure the investments pay off (and don’t evaporate). Government may also have to be very patient, especially in places with persistent economic distress, which adds an undeniable political challenge. But wouldn’t it be better to try to solve those problems and make better use of the resources available than to continually buy high?


Getting to a buy-low approach to affordable housing may also require changing how we talk about the need for affordable housing and the solutions to providing it. If we frame lack of affordable housing as a crisis, it implies the solution needs to be quick and dramatic (and possibly that it will be risky to try). If instead we frame the lack of affordable housing as an ongoing structural problem, then it demands an ongoing, structural solution. With that framing, a buy-low approach becomes more conceivable.

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