The Housing Crisis and the Landscape of Affordable Housing

As home prices continue to fall, the notion that the real estate market will allow for lower-income families to secure affordable housing increases. But it's not so cut and dried. How much a home costs is only one of many factors when determining affordability. In March 2012, Shelterforce hosted a roundtable discussion featuring leading research and policy experts to explore those various components of affordability looking at just how the housing crisis changed the affordable housing landscape in the United States.

Chris Herbert: Back to Alan’s point about the fact that there are other countries that have longer-term tenures by renters, I think, a lot of it goes back to renters’ legal rights and protections from rent increases and rights to occupy properties. It’s kind of a legal regime that’s probably unlikely to be replicated in this country.

We may not know exactly what the causes of higher mobility are, but certainly changes in rent levels and changes in landlords’ minds about what they want to do with their property are part of it. And I think that’s a good argument for why more supply-side subsidies could potentially have the benefit of creating long-term stability for renters.

We have this sense in which rental assistance ought to be a way-station along the way, but maybe for certain types of households in certain circumstances, long-term affordable renting development makes sense, changing that mindset about the role of project-based assistance and how long tenants should be expected to stay in it. Certainly there may be issues that people aren’t staying with those subsidies, but we need to understand why.

Alan Mallach: Actually, in the United States, there is something of a natural experiment in, if you will, European-style legal systems, which is the state of New Jersey, where you have what amounts to guaranteed tenure rights for renters, plus rent control being, if not quite universal, at least dominating the rental market. It’s local option, but I would say virtually every city or town with a significant rental stock has, in fact, adopted a rent control ordinance. And again, you have a concept essentially in New Jersey law of no eviction except for cause, so expiration of a lease cannot be grounds for eviction in New Jersey.

Chris Herbert: And there’s controls on how much rents can go up.

Alan Mallach: Right. Many of the ordinances provide for vacancy decontrol, but rent’s usually based on the CPI as long as you have a sitting tenant. And as far as I can tell, there’s no meaningful difference in typical rental tenures in New Jersey than elsewhere in the United States.

Chris Herbert: Interesting.

Alan Mallach: Yes. On this question, I think the point that we talked about a little bit just before in terms of understanding landlord behavior, maintenance, management, so forth, is a huge issue. I’ve tried to look at it as best I can, and what seems to be pretty clear is that the private, small scale landlords operate within a lot of very different economic climates, and that tends to affect how much they invest, or in the extreme cases in some of the really distressed inner city areas, whether they invest at all or are just trying to milk the property for a couple years and then walk.

I think there are a lot of areas—especially lower income areas where a lot of the low-income households that are in the private rental market live—where there seems to be significant under-investment by private landlords, largely because the rental stream does not support significant investment in the properties, as well as the difficulty of obtaining capital for investment. I think there’s some pretty good evidence of need for some kind of way to provide either soft money or affordable capital, so forth, for this segment of the housing stock.

Miriam Axel-Lute: Raphael, you mentioned earlier that there was a lot of discussion going on in HUD about how to put some attention toward this existing stock. Can you tell us a little bit more about the sorts of things that have been being assessed?

Raphael Bostic: Sure. From the very beginning of the administration, we came in in the midst of the housing crisis, and one of the realities that we faced was that rental as an answer was going to be particularly important. And in that context, making sure that we have a functional rental market locally is going to be critical.

And so, we have been focused a lot on preservation. As just about everyone here knows, most of the federal requirements for affordability on tax credit [properties] and some of the project-based [subsidized properties] are starting to expire or are on the cusp of expiring, and we are facing really the prospect of losing a significant proportion of our affordable stock that we’ve built up over the years. I think it speaks to some of the concerns that Jeff has noted.

So we’re, mainly through our multifamily group, working to develop some proposals to incentivize preservation of these properties. Some of it has to do with streamlining regulations. Some of it has to do with looking for new ways to get reinvestment through programs such as the tax credit program. But a lot of things are on the table because, as Alan has noted, existing stock is where most of the action is for your average American family. We need to make sure the policy’s paying attention to that.

Miriam Axel-Lute: It’s come up several times in the conversation that the one- to four-units, particularly and even up to 10 or so, get left out of a lot of these conversations. And I think I remember Alan saying they’re even left out of some of the data sets that we use when we look at national trends in affordability. Anyone want to throw out some ideas about what we need to be able to address those properties particularly and how we might go about that?

Jeff Lubell: Well, this is just one thought. It’s hard to provide financing for small properties. We all know that. And the transaction costs tend to be high. It just seems to me what we need—we really need to be sort of testing strategies on a pilot basis that can really demonstrate to the market that this can be done at scale reasonably affordably.

So I’m not saying I have the answer, but I think, for both the one- to four-[unit] stock, and also the 5- to 50-[unit] stock, which is another really important stock that has difficulty getting its financing needs met efficiently in the market, we need to be thinking about whether the GSEs, for example, could be evaluating methods of serving the stock more effectively to demonstrate that it is or is not cost effective. And if it’s not cost-effective, we need to figure out what kind of subsidy would make it so, because it’s going to cost a lot less to fund that incremental cost of the transaction costs associated with financing that stock than it would to go out and build whole new affordable units from whole cloth.

And I would add to that considering professionalizing the stock. It’s difficult to be a good property owner. And the more we could develop larger scale enterprises that are administering large numbers of units, I think the better quality and the lower cost administration we will see.

Alan Mallach: Let me throw out two comments, one of which is a disagreement. First, on the first part, I agree. I think we need to have better access to reasonable capital for this market. And I would say one possibility that I don’t think has been explored is to use CDFIs as a financial intermediary to access that market.

Many of them have very substantial, very respectable track records, and they tend to do small-scale lending in a fairly cost-effective and certainly good quality fashion. And again, their business model is much more oriented towards the small-scale transaction than most banks are, and I think they could be a real asset in this area.

Ironically, I think professional management is more expensive and very hard to make work on scattered [site]—especially when you’re looking at the ones to fours, maybe even up to nine. Some years ago, a bunch of very brilliant guys from MIT and elsewhere decided that investment in large pools of scattered single-family rentals was an incredible profit opportunity, raised a lot of capital through an offering, and went out and bought, I think altogether, something in the vicinity of 1,000 such units, concentrated in a number of markets where their financial models indicated that there was a really high potential profitability.

It was a bloody mess. It’s very difficult. One thing about the small moms and pops, of them need professionalization in terms of building their skills and a lot of other things. But as long as it’s their property, and they have a small inventory that they’re managing, they do a lot of stuff that never shows up on the books. They do a lot of stuff that is much more cost effective in how it’s handled than when it is done through a professional property management company.

And to the extent that there are any kind of comparable numbers available, they show this in terms of significantly lower costs for maintenance, operation, management, and so forth versus either the large professional management operations or, even more so, the nonprofits that operate tax credit projects.

Jeff Lubell: Alan, let me respond to that. I’m not sure we disagree entirely. I think that professionalization is more likely to be effective in the 5- to 50-unit space than in the one to four, so I want to clarify that.

And secondly, I think it would be very interesting to compare property management impacts, but I think we need to look not just at cost, but at outcomes. Part of what we’re hearing is that the quality of the stock is deteriorating. So sure, you could put in less money per unit, but if at the end of the day your asset deteriorates, that may be a good way to make money for a short period of time, but it’s not a way to preserve the stock over the long-term. So I think we’d really want to make sure that we’re looking at all those outcomes.

Finally, I just want to put in a plug for the CPC in New York and CIC in Chicago, which are two organizations that are working to educate smaller owners about how to be good property managers and providing access to financing. I’d be very interested to see whether those entities could be replicated and expanded, and how well they’re doing, because on paper at least, they look like very interesting models.

Raphael Bostic: We’ve had conversations about that. I think that there is a challenge in terms of capacity in other parts of the country to deliver on that, but it is something that we’re definitely interested in. Because I think we internally share the view that property management is a specialized profession that many of these mom-and-pops have not been fully trained in, and there would be benefits from that.

I would just push back on the notion that it’s 5 to 50s only. I think there is value in the one to four space, as well, and I also think that what we’ve seen through the course of this foreclosure crisis suggests that there are a number of folks out there who are doing quite well in the scattered site management arena. Property management is not easy. The thing that makes me nervous whenever I hear about MIT economists jumping into something is that the theory doesn’t always map so easily into the logistics of executing. So that bloody mess may not have been about the model being wrong but the people doing it not really being able to do it well.

And then the last thing, on the CDFIs, thing I wonder about, if we’re talking about a scale solution, is whether there are enough CDFIs who are large enough to really have a capital base that allows you to move the market at some level and have big enough investments to change local dynamics.

Alan Mallach: Well, I think the short answer is there are some. There are probably a fair number of them. They tend to be concentrated in probably a relatively small number of the major markets in the United States. But they would be a good starting point.

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Shelterforce is the only independent, non-academic publication covering the worlds of community development, affordable housing, and neighborhood stabilization.

2 COMMENTS

  1. Housing is unaffordable largely due to zoning (height, minimum setback restrictions, segregation of residential, commercial and institutional), impact fees (too low for low-density, too high for intensification/infill), and property taxes (based primarily on the value of the building, rather than the value or size of the land). In addition, apartments are taxed a higher rate of other types of dwelling units (because it is considered to be a business), in spite of the cost to provide services per dwelling unit is lower. Cost of living should incorporate both housing and transportation costs, as if one’s common destinations are within walking distance, transportation costs are close to zero.

  2. Pithy, insightful, and chock full of useful ideas. Great job Shelterforce!

    I’m particularly intrigued by the notion of a “pass-through” LIHTC for 2-4 family homeowners to help preserve market-rate affordable rental units. Over the next decade or two as low-density homeownership neighborhoods in NYC recover from the shock of the foreclosure crisis, I think we’re going to need some strategies to keep these homeowners (and their rental units) stable. I think we’re facing a wave of homeowners who will manage to squeak by and keep their homes, but who will suffer from underwater mortgages, poor credit, tight cash flows, and no other cash assets at their disposal. So what happens when they need to replace the roof or the boiler? They won’t be good candidates for accessing any conventional financing, that’s for sure. A straightforward loan fund (like HEMAP) is certainly an option — but a tax based incentive that’s simple for the homeowner to access could also prove a compelling tool.

    Anyway, great food for thought!

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