Before Katrina’s wind and waves toppled New Orleans’ antiquated levee system in 2005, the city was already languishing under the burden of over 26,000 vacant properties. The levels of vacancy were so severe that the city hired the Center for Community Progress—a nonprofit that helps communities address vacant, abandoned, and deteriorated properties—to perform a vacant property study and recommend anti-blight strategies for implementation. The presentation to Mayor Ray Nagin was scheduled for the first week of September. Katrina blew into town on Aug. 29, flooding more than 80,000 homes and ultimately adding about 20,000 vacant properties to the city’s tally.
Although the wait for recovery dollars felt like eternity for displaced families who were living in FEMA trailers and sleeping on relatives’ couches, state and federal government moved relatively quickly to deploy over $9 billion in Community Development Block Grant disaster recovery funds. Within four months of the disaster, Congress created $170 million in additional low-income tax credits for the state of Louisiana through the Gulf Opportunity Zone Act (GO Zone) of 2005 for the reconstruction and new construction of low-income rental housing projects. By 2008, the four hurricane-affected states—Alabama, Mississippi, Louisiana, and Texas—had allocated 95 percent of their new credits. And by the 10th anniversary of the disaster, thousands of new affordable rental housing units had been created, including 4,900 tax-credit funded, lushly landscaped apartments on former public housing sites and other large plots throughout New Orleans.
Thirteen years after much of the world had wondered whether New Orleans would ever make it back, more than 130,000 homeowners have rebuilt and reoccupied their properties. New, energy-efficient schools, libraries, hospitals, fire, and police stations replaced storm-damaged buildings that, even before the storm, were limping along. Formerly underdeveloped areas like the city’s Warehouse and Central Business districts have seen tremendous population increases largely through the development of new multifamily, market-rate apartments. Hopes for recovery have long been exceeded in historic working-class neighborhoods like Tremé, Bywater, Mid-City, and the Fairgrounds, igniting gentrification concerns and advocacy efforts for inclusionary zoning and against short-term rentals—both unimaginable before the storm. If not for the thousands of small, vacant lots where homes once stood in neighborhoods like the Lower Ninth Ward, Gentilly, and the much larger swath of town called New Orleans East, one might mistakenly think the recovery of New Orleans had been fully realized.
Subsidies Could Solve the Housing Shortage
With the increase in population outpacing the supply of available housing, and skyrocketing demand in the city’s higher-value neighborhoods, it is hard to explain the persistent lack of development in areas that hold hundreds of shovel-ready, residential-zoned lots. What’s the holdup? Why are we so ill-equipped to build modest, single-family housing?
For-profit developers don’t mince words when answering these questions. After looking at me like I had two heads, one developer impatiently explained that unlike in gentrifying neighborhoods, the areas with vacant lots still suffer from low real estate values. Houses built on these lots will cost more to build than they can be sold for. And developers won’t build houses unless they can be sold for more than it costs to build them. Period.
In theory, government subsidies could be structured to solve this problem. The reality, however, is more complex and can be traced to the Tax Reform Act of 1986, which created the Low-Income Housing Tax Credit (LIHTC). Designed to harness corporate dollars for the restoration or construction of multifamily rentals, LIHTC was an easy fit for the thousands of empty, hulking apartment buildings so prevalent in the ’80s urban landscape. When community development corporations, and the intermediaries that supported them, realized that thousands of new and rehabbed units could be financed through reliable, annual funding, the community development movement shifted en masse toward low-income rental housing production.
In 1990 the Rockefeller Foundation, under the leadership of Peter Goldmark, organized the National Community Development Initiative to fortify this newly created housing tool by focusing the attention of the top community development funders on it and leveraging it with a multimillion-dollar investment fund that effectively launched the LIHTC industry. Soon, a galaxy of lenders, syndicators, designers, lawyers, accountants, and builders grew up around it. Trade associations, complete with lobbyists, sprang up in Washington to represent these newly minted LIHTC professionals. In less a decade, the Low-Income Housing Tax Credit became the most productive affordable housing finance tool in urban America. The speedy passage of the GO Zone tax-credit legislation after hurricanes Katrina and Rita, and its rapid implementation on the ground in New Orleans and across the Gulf, underscored the prominence of this tool and the bipartisan support for it.
While LIHTC has galvanized a multifamily rental housing community, the same kind of muscle has clearly not been cultivated for affordable single-family housing development. Consequently, when disaster struck New Orleans—where 46 percent of the residential stock was single-family and owner-occupied—the community development movement had neither the technical expertise, financing mechanism, nor the political power to assist vulnerable homeowners in rebuilding, and it didn’t have the capacity to redevelop new homes on the more than 7,000 lots left vacant by homeowners who didn’t return. A patchwork of local and celebrity-led efforts moved to fill this gap, but without an established, well-funded tool like LIHTC, it is not surprising that 13 years later, the lack of expertise, money, and political heft has resulted in stark disparities in the recovery of neighborhoods across the city.
Some of these inequities can be traced to the troubled history of the Deep South, like the prohibition that prevented African Americans from purchasing homes in all but one of the new subdivisions built in the city after WWII, and unintended consequences of recovery policies. However much of the disparity in the rebuilding of the affordable homeownership housing stock stems from this gross imbalance in the national community development movement that predates the flood. If the movement’s single-family housing capacity mirrored that of the rental-housing capacity, New Orleans would have fewer vacant lots, more working-class homeowners, and less value disparity between physically similar neighborhoods.
The collapse of the housing market also underscored this capacity imbalance. In 2008, when the Housing and Economic Recovery Act (HERA) enabled the creation of the Neighborhood Stabilization Program (NSP), affordable housing developers suddenly found themselves with the money needed to purchase and rehab thousands of homes, but with limited ability to do so. In New Orleans, a consortium of homeless housing organizations, nascent single-family home developers, and the redevelopment authority banded together and secured an NSP grant in the second round of funding to cover budget gaps on single-family infill and rehab/resale housing, and apartments for homeless people. Then-Vice President Joe Biden came to town to announce the $29.7 million award in a vacant, storm-damaged recreation center with the flood’s high-water mark still clearly visible on the yellow cinder block walls. His motorcade had barely left town when stories began to emerge about contractors using change orders to drive costs above original bids, poor site selections resulting in beautiful homes being built on lots that were easy to obtain but hard to sell, unrealistic expectations about the ability of low- and moderate-income people to secure mortgages, and a general ineptitude regarding market building. These problems weren’t unique to New Orleans. Similar stories have come out of Flint, Detroit, and other cities across the country that have received NSP grants.
Eventually, some of the NSP developers got their sea legs and began efficiently building and selling homes. At the conclusion of the New Orleans NSP program, 220 single-family homes had been built on vacant lots, and 7 of the original 11 single-family developers were geared up and ready to continue building. The city still had thousands of vacant residential lots and just as many households who wanted to buy the homes that could be built on them. However, as suddenly as NSP appeared, it was gone. With the depletion of NSP funds after three rounds of appropriations, the only federal funds in New Orleans left for single-family new construction were the HOME Investment Partnerships Program (HOME) dollars. In 2017 the New Orleans HOME allocation (which is also tapped by LIHTC developers) was $1.9 million. Some quick math: In New Orleans, $210,000 builds a modest, 1,300-square-foot home that will sell for $170,000, leaving a $40,000 development gap. Houses built with HOME funds must be sold to low and very low-income families who earn less than 80 percent of the area median income (AMI). A family earning 80 percent or less of the area median income will need roughly $40,000 in downpayment and closing-cost assistance to buy this house. Hence, the total subsidy needed per house is $80,000. If every dime of the city’s $1.9 million HOME allocation went to subsidize the construction of single-family homes, the city could produce about 23 houses per year. New Orleans loses more than 10 times as many houses each year to demolition and neglect.
Although far from perfect, NSP had proven that with the on-the-ground capacity, technical assistance from the national intermediaries, and significant infusions of federal funding, this seemingly intractable problem could be addressed. But with no significant subsidies in sight to keep production rolling, four of the remaining seven New Orleans NSP2 nonprofits disbanded their staffs and closed their doors, and one declared it was now a LIHTC developer. Within a year, the development of new single-family homes, in difficult to develop areas, ground to a near halt.
Filling the Gap
In April 2016, a small group of academics, policy experts, developers, and lenders from across the country gathered in New Orleans. The goal of the meeting was to propose new ways to organize, finance, and build a sustainable production and preservation system in struggling neighborhoods of predominantly one- to four-family homes in places like Hartford, Detroit, Trenton, and Syracuse.
Months of discussion and debate resulted in a policy proposal for a new federal program that would enable states to convert private activity bond capacity into tax credits. These tax credits would then be sold to investors to raise cash to fill the gap between what it costs to buy and renovate a home in a distressed neighborhood and what it can be sold for. The policy proposal would come to be called the Neighborhood Homes Investment Act (NHIA). Like many community reinvestment programs, NHIA funds would be limited to census tracts with high poverty rates and below-median incomes and home prices. Unlike the HOME and CDBG programs that cap homebuyer incomes at 80 percent of AMI, this program would be open to a range of households from truly low-income families to those earning up to 140 percent of AMI, thus creating a significantly larger pool of potential buyers and providing an option for folks who may be priced out of robust local housing markets. With the new legislative proposal in hand, a fledgling coalition set out to vet it in the struggling communities it is intended to help.
Shortly after the presidential election in 2016, our alliance of national real estate, housing, community development, lending, and construction organizations became the Neighborhood Homes Investment Coalition, and we began advocating for the NHIA among our community development colleagues. A tax credit to spur investment in sagging, single-family residential neighborhoods, we explained, was the missing piece. We have the New Markets Tax Credit Program for commercial properties and LIHTC for multifamily rentals; we need NHIA for one- to four-family homes.
Reactions were mixed. For-profit and nonprofit rehabbers were jubilant that their biggest obstacle was finally being addressed. LIHTC developers, however, were initially leery due to concerns about something “new and shiny” that they feared might distract lawmakers’ attention from the established low-income rental housing programs. But the most common reaction was: Do you really think this is the right time?
Yes, this is the right time. In fact, for some communities, it may even be a little too late. But the issue is bigger than the rate at which housing stock is being lost. Being more relevant in neighborhoods and in Washington will require the community development movement to stretch beyond the narrowly targeted communities and constituencies we traditionally serve. A reinvestment program to address the aging one- to four-family housing stock would expand our reach to thousands of cities, towns, inner-ring suburbs, “middle neighborhoods,” and rural places across the country where we currently have little or no presence. New inclusive programs could dissolve current perceptions of “us” and “them” by creating opportunities for all the households that the market doesn’t serve. The current attempt to modernize the Community Reinvestment Act (CRA) presents a timely opportunity to structure new and equitable ways to reach these underserved markets and create new investment streams. NHIA would do the same. Both would exponentially increase support for single-family rehabbers and small nonprofits, neighborhood entrepreneurs, rural housers, Habitat for Humanity chapters, and historic preservationists without whom the community development movement would have little impact on single-family neighborhoods at all.
A new source for reinvesting in deteriorating homeownership neighborhoods would also help us confront a national crisis head on, namely, the widening disparities between African-American homeowners and those of all other races and ethnic groups. The 50th anniversary of the Fair Housing Act in 2018 brought with it the disastrous news that fewer African Americans own homes today than before the passage of the bill, and those who do derive far less wealth from their homes than any other racial or ethnic group. Countless scholars have adeptly examined and assigned blame for this national disaster on the legacy of redlining, the bias of federal transportation policy, and the failure of the financial markets. Still, our understanding of this failure could certainly benefit from a hard a look at the role the community development movement played or failed to play and the limitations of current federal programs to lift up the neighborhoods where African-American homeowners are most prevalent.
Thirty-two years ago, the community development movement inspired legislators to create what has become the most important low-income, rental-housing tool in America. It has been protected, expanded, and made more effective by the sturdy political and professional infrastructure that has grown up around it. To halt the erosion of homeowner wealth and quality of life in deteriorating neighborhoods, the single-family, neighborhood revitalization field also needs a well-organized constituency with a loud and clear voice that can be heard at home and in Washington, clear goals that take into account historic and systemic racism, and encompass savvy community developers, collaboration and coalition building with the building trades, lenders and appraisers, first-in money from philanthropy, and sustained technical assistance and advocacy from the intermediaries. All of this is possible with a reliable public-private investment program and the will of our movement.
Unfortunately, the FRB, FHA, and GSEs had an opportunity to provide deep subsidies to the single-family market out of the great recession when there was an abundance of foreclosed properties and instead they offered those deep subsidies (30 cents on the dollar) to wall street investors and created the for-profit SFR market that is exploiting renters instead of giving those subsidies to non-profit developers for affordable homeownership opportunities.
“Like many community reinvestment programs, NHIA funds would be limited to census tracts with high poverty rates and below-median incomes and home prices.” A good proposal, but if we really want to stretch beyond “narrowly targeted neighborhoods,” and help black and brown people build wealth, it should not be restricted to high poverty census tracts. There is a huge unmet need for affordable homeownership (and rentals) in areas where job growth is occurring and property values are rising. As we know, African Americans have largely been excluded from these areas, impeding their ability to build wealth. A well intended new homeownership program must not continue that harm.
That’s important Barbara, but my understanding of this program is that it is directed specifically at addressing the appraisal gap — the difference between what it costs to rehab a building and its final market value in a weaker market. It’s more aimed at stabilizing those areas (which helps everyone in them) than generating new homeowners. In the stronger market areas you describe, the appraisal gap doesn’t exist, so probably to expand homeownership among people of color in those areas you’d want a program more tailored to those circumstances and that goal.