Low-Income Housing: Problems and Solutions

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Low-Income Housing: Problems and Solutions

It’s time to relax zoning regulations and eliminate the mortgage interest deduction

Posted on Sep 15 2017 by Martin Holladay

Low-income Americans have a hard time finding housing. When families learn that market-rate housing is unaffordable, they often seek help from a variety of government agencies — some local, some state, and some federal. Unfortunately, government efforts to provide housing assistance to low-income families are unable to fully meet the need.

A full examination of all of the problems related to low-income housing in the U.S. is beyond the scope of a single article, so I won’t attempt it. Instead, I’ll share my own experience working with a nonprofit developer of low-income housing, and I’ll summarize what I’ve learned from personal experience and research.

Cobbling together project funding

For four years in the mid-1990s, I worked as a project manager for Northern Community Housing Corporation (NCHC), a small nonprofit developer in St. Johnsbury, Vermont, with five employees. (The agency no longer exists.)

If I had to characterize the nature of the agency’s employees, I would say (at the risk of generalization) that we were all well-meaning liberals concerned with issues of social justice. We all believed that every low-income American deserves access to decent, affordable housing.

NCHC used three main sources of funding — community development block grants, funds from low-income housing tax credits, and appropriations from the Vermont Housing and Conservation Board (VHCB) — to put together its development projects. Project funding was complicated, requiring many hours of work to secure.

Using these funds, NCHC purchased old multi-unit apartment buildings in St. Johnsbury, Lyndonville, and surrounding communities. Most were wood-framed buildings, at least 100 years old, with between three and five apartments per building.

We had an architect on staff, Ben Nickerson, who created plans and specs to rehab these older buildings. We invited contractors to bid on these rehab projects. Over a period of months, groups of these buildings underwent substantial rehab work, including energy-efficiency upgrades. Most, but not all, of the apartments got new kitchens and bathrooms, as well as new windows and flooring. A percentage of the apartments were made handicapped-accessible.

NCHC was committed to the principle that no family should pay more than 30% of their income for rent. In theory, project funding was adequate to ensure that these rehabbed apartments would be “perpetually affordable” for low-income families.

In reality, the projects were underfunded. After several years of operation, reserve funds were depleted. The available income streams were insufficient to pay for regular maintenance. The projects had to seek additional funding to avoid default.

Gaining experience by making a few mistakes

Some of the problems with the NCHC projects were due to unrealistic reliance on optimistic projections. In retrospect, our team had inadequate real-estate development experience, and therefore underestimated the financing requirements of rental housing projects.

When NCHC closed its doors and all of us were laid off, I left with renewed respect for for-profit developers and for-profit landlords. They work in a difficult field; those who succeed must be shrewd and experienced to avoid financial disaster.

Here’s the good news: the apartments that NCHC rehabbed are still providing safe, decent, affordable housing to low-income families.

Planning for future big-ticket expenses

After I was laid off from NCHC, I started a company, Vermont Assessment, that provided capital needs assessments to nonprofit housing developers.

You may be wondering, “What’s a capital needs assessment?” Building owners distinguish between maintenance costs — for example, routine painting and repairs at apartment turnover — and capital costs — for example, roof replacement or boiler replacement. Capital costs are usually paid out of a special fund called a replacement reserve account. If an owner expects a roof to last 15 years, the owner should deposit a little bit of money every month into the replacement reserve account, so that after 15 years of monthly deposits, the account holds enough money to pay for the new roof.

To perform a capital needs assessment, I undertook a thorough inspection of the property, including every apartment, crawl space, basement, attic, and roof, as well as all of the landscaping features. I estimated the remaining life of every capital item, as well as the replacement cost for each item, and I created a 30-year spreadsheet to determine whether the amount being set aside in the replacement reserve account was adequate.

During the years I was in business, I prepared about 50 capital needs assessments. In every single case, the replacement reserve accounts of the projects I assessed were underfunded. Every single low-income housing project I looked at was headed for financial trouble.

What happens when a low-income housing project in Vermont realizes that it is underfunded? Usually, the owners put together a proposal for a new round of rehab work, and then seek funding from the usual sources, including VHCB. During this second round of financing, the stakeholders attempt to create a new financial structure that is more robust than the underfunded financial structure that got them into trouble.

Nonprofits play a vital role

Here are some of the lessons I learned from my years working with NCHC:

  • Putting together the financial structure for a successful low-income housing project is challenging. Managing rental housing requires more resources than many people realize.
  • Current federal programs, including the community development block grant program and the low-income tax credit program, are band-aids that chip away at the edges of the nation’s housing problem. They are not robust programs designed to meet the full needs of low-income families.
  • Well-meaning Americans who staff nonprofit agencies often lack enough experience in the tough worlds of real-estate development and apartment management to balance the books of a low-income housing project.
  • Even though nonprofit agencies have been known to stumble in their efforts to address the housing needs of low-income families, these agencies are staffed with dedicated people who are making a difference in the lives of poor Americans. Without the work of these nonprofits, our housing crisis would be far worse.
  • Non-profit developers of low-income housing have been at the forefront of energy efficiency issues. All of the agencies I worked with had close ties to the Weatherization Assistance Program, which pioneered techniques for dense-packing cellulose in walls. One of the designers who worked on an NCHC project was William Maclay, the Vermont architect who went on to write a landmark book, The New Net Zero. The chief architect for NCHC, Ben Nickerson, went on to design Carter Scott's first net zero house in Massachusetts. And I ended up as editor of Energy Design Update.

The mortgage interest deduction and zoning regulations

Here is a quick summary of some issues related to U.S. programs to address the housing needs of low-income families:

  • Section 8 vouchers subsidize the rent of low-income families living in market-rate apartments. While the Section 8 program is a boon to needy families who are lucky enough to obtain a voucher, the need for Section 8 vouchers is far greater than the supply. In most states, eligible families have to wait years to obtain a Section 8 voucher. To put it another way: The funding that Congress provides for the Section 8 program has always been significantly less than the need.
  • The biggest federal housing subsidy, by far, is the mortgage interest deduction. This subsidy now amounts to $71 billion per year — far more than the federal government spends on all programs that provide housing assistance to low-income families. The mortgage interest deduction favors middle-class families and wealthy families, not low-income families. In fact, according to The Atlantic, “households earning more than $100,000 [per year] receive almost 90 percent of the benefits” of the mortgage interest deduction.
  • While supporters of the mortgage interest deduction claim that the tax deduction increases homeownership rates for American families, there is little evidence to support the claim. Canadian families have about the same homeownership rate as American families, even though there is no mortgage interest deduction in Canada.
  • In many U.S. communities, zoning regulations are used to limit the construction of affordable housing. For example, minimum lot sizes, limitations on the construction of multiunit apartment buildings, and regulations against granny flats or accessible dwelling units, all have the effect of limiting housing options for low-income Americans.

It's hard to beat the cost of a used mobile home

In urban neighborhoods, many low-income families live in run-down apartments in dangerous neighborhoods. Luckier families have a Section 8 voucher, or live in subsidized apartments in projects that are operated by a nonprofit agency, or live in a public housing project.

Every now and then, a developer will strive to come up with a new approach to affordable housing, employing modular techniques or offering homes with particularly small footprints. While these efforts are admirable, they are rarely successful.

In rural areas, low-income families usually live in manufactured homes, colloquially known as mobile homes or trailers. It’s hard to beat the price of a used mobile home, which is often available for $10,000 or less. For better or worse, used trailers are the go-to solution to house low-income families in rural America.

The problem is solvable

Many European countries do a better job than the U.S. of providing housing assistance to low-income families. But we don't have to continue in our current rut. Here in the U.S., we have skilled architects; skilled builders; experienced developers; experienced managers of rental apartments; and many examples of successful projects designed to meet the needs of low-income families.

We are also a wealthy country, with adequate resources to devote to the housing problem. What we lack is political will.

As a start, we could:

  • Reallocate the funds associated with the mortgage interest deduction — $71 billion per year — to programs designed to meet the housing needs of low-income Americans.
  • Get behind a nationwide push to change zoning regulations in ways that will increase density in residential neighborhoods.

Martin Holladay’s previous blog: “What’s Wrong, and What’s Right, With Residential Building in Texas.”

Click here to follow Martin Holladay on Twitter.

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Image Credits:

  1. Image #1: Rural Edge
  2. Image #2: Lamoille Housing Partnership
  3. Image #3: Martin Holladay

Sep 15, 2017 4:37 PM ET

Will the Internet come to the rescue?
by Andrew Bater

Very insightful article Martin, thanks for putting it together. Don't understand why you made it GBAPrime though. It seems like it should be a read for everyone.

The first place I went to see who might be the biggest proponent of the interest deduction was the National Association of Realtors website, https://www.nar.realtor/ It only takes a few seconds of searching there to see that they feel it's absolutely essential.

Given the above stance, my initial thought is that abolishing the interest deduction is a Sisyphean challenge; it will never happen with such a powerful lobby working to preserve it. However, you know taxi drivers in NYC once thought that having a medallion was tantamount to owning treasure. Uber, Lyft, and other Internet based ride sharing businesses quickly destroyed that model. So you may get your way as the Internet further decentralizes power in the real estate industry too.

Sep 15, 2017 10:59 PM ET

Great post, jibes with my experience
by Bennett Sandler

Martin, thanks for shining light on this critically important issue in housing.

I've wondered much the same thing--how can we have the knowledge, materials, so many people looking for useful work, the money exists, and yet somehow we don't solve this most basic problem. My experiences, though different from yours, have led me to most of the same conclusions.

To my mind one of the central cogs in this whole mess has to do with the power of capital and the expectations that investors have for profit. It took me a while to realize that private investment in healthy affordable housing is an incredible stretch mainly because investors come to the table expecting usurious returns. While the poor run like mad to stand still and keep up with the rent and utilities, the building owner insists on double their money in ten years or less, or else they take their money somewhere else.

We could also talk about how funding for energy conservation and renewables, as with the mortgage interest deduction, disproportionately benefits middle and upper class home owners and not those who need it most. And how the housing crisis of 2008 allowed big banks to legalize theft-- by "selling" houses to people who couldn't afford them, jacking up fees, and then generating fraudulent paperwork to seize the houses, knowing most victims would be unable to afford legal help. (David Deyen's book "Chain of Title" is a pretty eye-opening account of how big money talked and ultimately walked.)

One final digression: I remember reading somewhere that one reason that the dissolution of the Soviet Union was relatively non-violent probably had to do with a long tradition of public housing. People faced an uncertain economic future, but they didn't have to fear that they might suddenly be homeless.

Some national soul-searching on this subject of affordable housing would be good. Maybe after we get this health care thing worked out....

Sep 16, 2017 5:21 AM ET

Response to Andrew Bater (Comment #1)
by Martin Holladay

I agree with you that the power of lobbyists has a malign effect on politics in the U.S. The solution to this problem is campaign finance reform. For progressives, the work is never-ending.

Sep 16, 2017 5:23 AM ET

Response to Bennett Sandler (Comment #2)
by Martin Holladay

I agree that most of the benefit of PV incentives goes to upper-income Americans. There is, indeed, a pattern here.

Sep 16, 2017 9:29 AM ET

PV subsidy goes to middle income, mortgage subsidy is a vestige.
by Dana Dorsett

While it's true that lower income people are still under-represented amongst solar owners, the residential PV subsidy vs. income isn't as clear cut as it might seem. It's not nearly as regressive as some critics like to paint it (why would anybody believe the Kochs' propagandists on this one?). The bulk of the subsidy is going to middle-income households, not the wealthy. This has been covered multiple times by Greentech Media, most recently this past April:

https://www.greentechmedia.com/squared/read/how-wealthy-are-residential-... (https://pv-magazine-usa.com/2017/04/19/report-middle-income-homeowners-m...


On the mortgage interest deduction...

A hundred years ago when the US income tax was a young most homes were paid for in cash, and ALL interest payments to lenders were deductible. That was a policy driven by business stakeholders with high debt/revenue ratios, primarily farmers & small businesses. Home mortgages were included, but were rare prior to the late 1920s. When consumer financial products such as credit cards were developed, that interest too was deductible.

The Reagan era tax reforms ~30-35 years ago did away with most interest deductions, but the mortgage interest deduction proved too hot to handle by reformers since it would putting financial stress on too many middle & upper income people (and the mortgage lenders who were making out well on the subsidy.)

The subsidy encourages people in higher tax brackets to buy "too much house", and in the end is a regressive policy. Getting rid of it won't end the housing market as we know it today, but it may temporarily curb the number of McMansions being built.

Sep 16, 2017 10:06 AM ET

Property taxes

In the Chicago land area where I live property taxes have a huge impact on the affordability of housing. Typically we pay around 3% of the value of our homes in property taxes every year to the government.

In some of the poorer communities around Chicago they are paying 10% of the value of their homes in property taxes! In other words they could own their homes mortgage free within 10 years for what they pay in property taxes. In just 12 years of paying my current tax bill it will equal what I paid for my home! It doesn't just effect homeowners but renters and business owners as well which impacts the job market.

I guess if we are honest it isn't just greedy bankers, developers and builders that prevent people from owning a home but the government plays an even greater role.

Hopefully at some point in time you are able to own your home out right but the property tax bill just keeps increasing. For many of us our property tax bill grows larger then our mortgage ever was.

It is interesting that the single largest group moving out of Chicago is the African American population. The city hasn't proven to be a great place to live unless you are a young upper class professional.

Sep 16, 2017 11:27 AM ET

Edited Sep 16, 2017 11:27 AM ET.

Property taxes
by stephen sheehy

At least it's easy to see where your property taxes go. Here in my little Maine town, about 2/3 goes to schools, almost all of the rest to roads ( mostly plowing snow), the volunteer fire department, and to the county ( mostly for sheriff, since we don't have local police).
Everyone complains about property taxes, but I think I get pretty good value for about $3,000 per year, even though I don't have kids in school.

Sep 16, 2017 2:58 PM ET

Edited Sep 16, 2017 3:00 PM ET.

GREAT article!
by Robert Opaluch

I wish we could have an ongoing series of articles for more information on affordable housing.

Home ownership (not just reasonable rentals) seems important. I grew up in a working class neighborhood right next to a housing project. The 1950's 2 bedroom homes on 50'x100' lots were owner-occupied, the townhouse style housing project were all renters. About a third of those I know from the owned homes became quite successful (surprising actually), and a third went to jail or prison. I don't know any friends from the project rentals who became very successful. Same mixed race, mixed ethnic, Catholic/Protestant/non-religious backgrounds in owned and housing project homes. We went to the same schools (although some to Catholic schools). We had school-age friends in both places (but not before school age). Often families in the housing project had more kids/family, another difference.

Although this is purely anecdotal, seems to me that home ownership (and maybe fewer kids) is related to more favorable success outcomes of kids. Therefore, in addition to providing decent affordable housing and a safer low-income neighborhood, IMHO it would be great to get affordable housing renters to be getting some housing ownership over the decades, just like cheaper starter home homeowners. It might reduce some maintenance costs if renters could get some credit for maintenance labor for upkeep of subsidized housing, rather than always hire outsiders to do the work.

Personally I'm interested in designing high performance, lower cost, modest homes. The middle class is disappearing and can't afford the luxury or larger high performance homes. IMHO we need more affordable single family home ownership, affordable condos in cities, owner-builder and rent-to-own options, and lower total cost of home ownership (which includes low utility and maintenance costs). I've been an owner-builder, renovator, homeowner, longer-term renter, and landlord at various times, and can sympathize with landlords. But if money is subsidizing rents, I'd like to see some options for renters to get credits toward ownership or some opportunities to do home maintenance jobs. Not just social justice, but growing a sense of ownership and competence in home maintenance.

Sep 17, 2017 9:38 AM ET

Edited Sep 17, 2017 9:39 AM ET.

Workforce housing

A number of years ago they tried to destroy the zoning regulations in the county where I live. They called it workforce housing. Under these changes select developers would be allowed to ignore the restrictions of lot coverage, setbacks, parking allowances, and storm water considerations. It would allow subsidized multi family housing in neighborhoods zoned for single family housing.

I attended meetings where connected builders, developers, and housing activist were working to put these zoning amendments through. The only people missing were the homeowners from the neighborhoods that would be impacted. No one bothered to let them know about the changes that were about to be voted on that would have a huge impact on their neighborhoods.

Once I needed to get a variance for a screen porch I was building that would extend 12" beyond the set back restrictions. In order to get the variance we had to install a sign on the property of the hearing date, take an ad out in the local newspaper, mail dozens of neighboring houses of the request being made and attend a hearing. Contrast that level of transparency to what was being provided to the neighborhoods that would be impacted by workforce housing. A request for a small setback change was required to be done with everyone impacted being notified where huge changes to neighborhoods were being voted on without ANY notification to those being impacted.

Once the map of the impacted areas was leaked to the impacted neighborhoods hundreds of people started showing up to express their concerns. What was interesting was that the loudest most vocal opponents were the teachers and police officers who the housing advocates claimed the workforce housing was for.

The dangers of activist trying to destroy zoning laws is still out there. Now there is push by some activist to allow Washington D.C. to over ride local zoning laws to push their vision into our neighborhoods.

Sep 17, 2017 10:43 AM ET

Thank you so much for this.
by Andy Kosick

Martin, I didn't expect such a quick response, nor realize you had so much experience. Two questions.

Since there are two sides to this coin, the other being low income, do you know if any other developed countries have done a better job of reducing the sheer number of people who can't afford market rate housing? This seems like some fundamental measure of a society to me. "What percentage of the population can afford a place to live with out assistance? "

It seems to me there is a huge need for home owner education about capital needs. I've been working with local Habitat affiliates on what they call "Critical Repair" and learned from you article that they are basically helping low income homeowners with capital needs; the most typical being a roof. I'm inspecting these homes to make sure there aren't pressing safety issues (CO, smoke alarms, electrical hazards) or major foundation problems before they put a roof on it, but have felt compelled to provide them with a list of "next most important repairs". I'm realizing a capital needs assessment is what I've felt is missing from these projects. Is there a best way to learn more about doing these assessments?

Sep 18, 2017 5:57 AM ET

Edited Jul 13, 2018 6:26 AM ET.

Response to Andy Kosick
by Martin Holladay

You raise several questions. We can seek some answers by looking at two different rates: (a) the homelessness rate and (b) the homeownership rate.

Comparing homelessness rates from country to country is tricky, because different countries have different definitions of homelessness.

According to one source, France has a higher rate of homelessness than the U.S., while Portugal has a much lower rate of homelessness than the U.S. (See the top graph below.)

According to another source with a more complete dataset, many countries have much lower rates of homelessness than the U.S. (See the table reproduced as the second image below). Both sources agree that France has a slightly higher homelessness rate than the U.S., although a great many countries have lower homelessness rates than the U.S., including Chile, Croatia, Denmark, Estonia, Finland, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Mexico, Norway, Poland, Portugal, Slovenia, and Spain. Like all international comparisons, the usual caveat applies: "Different countries define homelessness differently, so use caution before reaching conclusions."

According to a third source -- more journalistic than academic -- those seeking to reduce the homelessness rate in the U.S. should look to Japan, Denmark, Singapore, and Canada as models.

I've traveled to many countries, and here is my anecdotal observation: homelessness tends to be associated with urbanization. It's less common in rural areas. (That said, there are exceptions to this rule, notably in Japan and Singapore, where urban homelessness is rare.)

When it comes to homeownership rates, one is immediately struck by the fact that high rates of homeownership aren't correlated with wealth. One list of homeownership rates puts Romania, Singapore, Slovakia, and Cuba at the top of the list. Another list of homeownership rates puts Mauritius, Romania, Singapore, and Macedonia at the top of the list.

Most analysts would agree that a low rate of homelessness is socially desirable. On the other hand, it's far from clear whether a high rate of homeownership is desirable or irrelevant to social stability and happiness.

As you correctly note, homeownership brings burdens as well as benefits. While it can be difficult to come up with the down payment for a home, it's even more difficult to create a plan to replace big-ticket items -- roofs and heating systems -- that inevitably need replacement. Many smart rich people choose to rent.


Homelessness rate comparison 1.jpg Homelessness rate comparison 2.jpg

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