Urban Housing Policy

1. Urban Housing Policy Prof. Clark Weeks #13-14

2. Housing Policy • Again, we just scratch the surface here. • Lets get an overview of housing policy, and then we will look at a couple of specific policies (focus is on recent emphasis) • Federal, state and local governments intervene in housing markets. • Is there a market failure here? • e.g., externalities? • What is a merit good?

3. Brief Overview of Housing Policy • 1940’s to middle 1960’s: • Urban renewal of blighted areas. • Eliminated neighborhoods with substandard housing and replaced with standard housing. • 1960’s to middle of 1970’s • Renewal replaced with supply side subsides to increase supply of standard housing. • Late 1970’s to present • Emphasis on demand side subsidies, with no link to supply side.

4. Gabriel Article provided good overview Provides very nice overview of Housing Policy in U.S.

5. Gabriel’s points • Overview of condition of housing over time • Consistent improvement • Overcrowding increased slightly for some (cultural explanation) • Quality has improved • Removal of deficient • Addition of higher quality • Reduction in Supply of low-quality rental units has generated shortage

6. Gabriel Article • Ownership issues • We have promoted ownership for a long time through variety of policies • Deductible mortgage interest • Innovations • Development of various mortgage instruments • Freddie Mac, Fannie-Mae (govt. sponsored finance agencies) • Secondary mortgage markets • Ownership has generally risen • Peaked in 1980 (65.8%), and then didn’t start rising again until 1993 period, reaching 65.6% in 1996. • Minority rates have risen.

7. Gabriel • Ownership issues • Volatile expected appreciation levels • Down payment problems • State policies frequently address these issues • Mortgage rates far below peaks during 1980’s. • Some innovations have introduced low cost housing alternatives.

8. Gabriel - Renters • Shrinking stock of low rent options • Supply side policies • Section 236 program • Contract with developer to build unit • Rent subsidies to landlord tied to difference between market and “basic” rent • Programs reduced in 1980’s • Public housing stock also declining • Deterioration, celebrated disasters • End of high-rise centralized public housing • Life-cycle approach to budget allocations

9. Gabriel • Shift to Demand Side Strategies • Mobility issues and spatial mismatch • Cost issues

10. Section 8 Rent Certificates • These are certificates that can be used anywhere. • Means tested. • Income<80% median family income for region. • Qualifications: • Quality of housing must meet minimal standard. • Actual rent less than fair market rent. • Subsidy=Actual Rent-0.3*Actual Income

11. Suppose fair market rent=$400 Actual rent=400. Income=$600 Thus: Subsidy=400-0.3*600 Subsidy=220 New Disposible Income=600+220=820 Move decision depends on moving costs. Other Good Influence of Rent Certificates on Housing Choice 420 300 U2 U1 Housing 300 400

12. Does this shift out budget line parallel by $220? No? Effect of subsidy depends on actual rent which must be less than $400. Thus, subsidy is not greater than $220, but it can be lower if actual rent is less than fair market rent level.

13. Housing Vouchers • Again, housing vouchers may be used anywhere. • Means tested • Qualifications • Housing must be minimum quality • Subsidy depends on fair market rent, not actual rent. • Subsidy=Fair Mkt Rent-0.3*Actual Income

14. Suppose fair market rent=$400 Income=$600 Thus: Subsidy=400-0.3*600 Subsidy=220 regardless of actual housing expense, if housing standard. Parallel shifts budget. Move decision depends on moving costs. Other Good Influence of Housing Voucher Choice 300 U2 U1 220 300 Housing

15. Which are preferable, Rent Certificates or Vouchers? • Vouchers less constraining • Why? • Which raises utility more?

16. Discrimination in Housing and Mortgage markets • Housing market • Some evidence to suggest this is a problem in both owner-occupied and rental markets. • Lending • Home Mortgage Disclosure Act data reveal problems in many cities/neighborhoods • Policy response has been on detection • Statistical modeling using HMDA data and other data on sales • Fair housing audits • Enforcement • DOJ, FRB • Modifying underwriting standards to enhance approval rates in low income neighborhoods.

17. “New Housing Landscape” • Republican control in (post 1994) Congress has resulted in budget cuts • Shift of control from Federal to state level • HUD’s ability to address needs diminished by budget cuts. • Consolidation is occurring • Restructuring of HUD • Warning • Limited ability to improve efficiency at HUD • Resources needed to improve supply of low income rental units

18. Homelessness is a significant problem in some U.S. cities Look at insights from Ellickson article.

19. What should be done about the homeless problem?

20. Rent Control as Housing Policy • There are arguments for and against rent control. • Economic arguments for the policy are quite weak. • Arguments against are compelling. • Rent control is a prime example of misdirected public policy which hurts the poor more than it helps them. • Lets look at the issues.

21. Rent Control Graphically Rent S Re Rmax D Quantity QS Qe QD

22. Rationale for Rent Control • Helps the Poor • This presumes that those who end up in rent controlled are poor. • No strong evidence to suggest this is the case. • Inefficient since payments in kind are inferior to payments in cash. • Inequitable, since only landlords bear the burden of the subsidy. • Assumes quality doesn’t adjust over time. • Supply decreases over time implying fewer beneficiaries.

23. Other Arguments:Rent Control reduces Inflation • Although housing carries a relatively large weight in the CPI, rent control is too limited in scope to have an influence here. • By reducing rents in housing sector, disposible income rises, and spending in other sectors increases also. • Finally, Friedman is probably right • Inflation is always a monetary phenomenon

24. Other Benefits Cited • Benefits minorities • Probably leads to racial discrimination as other allocation mechanisms are used. • Reduce tenent evictions. • Given the waiting list for these apartments, it should increase, not decrease evictions. • Prevents price gouging • Price gouging assumes landlords have monopoly power. Not likely.

25. Cited Benefits-continued • Reduces slums and enhances quality • Has just opposite effect, as housing falls out of housing stock as a result of diminished expected returns. • Optimal maintenance falls.

26. Real Disadvantages • Reduction in mobility • Residents more likely to hold on to RC units. • May increase unemployment as a result. • While not eliminating new construction, it is discouraged. • Diminished profit motive. • Firms opt for other investments • Reduced maintenance leads to more rapid depreciation.

27. Rent Control Graphically S’ Rent S Worsening shortage in controlled market Re Rmax D Quantity QS’ Qe QD

28. Disadvantages (continued) • Inefficient means to redistribute income. • If purchasing power is problem, then attack problem directly. • By contrast, rent control policies benefits some (not necessarily the poor) at the expense of others (likely the poor)!

29. The Uncontrolled Market The excess demand for rent contolled units shifts some households to the uncontrolled market. Thus, those in contolled units benefit at the expense of others! S’ Rent S Re Re Rmax D’ D Quantity Qe Qe’

30. Conclusions • In general, economists have long had a problem with public policies which “arrest the price mechanism”. • Rent control has never lived up to its billing • Remains in place today because of the acceptance of its false promises. • Politically difficult to remove controls. • However, a little economic logic reveals much better alternatives.