Reconsidering The Housing Markets

[u]REQUIRED READING[/u][/i]: In the U.S. today, there are 9.2 million extremely low income (ELI) renter households (incomes of 0-30% of their area median) and only 6.1 million rental homes they can afford (paying no more than 30% of their income for their housing).[/b] For every 100 ELI households in the United States, there are just 37 rental homes that are affordable and available to them. As a result, these households pay precariously high portions of their income for the housing, leaving little left for other necessities. Nearly three quarters (71%) of ELI renter households spent over half of their incomes on housing in 2007, and the average ELI renter spent 83% of household income on housing. The most recent State of the Nation's Housing report from the Joint Center on Housing Studies comes to the same conclusion. Households of all kinds with incomes in the bottom quintile all have housing-cost burdens, paying more than 30% of their household income for their homes. No matter what the age group, household composition or employment status of the head of households, these households have to pay unacceptably high portions of their meager income for their homes. In the wake of the foreclosure crisis, conventional wisdom is that the nation has an excess supply of housing and higher than normal vacancy rates. Although that may be the case for high-cost housing, there is no evidence that the available supply of low-cost rental housing has increased. Indeed, the supply of low-cost rental housing continues to decline. Moreover, rents at the lower end of the market continue to rise. The 2010 national housing wage – that is, the hourly wage that a full-time worker must earn in order to afford a two-bedroom rental home – is $18.44 an hour, up from $17.84 an hour in 2009. There remains no place in the U.S. where a full-time minimum-wage worker can afford the rent on a one-bedroom rental unit. The consequences of this scarcity of housing are dire for the families who are most directly affected. High housing-cost burdens mean fewer dollars to spend on other necessities. High housing costs mean never saving money and having no cushion for emergencies. High housing cost burdens mean risk of eviction and frequent moves. The shortage of affordable rental homes for ELI low-income households is the principle cause of homelessness in the United States. A stable home is the platform for success in all other spheres of individual and family life. Children cannot succeed in school if they do not have a stable place to go home to when school is out. Adults cannot succeed in the workforce or in civic life if they do not have a stable place to go home to at the end of the workday. Someone cannot recover from illness in the absence of a stable home. People with chronic disabilities are consigned to institutions or the streets if they lack access to stable homes. With the intense emphasis on homeownership as the preferred form of tenure in recent years, we have lost touch of with what housing really means. Housing needs to be understood much more as the place where one is sheltered and carries out family life, and much less as a financial asset and a source of wealth building. Given this understanding of the housing crisis today, we offer the following principles to guide reform of the housing finance system in the U.S. [b][i]Principles to guide reform[/i][/b] Federal subsidies to the housing sector should first be directed to meeting the needs of those with the most serious housing problems. In fiscal year 2009, the federal government spent $300 billion to support housing and the mortgage markets. Eighty percent subsidized homeownership, and the remaining 20% supported rental housing. The majority of the homeownership subsidy is provided through tax expenditures, while most of rental housing support is provided through the Department of Housing and Urban Development (HUD) budget. The tax advantages provided for homeowners are highly skewed to benefit higher-income households. First, a taxpayer has to have sufficient income to benefit from filing an itemized return in order to take a tax deduction at all. Only a third of all households claimed the mortgage interest tax credit in 2009. Second, the bigger a borrower's mortgage, the greater his or her deduction will be, so people with the most expensive homes get the most generous subsidy. Of those who took the deduction, 76% of the subsidy went to households with incomes of $100,000 or more; 32% went to households with incomes of $200,000 or more. Similar skewing in favor of the financially well-off is found in the real property tax deduction. A truer picture of the federal commitment to housing would also count the nearly $2 trillion in support for mortgage credit and other insurance through the Federal Housing Administration, Ginnie Mae, the Department of Veterans Affairs and Rural Housing Services loans, the National Flood Insurance Program, Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Despite this considerable federal involvement in the housing sector, we have a persistent structural deficit of housing that the lowest-income people can afford. This is a problem that the housing market has not and cannot solve. Clearly, subsidies are not being directed to where they are needed the most and where they would do the most good. Some would argue that imposition of the conflicting goals of maximizing profits and serving a public purpose contributed to the downfall of Fannie Mae and Freddie Mac. We would argue that housing, like healthcare, is so essential to human well-being that any profit-seeking enterprise in housing must be grounded by social responsibility that is assured by government regulation. In 1992, Congress directed Fannie Mae and Freddie Mac to take a more active role in assuring the availability of affordable housing by establishing ‘affordable housing goals’ that the government-sponsored enterprises (GSEs) were required to meet. There is little agreement as to the effectiveness of these goals. Many observers would do away with them. Certainly, the affordable housing goals made little difference in addressing the affordable-housing shortage for the lowest-income people. In July 2008, Congress enacted additional reforms for the GSEs and added a further affordable-housing obligation, in the form of contributions to the National Housing Trust Fund and the Capital Magnet Fund. The National Housing Trust Fund is specifically designed to address the shortage of rental housing for the lowest-income people. Of course, these contributions were suspended before they ever started when Fannie and Freddie went in conservatorship in fall 2008. We think that in whatever form Fannie and Freddie take in the future, the obligation to contribute to the National Housing Trust Fund must be renewed and expanded. Just as important, we think all federally regulated financial institutions have a similar obligation and should be required to make similar contributions. [b][i]Playing favorites[/i][/b] Federal policy should not favor one form of tenure over another; rather, federal policy should incentivize balance in the housing market and the full range of housing choices in every community. Federal policy has clearly favored homeownership over rental housing for much of the last 60 to 75 years, as indicated by the skewed nature of federal housing subsidies reviewed above. Not only has a disproportionate share of subsidies gone to homeownership, but subsidies provided to homeowners through the tax code is an entitlement. Someone who fits all the eligibility criteria automatically receives the subsidy. Subsidies to renters through direct spending by HUD or other federal agencies are limited to the amount of annual appropriations; most people who are eligible for rental assistance do not receive any because of a lack of funding. In the wake of the foreclosure crisis, many political and financial leaders, including HUD Secretary Shaun Donovan, are calling for a more balanced federal housing policy. Every community has members at all stages of the life cycle, at all income levels, and in all forms of family constellations. Every community needs a variety of housing options: owned and rented, single family and multifamily, assisted and supportive homes, sized for single persons and large families. Forms of housing that expand housing choices, such as two-to four-unit multifamily homes and manufactured housing, should be encouraged. Assuring that all members of a given community have homes they can afford in the neighborhood of their choosing will require strict enforcement of fair housing laws, including fair lending, and full implementation of the duty to affirmatively fair housing as a condition of receiving direct and indirect federal subsidies. [b][i]Size matters[/i][/b] One of the manifestations of the housing bubble was the growth in the square footage of individual homes. The demand for bigger homes with more expensive amenities was fueled, in part, by the federal housing subsidies through the tax code. Currently, interest on a mortgage up to $1 million is deductible. A simple reduction in the size of a mortgage that would be eligible for favorable tax treatment would help sure right-size houses and reduce the energy that each house consumes. Tax credits and favorable mortgage terms for homeowners and owners of multifamily properties that encourage energy efficiency should be continued and expanded. Furthermore, a strong secondary mortgage market is essential to the long-term health of the U.S. housing sector. Consider how much worse our economy would be if we had not had Fannie and Freddie over the past 18 months. Federal backing, in some form or fashion, will be required to sustain such a secondary mortgage market. Federal policy should maximize the capacity of mission-driven, public or nonprofit housing providers to achieve tangible results in solving the nation's housing woes. Public and nonprofit housing organizations that are not motivated by profit are more likely to engage in housing development and operation that will serve low-income people over the long term. [i]Sheila Crowley is president of the National Low Income Housing Coalition. She can be reached at (202) 662-1530. This article is based on recent testimony presented to the Financial Services Committee of the U.S. House of Representativ


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