Using the Wrong Tools to Build Affordable Housing

Posted by Alan Mallach on March 1, 2016

Along with most Rooflinesreaders, I believe that having some portion of a community’s housing as long term or permanently affordable is a desirable policy goal. That said, though, I’ve found myself wondering what might be the best way to actually pursue that goal. It is by no means obvious that the default answer of “build it” is the right one. About eight years ago, I spent a few weeks in France talking to developers, nonprofits, and public officials there about how they did affordable housing. It’s well known that from the 1950s through the '70s, France built huge public housing projects, a lot of them on the outskirts of major cities, only to see many of them turn into a social nightmare. The French learned some lessons from this experience. As a result, they came up with a very different approach.
Now, when French developers build subdivisions or condo projects, nonprofit housing corporations enter into turnkey contracts with the developer to buy blocs of apartments or houses, up to a maximum of 50 percent, of the units in the development. Based on those contracts, the nonprofits apply for a package of government loans, grants, and tax breaks so they can both buy the units and make sure they remain affordable. When the projects are completed, the nonprofit buys the units and operates them as affordable rental housing. I wrote a chapter about this program in a book that Nico Calavita and I wrote about inclusionary housing a few years ago. On top of that, the government also provides tax incentives for mom and pop owners to buy condos and rent them to affordable and middle-income renters; and it also offers combinations of tax incentives and zero percent second mortgages to enable moderate-income families to buy homes and condos in the same developments.
The point is that developers do what they do best, which is to build housing, and the housing programs take it from there. As a result, a lot of French housing developments contain a mix of both market-rate and subsidized rental units, and both market-rate and subsidized owner-occupied units. We could learn something from that approach.
Even though we don’t like to talk about it, most everyone in the housing industry knows that many market developers create a decent product for a lot less than Low Income Housing Tax Credit (LIHTC) projects going up in the same area. There may be some differences in materials and finishes, but that doesn’t account for most of the cost difference. Even in relatively low-cost areas like Arizona, unit costs on most new LIHTC projects run $200,000 to $250,000 and up, but developers in Phoenix are selling brand new three bedroom, two bath houses for well under $200,000. Market discipline has its uses.
Meanwhile, lots of areas have a lot of good existing housing available. When I checked recently on Zillow, there were over 1,000 houses for sale in Phoenix at $200,000 or less, but Phoenix is, believe it or not, a higher than average cost housing market. In the fall of 2015 (again from Zillow) the median sales price in Dallas was $132,500, Columbus $118,000, Tulsa $107,400, and on. These are not low-end prices; they are citywide medians. And these are not low-end cities. If one could use LIHTC funds simply to buy blocs of units from developers, or buy existing homes on the private market and turn them into long-term affordable rental housing, we might end up creating a lot more affordable housing than under the current system. We would save millions in construction costs, transaction costs, and in the costs of keeping projects alive for year after year while putting together ever more complicated subsidy layering schemes, and dramatically reduce the multi-year lag from when a project is first conceived to when the first tenants move in.
On top of that, this approach offers ways to further fair housing and help families move into areas of opportunity that could be executed far more simply and efficiently than the current struggle of convincing suburban municipalities to rezone land for LIHTC projects, or permit them to happen. The great majority of LIHTC projects are located in areas that have weak markets or no markets at all—low value, high-poverty inner city areas—as this map of the Rochester, New York area illustrates below. Almost all of the LIHTC projects in the Rochester area are in places with poverty rates of 40 percent or more. While some of these projects may be contributing to the revival of those areas, many are there because it’s the path of least resistance. Meanwhile, good houses in solid neighborhoods, both urban and suburban, are available at far less cost.

The darker the color, the higher the poverty, with the darkest color showing areas where 40% or more of the population is below the poverty level. Each triangle represents a separate LIHTC project. SOURCE: PolicyMap]

I’m not suggesting that we stop building new purpose-built affordable housing projects, just a lot less. The approach I’ve described might not be the best strategy everywhere. There are some circumstances where an LIHTC project can actually make a real difference for a struggling urban neighborhood, although I think they are fewer than often claimed. There are also a few places in the United States, like San Francisco and Washington, DC where the market has just gotten too expensive, and where conventional LIHTC projects, even if they cost $300,000 or more per unit, are still a good deal. These areas, however, are the exceptions.
The LIHTC program currently can not be used to buy houses in good condition—whether existing or newly built—and virtually no other money is available for that purpose. I realize we’re doing what we can with the tools we have, but they may not be the right tools. Instead of going on using them, perhaps we should be thinking more about whether what we’re doing really makes the most sense for the millions of families who not only need better housing, but deserve the opportunity to live in better neighborhoods, and how we might change things.
Photo credit: Courtesy of Nexity, a French housing developer. The photo is of a project in a small city in Brittany, in which Nexity sold half of the units to a non-profit housing corporation for social rental housing. The other half were sold to homebuyers at market rate.