Urban Housing PolicyUrban Housing Policy

Prof. ClarkProf. Clark

Weeks #13-14Weeks #13-14

Housing PolicyHousing Policy• Again, we just scratch the surface here.Again, we just scratch the surface here.• Lets get an overview of housing policy, and Lets get an overview of housing policy, and

then we will look at a couple of specific then we will look at a couple of specific policies (focus is on recent emphasis)policies (focus is on recent emphasis)

• Federal, state and local governments Federal, state and local governments intervene in housing markets.intervene in housing markets.– Is there a market failure here?Is there a market failure here?

• e.g., externalities?e.g., externalities?

– What is a merit good?What is a merit good?

Brief Overview of Housing Brief Overview of Housing PolicyPolicy

• 1940’s to middle 1960’s: 1940’s to middle 1960’s: – Urban renewal of blighted areas.Urban renewal of blighted areas.– Eliminated neighborhoods with substandard housing and Eliminated neighborhoods with substandard housing and

replaced with standard housing.replaced with standard housing.

• 1960’s to middle of 1970’s1960’s to middle of 1970’s– Renewal replaced with supply side subsides to increase Renewal replaced with supply side subsides to increase

supply of standard housing.supply of standard housing.

• Late 1970’s to presentLate 1970’s to present– Emphasis on demand side subsidies, with no link to Emphasis on demand side subsidies, with no link to

supply side.supply side.

Gabriel Article provided Gabriel Article provided good overviewgood overview

Provides very nice overview Provides very nice overview of Housing Policy in U.S.of Housing Policy in U.S.

Gabriel’s pointsGabriel’s points

• Overview of condition of housing over Overview of condition of housing over timetime– Consistent improvementConsistent improvement– Overcrowding increased slightly for some Overcrowding increased slightly for some

(cultural explanation)(cultural explanation)– Quality has improvedQuality has improved

• Removal of deficientRemoval of deficient• Addition of higher qualityAddition of higher quality

– Reduction in Supply of low-quality rental Reduction in Supply of low-quality rental units has generated shortageunits has generated shortage

Gabriel ArticleGabriel Article

• Ownership issuesOwnership issues– We have promoted ownership for a long time We have promoted ownership for a long time

through variety of policiesthrough variety of policies• Deductible mortgage interestDeductible mortgage interest• InnovationsInnovations

– Development of various mortgage instrumentsDevelopment of various mortgage instruments– Freddie Mac, Fannie-Mae (govt. sponsored finance Freddie Mac, Fannie-Mae (govt. sponsored finance

agencies)agencies)– Secondary mortgage marketsSecondary mortgage markets

– Ownership has generally risenOwnership has generally risen• Peaked in 1980 (65.8%), and then didn’t start rising Peaked in 1980 (65.8%), and then didn’t start rising

again until 1993 period, reaching 65.6% in 1996.again until 1993 period, reaching 65.6% in 1996.• Minority rates have risen.Minority rates have risen.

GabrielGabriel

• Ownership issuesOwnership issues– Volatile expected appreciation levelsVolatile expected appreciation levels– Down payment problems Down payment problems

• State policies frequently address these State policies frequently address these issuesissues

– Mortgage rates far below peaks during Mortgage rates far below peaks during 1980’s.1980’s.

• Some innovations have introduced Some innovations have introduced low cost housing alternatives.low cost housing alternatives.

Gabriel - RentersGabriel - Renters

• Shrinking stock of low rent optionsShrinking stock of low rent options– Supply side policiesSupply side policies

• Section 236 program Section 236 program – Contract with developer to build unitContract with developer to build unit– Rent subsidies to landlord tied to difference Rent subsidies to landlord tied to difference

between market and “basic” rentbetween market and “basic” rent

• Programs reduced in 1980’sPrograms reduced in 1980’s• Public housing stock also decliningPublic housing stock also declining

– Deterioration, celebrated disastersDeterioration, celebrated disasters– End of high-rise centralized public housingEnd of high-rise centralized public housing– Life-cycle approach to budget allocationsLife-cycle approach to budget allocations

GabrielGabriel

• Shift to Demand Side StrategiesShift to Demand Side Strategies– Mobility issues and spatial mismatchMobility issues and spatial mismatch– Cost issuesCost issues

Section 8 Rent CertificatesSection 8 Rent Certificates• These are certificates that can be used These are certificates that can be used

anywhere.anywhere.• Means tested.Means tested.

– Income<80% median family income for region.Income<80% median family income for region.

• Qualifications:Qualifications:– Quality of housing must meet minimal standard.Quality of housing must meet minimal standard.– Actual rent less than fair market rent.Actual rent less than fair market rent.

• Subsidy=Actual Rent-0.3*Actual IncomeSubsidy=Actual Rent-0.3*Actual Income

Influence of Rent Influence of Rent Certificates on Housing Certificates on Housing

ChoiceChoice• SupposeSuppose– fair market rent=$400fair market rent=$400– Actual rent=400.Actual rent=400.– Income=$600Income=$600

• Thus:Thus:Subsidy=400-0.3*600Subsidy=400-0.3*600

Subsidy=220Subsidy=220

• New Disposible New Disposible Income=600+220=820Income=600+220=820

• Move decision depends Move decision depends on moving costs.on moving costs. Housing

U1

Other GoodOther Good

300

300

420

400

U2

Does this shift out budget Does this shift out budget line parallel by $220? line parallel by $220?

No? Effect of subsidy depends on No? Effect of subsidy depends on actual rent which must be less than actual rent which must be less than

$400.$400.

Thus, subsidy is not greater than Thus, subsidy is not greater than $220, but it can be lower if actual $220, but it can be lower if actual rent is less than fair market rent rent is less than fair market rent

level.level.

Housing VouchersHousing Vouchers• Again, housing vouchers may be used Again, housing vouchers may be used

anywhere.anywhere.• Means tested Means tested • QualificationsQualifications

– Housing must be minimum qualityHousing must be minimum quality– Subsidy depends on fair market rent, not Subsidy depends on fair market rent, not

actual rent.actual rent.

• Subsidy=Fair Mkt Rent-0.3*Actual IncomeSubsidy=Fair Mkt Rent-0.3*Actual Income

Influence of Housing Influence of Housing Voucher ChoiceVoucher Choice

• SupposeSuppose– fair market rent=$400fair market rent=$400– Income=$600Income=$600

• Thus:Thus:Subsidy=400-0.3*600Subsidy=400-0.3*600

Subsidy=220 regardless of Subsidy=220 regardless of actual housing expense, if actual housing expense, if housing standard.housing standard.

• Parallel shifts budget.Parallel shifts budget.• Move decision depends Move decision depends

on moving costs.on moving costs.Housing

U1

Other GoodOther Good

300

300

U2

220

Which are preferable, Rent Which are preferable, Rent Certificates or Vouchers?Certificates or Vouchers?

• Vouchers less constrainingVouchers less constraining– Why? Why?

• Which raises utility more?Which raises utility more?

Discrimination in Housing Discrimination in Housing and Mortgage marketsand Mortgage markets

• Housing marketHousing market– Some evidence to suggest this is a problem in both owner-Some evidence to suggest this is a problem in both owner-

occupied and rental markets. occupied and rental markets.

• LendingLending– Home Mortgage Disclosure Act data reveal problems in many Home Mortgage Disclosure Act data reveal problems in many

cities/neighborhoodscities/neighborhoods

• Policy response has been on detectionPolicy response has been on detection– Statistical modeling using HMDA data and other data on salesStatistical modeling using HMDA data and other data on sales– Fair housing auditsFair housing audits

• EnforcementEnforcement– DOJ, FRBDOJ, FRB

• Modifying underwriting standards to enhance Modifying underwriting standards to enhance approval rates in low income neighborhoods.approval rates in low income neighborhoods.

““New Housing Landscape”New Housing Landscape”

• Republican control in (post 1994) Congress Republican control in (post 1994) Congress has resulted in budget cutshas resulted in budget cuts– Shift of control from Federal to state levelShift of control from Federal to state level

• HUD’s ability to address needs diminished HUD’s ability to address needs diminished by budget cuts.by budget cuts.– Consolidation is occurringConsolidation is occurring– Restructuring of HUDRestructuring of HUD

• WarningWarning– Limited ability to improve efficiency at HUDLimited ability to improve efficiency at HUD– Resources needed to improve supply of low Resources needed to improve supply of low

income rental unitsincome rental units

Homelessness is a Homelessness is a significant problem in significant problem in

some U.S. citiessome U.S. citiesLook at insights from Ellickson Look at insights from Ellickson

article.article.

What should be done What should be done about the homeless about the homeless

problem?problem?

Rent Control as Housing Rent Control as Housing PolicyPolicy

• There are arguments for and against There are arguments for and against rent control.rent control.– Economic arguments for the policy are Economic arguments for the policy are

quite weak.quite weak.– Arguments against are compelling.Arguments against are compelling.

• Rent control is a prime example of Rent control is a prime example of misdirected public policy which hurts misdirected public policy which hurts the poor more than it helps them.the poor more than it helps them.

• Lets look at the issues.Lets look at the issues.

Rent Control GraphicallyRent Control Graphically

RentRent

Quantity

S

D

Re

Qe

Rmax

QDQS

Rationale for Rent ControlRationale for Rent Control• Helps the PoorHelps the Poor

– This presumes that those who end up in rent controlled This presumes that those who end up in rent controlled are poor.are poor.• No strong evidence to suggest this is the case.No strong evidence to suggest this is the case.

– Inefficient since payments in kind are inferior to Inefficient since payments in kind are inferior to payments in cash.payments in cash.

– Inequitable, since only landlords bear the burden of the Inequitable, since only landlords bear the burden of the subsidy.subsidy.

– Assumes quality doesn’t adjust over time.Assumes quality doesn’t adjust over time.– Supply decreases over time implying fewer beneficiaries.Supply decreases over time implying fewer beneficiaries.

Other Arguments:Other Arguments:Rent Control reduces Rent Control reduces

InflationInflation• Although housing carries a relatively large Although housing carries a relatively large

weight in the CPI, rent control is too weight in the CPI, rent control is too limited in scope to have an influence here.limited in scope to have an influence here.

• By reducing rents in housing sector, By reducing rents in housing sector, disposible income rises, and spending in disposible income rises, and spending in other sectors increases also.other sectors increases also.

• Finally, Friedman is probably rightFinally, Friedman is probably right– Inflation is always a monetary phenomenonInflation is always a monetary phenomenon

Other Benefits CitedOther Benefits Cited• Benefits minoritiesBenefits minorities

– Probably leads to racial discrimination as Probably leads to racial discrimination as other allocation mechanisms are used.other allocation mechanisms are used.

• Reduce tenent evictions.Reduce tenent evictions.– Given the waiting list for these apartments, Given the waiting list for these apartments,

it should increase, not decrease evictions.it should increase, not decrease evictions.

• Prevents price gougingPrevents price gouging– Price gouging assumes landlords have Price gouging assumes landlords have

monopoly power. Not likely.monopoly power. Not likely.

Cited Benefits-continuedCited Benefits-continued

• Reduces slums and enhances Reduces slums and enhances qualityquality– Has just opposite effect, as housing Has just opposite effect, as housing

falls out of housing stock as a result falls out of housing stock as a result of diminished expected returns.of diminished expected returns.

– Optimal maintenance falls.Optimal maintenance falls.

Real DisadvantagesReal Disadvantages• Reduction in mobilityReduction in mobility

– Residents more likely to hold on to RC units.Residents more likely to hold on to RC units.– May increase unemployment as a result.May increase unemployment as a result.

• While not eliminating new construction, it is While not eliminating new construction, it is discouraged.discouraged.– Diminished profit motive.Diminished profit motive.– Firms opt for other investmentsFirms opt for other investments

• Reduced maintenance leads to more rapid Reduced maintenance leads to more rapid depreciation.depreciation.

Rent Control GraphicallyRent Control Graphically

RentRent

Quantity

S

D

Re

Qe

Rmax

QDQS’

S’

Worsening shortage in controlled market

Disadvantages (continued)Disadvantages (continued)• Inefficient means to redistribute income.Inefficient means to redistribute income.

– If purchasing power is problem, then attack If purchasing power is problem, then attack problem directly.problem directly.

• By contrast, rent control policies benefits By contrast, rent control policies benefits some (not necessarily the poor) at the some (not necessarily the poor) at the expense of others (likely the poor)!expense of others (likely the poor)!

The Uncontrolled MarketThe Uncontrolled Market

RentRent

Quantity

S

D

Re

Qe

Rmax

S’ 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!

D’

Re

Qe’

ConclusionsConclusions• In general, economists have long had a In general, economists have long had a

problem with public policies which “arrest problem with public policies which “arrest the price mechanism”.the price mechanism”.

• Rent control has never lived up to its billingRent control has never lived up to its billing– Remains in place today because of the Remains in place today because of the

acceptance of its false promises. acceptance of its false promises. – Politically difficult to remove controls.Politically difficult to remove controls.

• However, a little economic logic reveals However, a little economic logic reveals much better alternatives.much better alternatives.