Over past few years I have been studying public policy in the context of developed countries, and US in pirticular. This is first post in the series on US policy from an outsider view.
As a developed nation, there are challenges to maintain status quo of what worked in the past, reform what is not working anymore, and build something new to drive progress. The three viewpoints are often at collision with each other with well defined, valid and competent ideological frameworks, but as everything in social sciences, no framework is complete.
Ill try to summarize my learnings in the areas of housing in the upcoming few posts.
Housing Stakeholders
US democracy had something that was very new from an Indian perspective, Strong Local Governments. Its not a lipservice, when I say strong, they are pretty strong. Housing permits, school boards, local taxes etc can be various sources of revencue but the strength can be determined by expediture. From total government expenditure, Approx 55% is spent by Federal govt, 22% by state, and 23% by local bodies. Housing usually falls under the purview of Local bodies.
Local Bodies maintaining Status Quo
As population grows, land become scarce, and housing cost rises. This is a general trend around the world in cities. The price rise make early investment in the land and housing very profitable, and the existing owners usually strong constituents of the local bodies. It is in their interest to keep the housing units limited, to increase the price rise, and their profits.
Local bodies force stringent rules on permits for new housing, sometimes aesthetic (number of floors, number of units, location to maintain green areas), and sometimes strategic long view (slowly increase the housing units to maintain limited supply and keep demand high, hence maintain price rise).
As the housing price rise, the local bodies get higher revenue from property taxes, can invest better in local schools, and lead to higher property prices due to US School District Zones.
Local Businesses see rising costs.
With the rise of housing cost, rental costs rise (closely follow morgage payment for new home owners), and increase the cost of labor as rent burden increases.
Most business rely on low wage workers as bulk of their workforce to compete in local, state, national and international markets. These businesses increasingly find it harder to deal with labor shortages. Another great graph to show housing cost in terms of Min wage is below.
New business unable to start due to Labor Shortage.
Cities are ecosystems of Entrepreneurial activities. They provide source of existing talented labor force, attractive service industry (restruants, schools, hair salons etc.) to create new businesses, which can work using local talent but also need additional workforce from other states. US has dropped significantly in Labor mobility over time.
Reducing labor mobility impacts both cities facing skilled labor shortage, and skilled labor unable to move to find better work. Though there is no single number that quantifies the impact of housing on labor mobility, multiple reviews [1][2][3] suggest some impact of housing prices on labor mobility and unemployment expecially for high skilled labor.
Reform proposals Part 1 – Affordable Housing
Poor man’s Economic Review
Though I intend to keep the review jargon-free as possible, it helps to get some basic economics understanding. I cannot help pitching this amazing book for introduction.
Ideally, Economist think Free Market Capitalism should solve an issue where difference of demand and supply is shoring up the prices. But as always there are caveats. Most markets are not “Free“, they can either be impacted by Monopoly, or Government Regulation artifically has to regulate the market due to Negative Externalities. Any regulation has a potential to cause intended/unintended side effects in working of free market, and hence we arrive at our issue at hand.
Limited Land: Most urban cities have limited commodity, Land, which limits the supply of raw material (aka Land) for Supply from outside. However, if left unchecked, free market can still work by buying up under utilized land to respond to demand for housing, but regulations for safety, health, hazard, aesthetic, permit etc make the market entry very costly for new players.
Building Cost vs Recovery from Rent: Urban.org does a great analysis of getting a loan for constructing 50/100 unit apparment for low income residents. Adding just the summary below, it doesn’t make economic sense without government subsidy to make low income housing.
Negative Externality: In simple terms, Additionally, government bodies are elected from local representatives, who donot want price to decrease for their own homes, so there is partial disincentive to approve too many projects as it may impact housing price suddenly, making existing long term investments (Morgages) unstable.
Reforms:
Most reforms for this scenario fall under Affordable Housing category.
Permit to construct on Govt subsidized Land: Government grants permit/subsidy to developers to construct some percentage of total housing units as Low Income Housing.
Build low income housing: Governments can build housing using open contracts at selected sites. This faces vehemont opposition from places which are selected for such locations (NIMBY – Not in My Back Yard), as it can decrease the property value around the neighbourhood. The issue was highlighted famously in the HBO mini-series, Show Me a Hero (strongly recommend), from the quote Show Me a Hero, and I’ll write you a tragedy.
Housing Choice Voucher (HCV) program: Voucher recipients find rental housing in the private market and contribute 30% of their adjusted gross incomes toward housing costs. The voucher pays the remaining costs up to the local housing agency’s payment standard. The incentive to find the lowest required house is reduced, as the voucher covers all remaining cost, without increasing cost based on house cost.
Impact of existing reforms:
I used the THE GAP: The Affordable Housing Gap Analysis 2016 for getting definitions and figures:
Area Median Income (AMI): The median family income in the metropolitan or nonmetropolitan area
Extremely Low-Income (ELI): Households with incomes at or below the poverty guideline or 30% of AMI, whichever is higher
Very Low-Income(VLI): Households with incomes between ELI and 50% of AMI
Low-Income (LI): Households with incomes between 51% and 80% of AMI
Middle Income(MI): Households with incomes between 81% and 100% of AMI
Above Median Income: Households with incomes above 100% of AMI
Cost Burdened: Spending more than 30% of household income on housing costs
Severely Cost Burdened: Spending more than 50% of household income on housing costs
Issues with existing reforms
Note: The figure above prints a rosier picture than what we should be looking at. Affordability of houses based on percentile of AMI, and rent limit on them is based on the standard of 30% of income. But the ELI households are competing for ELI Rental Units with all the other eligible households that fall under the category of Affordable eligible households.
Due to these distinctions, made at county/state level, there is often mismatch in units needed vs available.
These Low Income housing donot solve the problem for Skilled labor unwilling to move with salaries higher than AMI, but causing rent burden higher than 30% due to unavailability of right housing for them.
Change of job to different Tier (Start earning above the limit), Second job by partner etc are income changing events that are harder to deal with due to stringent requirements of Rental Unit income restrictions, and lowers the incentive to move to higher income not high enough to accommodate losing the current unit, and starting the search for new unit.
Loss of job etc, can cause sudden burst of defaults in the market, and applying for federal housing assistance is hard, timeconsuming, and unreliable (<25% of those in need get approved).
Potential Solutions
Penalize Local Governments for low availability of housing:
Fixing the incentives for Local governments is required to manage requirements for both high income constituents and Low income constituents. Forcing some part of housing assistances to come from Local governments should force them to fund/permit more low income housing to reduce tax burdent.
Scale up Voucher programs with incentives for chosing lower rent housing.
HCV is great program with increasing acceptance in congress, but it disincentivizes the search for lower rent household and not distort the market. Low Income Housing Tax Credit (LIHTC) program to better target the housing needs of extremely low-income households can be used. Basically it scales up the subsidy for housing upto a modest limit based on housing availability in the area, and increases burden on household for chosing higher rent house.
Allow residents to continue in Low Income housing if income increases, to reduce disincentives to find better options. Provide instead reduced subsidy as the income increase.
Reduce Impact of Unemployment: Eviction Prevention and tackling homelessness
Lastly, significant life changing events, like care for family, or child birth can reduce the income of the household, upto unemployment, and suddenly the household is facing eviction. This issue was highlighted during Covid-19 when millions of households lost single source of income. During stressfull moments applying right subsidies, finding right rental assistance programs etc are harder to find and fill. Solutions can include sending pre-filled related programs forms to assist, guide on what the the options when a potential loss of employment is detected.
Thats all for now. Hopefully will send second part soon.
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