Home Real Estate In Which I Propose an Affordable Housing Solution

In Which I Propose an Affordable Housing Solution

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It’s way too late, but I have insomnia. Plus, Brad Inman of Inman News published a rare Op/Ed about Bernie Sanders’s housing plan with what seems like approval:

I don’t agree with all of it, but Bernie Sanders was not afraid to put it forward. Cheers to that. Moreover, it is not a plan guided by self-interests — though I figure the unions will play a heavy hand if Sanders were elected president.

So, what is the Sanders plan? He has a 15-point scheme; here are a couple of highlights.

  • He promises to increase funding for the housing trust fund to at least $5 billion a year in order to construct and rehabilitate at least 3.5 million affordable housing rental units.
  • Demand more from developers. Housing that is built with government subsidies should remain affordable longer than the 10 years typically required by federal housing programs. “In my view, once we subsidize rental housing, we shouldn’t have to pay again and again simply to preserve it,” said Sanders.
  • Protect Homeowner Mortgage Interest Benefits. Sanders supports tax policies that promote homeownership. However, he wants to close the second home and yacht deduction, “and expand homeowner mortgage interest benefits to the 19 million homeowners who do not itemize their deductions.”

I posted a brief comment on the story on Inman, but then thought, I can’t sleep anyhow… why not go full Notorious on this? I’m not actually that interested in Sanders’s plan, because it’s very general, easy to pick apart if one were so inclined, and so on and so forth. (My guy Cruz hasn’t even proposed a housing plan, except to say that he would eliminate HUD, so there’s not even anything to pick on over there….)

Instead, let’s focus on one key issue, which I consider to be the fundamental issue, and then craft an actual affordable housing solution.

So here we go.

The Key Question

Again, try to ignore the details, like $5B for housing trust fund. Forget about all the stuff about taxes and government interference and so on and so forth. All of that is detail, and not relevant to a broad articulation of policy and principles.

The key question, to me, is this:

Will affordable housing rent be higher or lower than the mortgage payment on a comparable property?

I originally went with “median home price” but realized that we’re talking about low income families here. So maybe we’re looking at more like the bottom 20%. So I’m gonna go with “comparable” property, whatever that means in a particular area.

That is to say, suppose we’re talking about a 800 sq.ft. 2BR/2BA apartment with modern amenities, appliances, and the like. (After all, all affordable housing plans have in them encouraging construction of new units.) But as low-income housing, it’s in a relatively less desirable part of town, and it’s basic, rather than upgraded. Nonetheless, we’re talking about a safe, well-constructed, non-infested place suitable for families, not a crack den.

Say that unit would sell for $150K if it were a condo on the open market. A rough calculation for a 30-yr fixed mortgage using 3% down (the latest in BofA low-down mortgage programs) with 4.5% APR gets us to $1,073 ($737 P/I, $119 PMI, $67 Insurance, and $150 Tax). Who knows what the market rent of that same unit would be, but one assumes it would be significantly more than $1,073 just to account for vacancy risk and property management costs and so on.

So that unit, if it were part of an affordable housing rental program (however such a program is done) would rent for more than $1,073 or less than $1,073?

Why This Is the Key Question

The reason I think this is so important is that every politician who has ever run for office since FDR has praised homeownership. Bernie Sanders, in his affordable housing plan, says “Owning a home remains one of the best ways for families to build wealth and enter the middle class.” NAR would certainly agree.

Let us, for the sake of discussion, agree that homeownership is the best path out of poverty and cycles of low income families. Even if you pay interest, you put away a little bit of equity with each monthly payment, and after 10-15 years, suddenly you have an asset!

 

So the key question is the key question because of homeownership.

Affordable Rent Is Lower Than Mortgage

If “affordable rent” is lower than $1,073 (enough to make a difference), then that discourages homeownership. What is enough to make a difference? I don’t know, but by definition, it has to make a difference in the family’s life. $10 or $20 a month ain’t gonna cut it, right? Would $200 a month cut it? Maybe — that’s possibly a couple of weeks of groceries. $400 would make a substantial difference, one would imagine. So come up with a number for “affordable rent” in your mind. In my mind, that amount is 25% — $750/mo for that 2BR/2BA apartment. (Again, we’re not talking about market rents here, which we agree would be more than the mortgage payment, but about somehow-subsidized-or-controlled affordable rent.)

If my housing cost is $750/mo, and since it’s affordable, it has to be controlled and not part of the market rent. It’s not going to go up after two years to $1,500/mo. It’ll stay around $750 a month. Doesn’t that below-market rent provide a major incentive to me not to ever buy a house?

In this context, note that in 2010, a couple of activist types crunched census numbers and found out that there are millionaires living in NYC rent-stabilized apartments. And not just a few. We’re talking about 2,300 people making $500,000 per year or more living in rent controlled, affordable housing units:

Citizens Budget Committee and DNAinfo crunched the census numbers and found that in 2010,22,642 of the city’s 970,000 rent-stabilized apartments (approximately 2.3 percent) were occupied by households making more than $199,000. Of those, 2,300 apartments were occupied by people making more than $500,000, including a former Philip Morris executive, a polo-playing multimillionaire whose father is one of the country’s biggest McDonald’s franchisees, and other such cartoonishly rich people.

Ignore for the moment that these folks are completely taking advantage of a law/regulation that was not intended for them, and likely taking affordable housing stock away from low-income families who need it. Instead let’s focus on incentives. Are those people not buying a comparable place in NYC because they can’t afford it? Of course not; they have a strong incentive NOT to purchase when their monthly housing costs are so far below what the mortgage would be.

So any affordable housing program that puts the monthly cost of housing below what a mortgage would be is discouraging homeownership, the “best way to build wealth and enter the middle class.” Does that make sense to you?

Affordable Rent Is Higher Than the Mortgage

On the flipside, if “affordable rent” is actually higher than what the mortgage (expensive one, due to low down payment, probably low credit score, etc.) payment would be… then that makes precious little sense in a different way.

Homeownership is the best way to build wealth, as we’ve said, but we’re going to penalize the low-income families with higher monthly housing costs than those already well-off enough to own a home? That’s our affordable housing plan? A family that would qualify for affordable rents presumably has below-average income, no? (Again, NYC didn’t intend for Philip Morris executives to ride the rent control gravy train.) So we’re going to take even more of their income compared to someone who owns that exact same unit so they  have an even harder time saving up for a down payment?

Sure, such an “affordable rent” might still be far less than market rent — maybe $1,200/mo instead of $1,500/mo or more. But it’s still higher than the comparable mortgage payment, which penalizes those who can least afford to be penalized.

And we wonder why the wealth gap in the country continues to grow.

The Notorious Affordable Housing Plan

So, here’s my housing plan. If I’m elected President, which is slightly more likely than my being named the next CEO of NAR, here is what I would do: subsidize homeownership, not rentals.

The two barriers to homeownership are down payment and qualifying for a mortgage. OK, let’s just get rid of those two barriers.

If you qualify for low-income housing, you will pick a house/condo on your own. It must be in the bottom 20% in terms of price in your area. Uncle Sam will give you the down payment assistance as follows:

  • The first $5,500 is a grant. I picked that amount because that’s what the Federal Pell Grant amount is. (It’s actually $5,775 for 2015/16, but let’s make the math easier on ourselves). If college education is important enough for the government to just subsidize straight up, then so is homeownership.
  • The remainder may be borrowed, up to a maximum of 80% of the down payment required, directly from the Federal government at the Fed Funds rate (currently 0.5%). So the family has to shell out at least 20% of the down payment amount; if we’re talking about 5% down, it gets affordable real quick. That $150K apartment above? 5% down is $7,500. $5,500 is the Homeownership Grant. That leaves $2,000 — come up with $400, and borrow $1,600 from the Down Payment Assistance Program.
  • This is a once-in-a-lifetime program. You only get the assistance once. After that, we expect that you will have some equity in your home when you sell it to make a normal market down payment on your move-up purchase.

That takes care of down payment. What about the mortgage?

That’s easy: Uncle Sam will guarantee your mortgage. We do it with FHA loans and VA loans and other loans. Just expand the program and simplify it. If you default, the Federal government pays the lender. Lender has zero risk. In exchange, the interest rate will be fixed at prime minus 100 bp (today, that would be 3.5% – 1% or 2.5%). Not too bad for what is pretty much a risk-free loan, no? But not so great that banks wouldn’t want to make market-rate mortgages to folks not in the low-income program, with the attendant higher risks.

If you default, the U.S. will take what you owe out of your various checks from the government. Whether that’s Social Security payments, tax refunds, whatever — they get reduced slightly to repay the mortgage. If you have a job, your wages will be garnished to repay the loan.

There. That’s my affordable housing program. No Section 8, no subsidies to builders, and a minimum of bureaucracy. The application process can be automated, since there is no credit check, no DTI checks, nothing — the whole thing is guaranteed by the United States. Just verify your income (or lack thereof) and off we go. No renters, but only homeowners on their way to building wealth, pride of ownership, and joining the middle class.

What would be the cost? I don’t know. I didn’t crunch the numbers, nor do I really have the desire to do so. But HUD’s 2017 budget asks for $48.9 billion, so that’s a starting point.

But… What About Those Who Do Default?

The wrinkle is what to do about those people who enter this low-income housing program, and then default anyhow.

Well, this is where the wind turns cold. As I see it, defaulters have three choices.

  1. Open Market: You are now at the mercy of the open market in rentals, since you blew your chance at homeownership and affordable housing.
  2. Private charity: Since there will be zero other affordable housing programs, there may be private charities that pop up to help those who defaulted on their Fed Homeownership Program. I urge Bill Gates and Zuckerberg and the like to think about spending some of their billions on that.
  3. Government Housing: As a last resort, you can go live in government housing for free. These will not be, however, family residences or private apartments. No, they will be barracks, with a mess hall, and a PX: exactly as if you were a soldier. If it’s good enough for our men and women in the military, then it’s damn sure good enough for Mr. Defaulted-On-My-Low-Income-Mortgage-Program guy. If you have a job, best start saving up while you have free housing and free food. If you don’t have a job, you will be given one at the prevailing minimum wage. It might be cleaning highways; it might be menial clerical work; it might be whatever we need done as a nation at that time. If that sounds uncomfortably like some sort of a labor camp, well, so be it. You are free to leave anytime, of course, since you are not a criminal. But that’s government housing going forward. It’s not a good option, but you won’t be homeless.

So, what do you say? Do I have your vote?

The Point Is…

Obviously, I don’t expect this to go anywhere past these pages. But it’s worth thinking about “affordable housing” holistically. The continued assumption that affordable housing must mean rentals goes against all of our praise of homeownership as a real positive. Why subsidize and spend billions of dollars on a second-best option? Why not spend it on subsidizing the best option, which is homeownership?

There may still be renters in this fantasy world. There are valid reasons to rent, such as mobility, not wanting to deal with the headaches of homeownership, not wanting to take on a 30-year debt, etc. But let those people do what they want in the open market. If the government — and by extension all of us taxpayers — are going to subsidize anything, it should be homeownership, not Renter Nation.

-rsh

 

23 COMMENTS

  1. Rob, you have out done yourself with this. its an excellent frame work for affordable housing purchases.
    There is still going to be a need for some subsidized rental housing like Section 8, and there is simply too much money on the table to expect the many interests who currently provide this housing to go away. Better to let that dog lie than wake it up with a kick right now so your idea is not facing a lobbying onslaught by a coalition of groups who should be supporting you or at least standing on the sidelines. You actually create a long term exit strategy for some of this investment.
    Your plan actually should draw interest from that portion of the 40% f American households who now rent and are paying more in rent than they would to own, but run into income/debt ratio and and credit barriers to getting loans.
    The simplicity of the idea and the implementation is great, now we need to find someone at the national level in HUD or FHFA to seriously consider it. There is the rub.

  2. A possible solution for your top level question: “an affordable housing solution?” I think that your statement: “After all, all affordable housing plans have in them encouraging construction of new units” is where the most important solution resides.

    I don’t know if there is a term, I just call it “reverse zoning”. That’s taking existing property in desirable, walk-to etc. locations and modifying zoning to make smaller buildable lots. Yes, it increases density…but in the places where people want to live i.e close to schools, town, city-centers, parks etc.

    Under this scenario, current home/property owners don’t suffer financially. Their 20 foot wide “city lot” that’s amended into two 10 foot lots gives the current property owner full value while creating two newly constructed homes/units available to builders and the subsequent homeowners at half the price. Kind of the opposite of what some call “McMansionization” (a mostly suburban phenomenon).

    While it wouldn’t work in every community, there are many urban, suburban towns and villages where this type of activity would solve a lot of problems; current property/home owners don’t suffer losses, older market are rejuvenated, millennials have a better chance to enter the market on an ownership basis etc…a lot of good stuff.

    Just a thought 🙂

    Thanks,
    Brian

    • ROB,

      No insomnia, but that thing where I wake up early and can’t shake a thought until it’s addressed…

      So, I’m commenting on my comment.

      My “city lot” example was probably too extreme. It would be more feasible to address the depth of the new construction than the width…don’t think we’re Japan quite yet.

      In fact, creating affordable housing under this strategy is probably easier in the suburbs, especially those that feed into major metros with train or bus lines or are reasonably drive-able.

      Westmont, IL. http://www.westmont.illinois.gov/ is a good example.

      Westmont sits on the commuter train line west out of Chicago. It is nestled between some nice(r) middle-class communities. Westmont, on the other hand, struggles. Most of the housing close to its village center is old and obsolete. The city center itself is a throwback to the 1950’s. The schools are nothing to talk about…I think your readers get the visual.

      Westmont is built out, there are no vacant properties, if there are, there are not many. The average parcel (with the home on it) is approx. 50 x 150. Those properties sell between $120,000 and $300,000, mostly for redevelopment http://www.zillow.com/homedetails/209-S-Lincoln-St-Westmont-IL-60559/4568562_zpid/

      The affordable housing solution? Re-zone these 50 x 150 properties into two 25 x 150 buildable parcels and redevelop the whole town. Turn it into a hip, maybe urban vibe, millennial friendly, yet affordable community. Go street-by-street.

      Any homeowner that bought in Westmont between 1990 and 2008 is probably underwater; these homes never recovered from the crash, in fact, many homeowners have put upkeep on the back burner. Selling into this strategy would make the current homeowners whole, maybe even a little profit. Private money would fund the redevelopment with various independent builders competing for projects. The housing? Well, again, I’m talking affordable in terms of the scope of your readership. Re-zone the lots into three 16 foot wide parcels and prices for newly constructed units would go down even further.

      The success of these strategic and targeted projects is dependent on the stats that back it up; the desire for being able to walk to Starbucks, the ability to commute to Metro markets, all the stuff that seems to be where the demand for housing is…..plus, all the greenspace stays green.

      To me, it seems like a win for everyone….that doesn’t happen often, usually someone has to lose.

      The technical term is “infill”.

      My thought anyway…

      Thanks for the space 🙂

      Brian

      • Love the commentary, Brian, and the detailed thinking.

        I don’t know if the “infill” strategy is directly related to affordable housing, but I guess there’s a component that would work… What I would point out is that under my plan, the program is available only to low-income buyers buying a cheap house (bottom 20% of market).

        My question is this. Take the house you mentioned at $120K. It’s in the bottom 20% of available properties from what I can see. If you tear that house down and redevelop two homes on two lots as you mentioned, what is the likely price of those new homes? Especially if they are, as you write, “hip and cool”?

        Keep in mind that under my program, all builder subsidies and the like are gone. So any development has to be with private money, without tax breaks, subsidies, etc. (except for local/state tax breaks, I guess).

        So my question is, suppose this happens. You teardown and infill. What would you price the new smaller homes at?

      • ROB,

        I had those numbers in my commentary and then took them out. I didn’t want to go down the road of how each of us defined “affordable”. I figure your readers are from and/or do business in the middle to upper tier of the market…. but I’m just speculating. I can’t speak to the bottom 20%.

        The typical teardown to new construction multiplier is about 2.5/3 to 1. So, if a 50 foot property is sold for $200,000 and then split into two stand-alone 25 foot wide $100,000 parcels, the resulting new construction on each lot would be $250,000 to $300,000.

        We actually backed into those numbers ourselves a few years ago in certain market we covered, that’s actually one of the ways we determine property value for clients.

        Here is another prospective that comes to a similar outcome:
        http://goo.gl/1qWPzq

        Thanks,

        Brian

      • Brian – well, if we’re taking a $200K property and making two $250K properties out of it, that doesn’t strike me as affordable housing solution of any kind 🙂 Sounds like a good business, though!

      • The same works at the bottom of the market. Plenty of “free” housing in Detroit, Chicago, LA, NYC etc.. “Free” being very close to zero http://www.businessinsider.com/abandoned-houses-detroit-2011-2

        Rezone those properties, use modular housing or just order the whole house, appliances and all, from China and bring them over as a “kit” on ships……….the new housing units could probably be as low as $25,000/$30,000……is that affordable?

        🙂

  3. More big governance,free food,telephones,health care,etc, free college, Oh’ wait unemployment is 4.9%,the only problem is we need a higher minimum wage to balance the economy, the great jobs at Walmart, Wendy’s are rising and soon we will be at full employment,housing is back,the numbers are great,all we need now is an increase in subsidized housing,Progress!!!!! ,what a country.

    • I think you’re missing the target. Subsidized housing exists today, but they only subsidize rentals. I’m saying subsidize affordable homeownership, because we do already subsidize wealthy homeownership like crazy. (See, e.g., mortgage interest deduction).

      • I do not think you can not solve the problem with more social programs, but with a business environment that creates meaningful jobs with decent paychecks,how about buying products “Made In The USA” ,start with cars,.

  4. One thing many recent college graduates have in common with the chronically unemployed is the lack of expendable cash. In the current rental system we depend on both good landlords and slumlords to repair leaking roofs, replace exposed wires, and assure that appliances, walkways and structures are kept up to code. In the proposed model, how would these cash-strapped folks tackle needed repairs? Or would default or collapse be the most likely outcomes when facing major repairs? I like the idea of encouraging home ownership IF it is sustainable.

    • Well, I think they way I see it is that even young Millennials change their incentives and where they spend their money if they become homeowners. It’s one thing to trash a rental unit knowing that the landlord will fix things and knowing that they’ll be moving out in six months; it’s another thing altogether to not upkeep your own house such that your selling price if/when you move will be lower.

      I suspect that recent college grads would find themselves eating out less and spending more at Home Depot. 🙂

  5. I’m more in favor of subsidizing income to where people can afford to buy homes without the need to get subsidized housing. This would make for a stronger and more sustainable housing market and economy.

    • The only issue is that higher incomes –> inflation –> higher prices, unless the higher income is the result of higher productivity. And if we’re raising incomes through subsidies, it would definitely not be that.

      That’s one of the problems of the minimum wage deal; if minimum wage doubles, then the price of goods will just go up, partially to offset higher labor costs, but also because consumers have more dollars chasing the same number of goods.

      • Pie in the sky? What’s the problem? Some folks cannot afford a home and many do not want one. When we begin forcing the market with schemes and guaranteed incomes and subsidies, we are blowing more air into the bubble.
        Millenials – foolinials. Going $25,000 – $100,000 in student debt is insane. I worked my way thru – no debt. Are today’s kids too lazy to w-o-r-k?

  6. How does any of that work where the MEDIAN home price is higher then $600,000 and the median wage is $53,000? No one in my community can conceivably amass 20% down in real life time.

    • This broker does not believe any of the numbers coming from the RE establishment,or the White House,there is a small market from the movement of the military ,100%VA loans
      paid for with their BAH,and some that just must sell or buy and the reason is simple you cannot buy a $600k house with incomes of $50k.,I fear a repeat of the events in 07/08,we have to create good manufacturing jobs,we need to buy MADE IN THE USA,we are destroying our country,and I am for a free market but the rest of the world does not,so who is going to buy our listings,this year???

      • To varestatebroker – I know that in many areas of the country, things are tough. Where I am, NW Arkansas, home of Waaaalmart, Tyson foods, JBHunt – the economy is above great – 3% unemployment with ‘help wanted’ signs every where. With commercial and residential construction every where. Makes one think of 2000 thru 2006. De ja vue all over again.
        I think that you think there are dark days ahead. With 93,000,000 unemployed adults, one must be a fool to believe the economy numbers spouted by the DC crowd. The rest of the world – including China – are sliding into recessions. Europe is devastated by refugees flooding the continent. We have millions of hispanics and asians flooding into our country. And we have 20 Trillion dollars of debt.
        What idiot believes this is a good thing?
        Affordable housing by any scheme is only blowing up the bubble.
        Kathy and I have weapons, huge garden and 100s of chickens. I list and sell rural property – which only sneezed when the last bubble popped.
        And Mr. broker – I agree that we must create good-paying American jobs to avoid catastrophe I don’t know how that will happen. I don’t think it will happen. We can discuss this in depth privately.

      • Marvin – if the time comes when you and I will have to use our weapons, and we have an EOTWAWKI scenario… I doubt affordable housing and mortgages will be on any of our minds. Soup, medicine, water maybe, but not real estate policies.

  7. Terrific roadmap from a practitioner’s standpoint and much better than many programs that have strings attached due to loan payback or condition issues.
    Something that caught my eye was:
    ” It must be in the bottom 20% in terms of price in your area”.
    Would that mean that appraisals could disqualify the property if it came in high,and would that put borderline properties at risk of losing their subsidy status, and therefore a huge loss in marketability? Is there a scenario where the parties are affected positively by “low” appraisals?

    • Hi Russ – Good point about borderline properties losing eligibility for subsidy. I don’t think it’ll happen due to appraisal though, since for this, what matters is what the buyer (who we are subsidizing) is paying. Usually, when appraisals become an issue, it’s because the buyer is paying more than what the home appraises for, which makes the lender unhappy about the quality of the collateral. If appraisal comes in too high, the only person who would be unhappy is the seller, and he already decided he was happy with the listing price and the contract price.

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