Left hand...meet the right hand

This week I received the quarterly magazine from a local foundation. This particular issue focused on affordable housing, a topic that I admittedly have had a difficult time understanding in the context of the planning profession. I say that, and I write this today, because I want someone to explain it to me and explain to me where my thinking (as I will elaborate on in the following) is wrong.

Let me preface the rest of this discussion by plainly stating that I don't believe I hold any different objectives than affordable housing advocates. All people need to have housing that is safe and affordable to them. We are not going to argue about the ends, I don't believe, but perhaps the means. We'll see.

On the Left Hand

As the Initiative Quarterly points out, we have a huge problem with affordable housing. This graph that was included in the article demonstrates how half of Minnesota's renters and a third of home owners are paying more than 30% of their household income on housing. That figure - 30% - is the standard measure for affordability. 

In fact, prices are so elevated in respect to income that, as this graph demonstrates, in one fairly-typical Minnesota county the incomes of many good-paying jobs don't come close to paying a typical mortgage or making a typical rent. 

So prices are high. Too high for many, many people to be able to afford the basic necessity of shelter. This is a huge problem.

Our response, with all good intentions, is to try and help people bridge the gap. From the article:

Each year, government, nonprofit and commercial developers build 1,200 to 1,400 new units of affordable housing in greater Minnesota. New housing is important, but according to Colleen Landkamer, state director for Minnesota’s USDA Rural Development office, the highest priority for her agency and other state-level partners is the preservation of the existing affordable rental housing.

She said her agency financed and maintains about 11,800 units of affordable rental housing in small cities and towns throughout Minnesota. Much of this housing was built in the 1960s and 1970s and some of the units desperately need improvements like energy-efficient windows, heating and cooling as well as new appliances and basic updating.

From further down in the same article:

Minnesota Housing Finance Agency Assistant Commissioner Tonja Orr said rental preservation is one of her top concerns. According to Orr, the federal low-income housing tax credit program has historically been the single largest source of capital for funding affordable rental housing.

The program allows investors with a federal tax liability to buy tax credits that can supplement 70 percent or more of the total cost of an affordable rental project. The more private investment in a project, the less government subsidy is needed.

In summary, on the left hand we have houses that are too expensive which prompts a need for government subsidies to help people afford them.

On the Right Hand

Readers of this blog are familiar with our analysis of the housing crisis and our critique of government efforts to artificially prop up housing prices. A good summary is a post from November 30, 2009 titled What if Housing Crashed, based off of an analysis published in Forbes by Stephane Finch in September 2001, just a week prior to 9/11.

The conclusion in 2001 was that housing prices had given in to irrational exuberance and were significantly overvalued. Between 9/11 and the housing crash beginning in 2007, we artificially left interest rates low creating a well-documented asset bubble in the housing sector. And this is on top of the standard subsidies of mortgage interest deductions, first-time homebuyer credits, Freddie/Fannie support as well as the indirect subsidies of lax regulation and rating agencies whose behavior was either grossly incompetent or criminal.

Oh, and all those other subsidies and Ponzi schemes to drive growth.

And now we are not only pumping a trillion dollars into Fannie and Freddie, increasing and extending homebuyer credits and maintaining low interest rates, the Federal government is now going to pay down the principle of mortgages that are underwater.

All of this money is being spent for one reason: to keep home values artificially elevated. As reported in the NY Times:

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

In summary, on the right hand we have houses that are falling in value which prompts a need for government subsidies to keep the prices elevated.

Do you see my confusion? This doesn't make any sense.

As a matter of national policy, we spent a significant amount of money artificially inflating housing prices. Now that housing prices are trying to drop, we are spending even more money trying to stop them from doing so. At the same time, we spend even more money trying to get people who can't afford this overpriced housing into said housing. All sides argue that they need more money.

Hello. It's Adam Smith calling. He wants his laissez-faire back. 

What we are doing now is simply cruel. We're borrowing money from future generations so we can live a lie of artificial wealth that, in turn, forces a great number of our people to choose, as stated by Warren Hanson, "whether to pay the mortgage payment, buy food, get medical attention, or make car repairs." Who are these policies benefiting?

Am I crazy to suggest that if we simply quit subsidizing both sides of this equation that the market would put housing prices in line with what people actually had the ability to pay?

Might be worth a try.

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