LIHTC

The Coming Budget Will be a Disaster for Housing, but Housers Are Part of the Problem

"The Marriage of Real Estate and Money" (Tom Otterness, 1996)

"The Marriage of Real Estate and Money" (Tom Otterness, 1996)

Republican-controlled Congress passed a major hurdle in their plan to radically reshape the nation’s tax code last week by narrowly passing a budget for 2018 in a close 216-212 vote.  The narrow spread included 20 Republican defections, which is a clear signal of the considerable challenges that lay ahead.  Regardless, this process will be a disaster for housing policy – affordable housing or otherwise.  The fact that this process is proceeding in rapid, secretive, and reckless fashion barely registers anymore shows how far our legislative process has come apart. It also shows how little the housing community can do to prevent this damage and how little it understands the changing landscape of national politics.

I have written extensively about three major threads since the beginning of the Trump Era (although they originate well before) that continue to dominate housing policy discussions. This budget (which is not law yet and is still largely unknown as policy) reflects these trends. The response the housing community has to each also shows how much it needs to change its approach and fight for a simple, clear cause: housing as a right.

1. Down with Public Housing

First, President Trump, despite his incoherencies, has been steadfast in his utter indifference to affordable housing, especially public housing. Given other mounting evidence, it seems more likely that he holds the people (or those people, more aptly) that rely on it in contempt. 

Appointing Secretary Carson has worked out exactly as the President had hoped and as housing advocates had feared.  HUD will face devastating cuts whether the Secretary understands them or not. The 13% across-the-board cuts long-promised by the administration are starting to take form and no one suffers more than the poor Americans who rely on housing vouchers, community block grants, and of course, public housing. 

Public housing authorities across the country will be further starved of funding and will likely turn increasingly to measures such as the Obama-era program Rental Assistance Demonstration (RAD) that provides upfront funding by turning public housing into privately-leased Section 8 units.  Seen as a necessity, or even as a progressive fail-safe by many housers, this program will only weaken cash-strapped public housing authorities and undermine their broader mission. Housers who support RAD will live to regret those decisions instead of rallying around a robust defense of public housing on its merits.

Saying Secretary Carson is unqualified or simply dumb doesn't change the narrative on public housing.  Saying the President doesn't support or respect poor Americans' struggles won't change the support most Americans have for public housing.  Making the case that public housing - and greater federal involvement in affordable rental housing - is good for the country and good for everyone - city or suburb - is the only way to effectively fight the Trump administration.  Right now, the playbook is wracking up losses. It's time to change it.

2. Up With LIHTC

Second, Congress continues to gaslight the housing community about the effectiveness of the main national affordable housing policy – the Low-Income Housing Tax Credit (LIHTC).  Enacted after the last major tax overall in 1986, it has created over 3 million housing units representing 90% of all affordable units built during the period.

That’s seen as a success by many well-meaning actors in housing despite the fact that it is has demonstrably failed to provide the volume of units our country needs.  99% of US counties are in an affordable housing crisis. When the only policy explicitly designed to address affordable housing is failing that broadly, it is irresponsible to defend the status quo. But that is largely what is happening at the moment.

The legitimate fear from this proposed tax cut plan - I won't pretend it's some nebulous "tax reform" - is that lower corporate rates will dramatically weaken the incentive to partake in the LIHTC program. What will be left unsaid is that relying on the private sector to build affordable housing through tax incentives is inherently and obviously flawed.

Instead of arguing for a larger policy shift, many housers will try to defend LIHTC and, by extension, the status quo of federal housing priorities. When, inevitably, both parties do offer some type of carve out for LIHTC to remain attractive, this will be hailed as a victory. We should know better by now. We should be arguing for more policies like community land trusts that offer the same type of decentralized, local control that many communities want, while rejecting the speculative component that largely dictates development today.

3. Upside Down on Homeownership

Third, we have learned nothing from the 2008 mortgage crisis.  Not only have we failed to address the dangers of increased financialization of the housing market, or the more fundamental challenges of slow wage-growth, rising debt, and geographic inequality that is crushing the housing market, but we have never rectified that promoting homeownership for 80 years has been a disaster for our country.

Homeownership has undoubtedly pushed millions of Americans into the middle class but it has also prevented millions more from doing so.  Wealth inequality across racial lines has increased in recent decades.  Racial segregation has increased in recent decades.  The environmental and social costs of single-family suburban sprawl will only get worse as a generation of baby boomers age and realize no one is coming to buy their homes at what they think they are worth.  Nobel-prize winning economist Robert Schiller has long debunked that houses automatically appreciate in the US. In fact, on average, they haven't at all since the 1940s. That's only going to get worse in many parts of the country.

The only minutely (unintentionally) progressive element of the tax cut plan currently under consideration is reducing the mortgage interest deduction, which disproportionately benefits wealthier Americans. This is being met with fierce resistance by the housing industry. It's not hard to see why homeowners and housing developers wouldn't want to support massive tax cuts for corporations and the top percent of earners.  Reducing the MID to pay for tax cuts isn't what many housing reformers had in mind, but it shows how hard it will be to try such a thing under any circumstances.

This is because treating housing as a tool of wealth creation as opposed to one for shelter provision is the definitive policy choice of 20th century America.  We have built a nation on this principle (along with car ownership, which of course is directly tied to housing.)  There are many ills facing our society today and our housing policy explains a lot of them.

To truly change this, we must first accept a blatantly obvious reality: treating housing like an asset has failed.  We have commodified it, securitized it, and speculated on it like it’s something less important than a basic human right.  Many elements of our country have profited handsomely from this.  Indeed, go to any real estate conference now and there will be a technocratic consensus that “the market is doing well” while ignoring the larger truth: our society is not doing well.

Housers must recognize the opportunity that we have to dramatically change the discussion on housing by rejecting the 20th century concept of housing.  Millions of Americans are hurting and are angry.  Ideas that might have once been considered 'radical' by some people - even many housing advocates - are now entering the conversation and public policy. Most Americans recognize that the old way we constructed our politics isn't working. 

We must extend that realization to the built environment and offer a positive, actionable vision for a better future.  Housers have to stop accepting a failed premise and fight to establish a new one. It starts with saying simply, proudly, and forcefully that housing is a right. 

Bipartisan Support for LIHTC Doesn't Mean Either Party Really Cares About Affordable Housing

The consensus is: ¯\_(ツ)_/¯(cnbc)

The consensus is: ¯\_(ツ)_/¯(cnbc)

Last week the Senate Finance Committee held a hearing on a proposal to “improve” the Low-Income Housing Tax Credit (LIHTC), which is the only federal program expressly dedicated to the construction of affordable housing. The program has funded 90%  (around 3 million units) of any such projects over the last 30 years. Part of its touted success is how it has maintained broad bipartisan support in Congress over that period, which is also true of the bill being considered at the moment.  In an era where “bipartisan support” is a seen as a bad thing in many circles if it’s seen at all, this is no small feat. However, don’t confuse support for LIHTC with support for affordable housing.  Both parties are failing to address the affordable housing crisis.

I want to be clear, despite my many concerns with it, the LIHTC is mostly a fine program for what it is designed to do – encourage construction of new low-income housing by subsidizing developers’ costs.  The proposals to update the program, made more urgent by the potential for large tax reform that could undermine the program, are also fine, as far as they go.

The bigger problem is that LIHTC is basically the only federal affordable housing policy (Section 8 vouchers is a much smaller program), which is very bad.  99.9% US counties don’t have enough affordable housing. 11.4 million Americans are severely rent burdened.  75% of Americans who qualify for housing assistance don’t receive any.  Several million Americans are housing insecure or homeless.  The drain on our economy and the stress on our society are staggering.

 If LIHTC has been the only program at the federal level that addresses affordable housing construction, and we’re in the midst of a crippling nation-wide affordable housing crisis, then the program is obviously failing by a wide margin. That shouldn’t be a controversial statement.

But no one is saying it.  The testimony at the Senate Finance Committee was from a wide range of developers, advocates, and policy wonks.  They all spoke passionately and knowledgeably about the affordable housing crisis and about how important LIHTC is to addressing it. I don’t doubt the sincerity and expertise of anyone involved in the process. But the narrow focus of this hearing ignores the larger questions that we should be asking these experts and advocates.

There is a slow moving unnatural disaster in our country and our bipartisan answer is not actually an answer.  Even if the new proposal is enacted, it is estimated that it will create about 1.3 million units over 10 years (an addition of 400,000 units).  We need 7.4 million units just for extremely low-income Americans.  How does anyone think LIHTC is working if that’s the known and accepted gap?

What else could we be doing? Could we suggest radically expanding LIHTC or radically redesigning it? Could we be radically expand and rethink Section 8 vouchers or mandate that they must be accepted everywhere? Could we also expand public housing funding rather than keep undermining it? Could we be introducing alternative models like community land trusts and SROs at the national level?

The urgency and relentlessness of the crisis demands bold thinking and honest self-assessment.  Accepting the premise that LIHTC is the best answer that only needs a few marginal tweaks is a failure of public duty and intellectual honesty.  Our representatives need to represent all ideas that could help the affordable housing crisis. Housing experts and advocates need to take advantage of a rare opportunity like a Senate hearing to challenge every premise and assumption. That wasn’t what happened this week.

It is a simple truism in politics that when both parties own an issue, no one owns it.  By creating a large program like LIHTC that accepts basic market-principles but has an ostensibly low-income focus, both parties can sign off on it comfortably.  When housing comes up as a political issue, which is rare, both parties can point to their support of LIHTC to show that they are “good on housing” even though the program falls well short in practice.

This political reality is why no one challenges the premise that LIHTC is a great policy tool or that it can address the affordable housing crisis alone.  The truth is, neither party has an answer for the affordable housing crisis. Instead, they both have accepted the same flawed market premises about housing as an asset rather than a basic right. 

Both have also so thoroughly bought into the myth of promoting homeownership that neither has a policy infrastructure or donor constituency outside of that (it will be fascinating to see if rumors of reducing the Mortgage Interest Deduction will actually materialize during the tax reform debate).  It is much easier to hold up the LIHTC to show that you are doing something and shrug about how it’s the best you can do under the circumstances.  It is much harder to admit that LIHTC is not working and that he accepted policy framework on housing is not enough.

On that last point, I’ve had conversations with folks that defend the program by saying it’s not intended to be the only solution.  But again, where are the other solutions? The oxygen in housing policy gets sucked up by LIHTC and until that changes, we’ll keep accepting that this is the best we can do.  We’ll keep allowing both parties to point to an obviously inadequate policy and let them off the hook. We’ll keep boiling in the affordable housing crisis by accepting a deeply flawed premise about the nature and purpose of housing.  This is not good enough.

Frontline Doc on Housing Crisis Sidesteps Larger Problem

Is that light at the end of the tunnel? (pbs/frontline)

Is that light at the end of the tunnel? (pbs/frontline)

 

This week, Frontline  released a documentary focusing on the affordable housing crisis. Specifically, reporter Laura Sullivan examined Section 8 and the Low Income Housing Tax Credit (LIHTC) - the two main federal policy tools tasked with providing affordable housing - to see why these programs are not making an impact on the crisis. The doc suggests the reason is a combination of local resistance, lack of oversight, and outright fraud. Though these do play a role and must be addressed, the larger issue is that the US does not see housing as a right. Without focusing federal policy around this principle, the current, weak federal intervention in rental housing will never solve the affordable housing crisis.

The documentary is at once heartbreaking and hopeful. We see individuals and families that are trapped in a cycle of poverty utterly beyond their control. But we see individuals who have benefited from low-income housing programs, who now have a stable home for the first time in their lives. Though the documentary does not make a value claim, it shows how decisive an affordable home is in the outcomes of Americans, and how important it is that we provide one as a society.

As the doc points out, however, only 1 in 4 Americans who qualify for housing assistance receive any. That there are so many Americans who need housing assistance (approx. 12 million) and that they do not receive it are equally scathing indictments on our nation’s priorities.

The Americans that do receive aid do so mostly through Section 8 vouchers, which allow an individual to rent a home (that accepts the program and has a certain cap) and to pay no more than 30% of their monthly income for it. The federal government, administered through the states, covers the difference. The program costs about $30 billion a year (less than half the cost of the annual mortgage interest deduction) and houses 2.1 million Americans . It was started in 1974 as a correction to the mistakes of concentrating large public housing blocks in poor urban neighborhoods, but more on that later.

Part in parcel with Section 8 is housing built through the LIHTC that generally requires a percentage of units be put aside for residents with those vouchers. As I explained here, LIHTC was part of the landmark 1986 tax reform and created tax incentives for affordable housing construction. The idea was/is to create affordable housing by allowing developers to sell IRS-issued tax credits to private investors for cash towards their projects. A given community gets nice new affordable housing, the investors (usually banks) get a significant tax credit, and the developers make a small profit.

It’s the ultimate public-private partnership and a lot of people across the political spectrum support this premise. LIHTC has built 2.7 million affordable housing units over 30 years and represents 90% of all affordable housing construction in the country.

To recap, the federal government’s answer to the affordable housing crisis is to incentivize the private sector to create affordable housing and to then help subsidize some residents into those units. But as Frontline shows, this premise is deeply flawed at almost every point in this cycle because the federal government is basically absent.

Beyond the fact that so few receive Section 8 vouchers, those that do often face incredible odds against finding a home anyway. Many landlords simply refuse to rent to people with Section 8 vouchers. Few wealthy communities, which are closer to better jobs and schools, offer Section 8 housing at all. And, as witnessed in the doc and elsewhere, those individuals that get a home in those communities often face a disgusting level of communal and institutional discrimination.

Section 8 was not designed with enough understanding or acknowledgement of how race and class define that geography of our nation and how that geography provides opportunity. As a result, the program is incapable of overcoming this aforementioned type of local resistance and discrimination. “Section 8” is often a shorthand for a racial slur in many places and existing residents don’t want them in their communities.

Luckily for those residents, cities and towns have many ways around providing Section 8 housing, whether explicitly through zoning or implicitly through delay tactics, as the doc points out. Even though the Supreme Court has intervened to acknowledge and try to prevent this, decades of institutional discrimination have limited the ability of any current federal programs to overcome local governments. Additionally, the current administration is unlikely to enforce any real changes at the local level.

As for the other end of the cycle, the LIHTC is a deeply flawed policy tool. I have discussed why it only works in relation to other bad tax policy that might not last, why its focus on market principles limits individual developments’ effectiveness in size and location, and why its complexity actually drives up the cost per unit.

However, Frontline focused on two elements that I did not cover: corruption and lack of oversight. Because LIHTC funds are administered by the states and cities have significant local discretion on development, there is a lot of ambiguity to how developers proceed through this regulatory complexity. The result, at least in some cases, has been kickbacks or pay-to-play schemes that have led to several high-profile federal corruption convictions.

Any big dollar programs are going to attract bad actors and I’m not convinced that fraud is a systemic issue with LIHTC, but the point is, we really don’t know. There is basically no federal auditing. Most state housing agencies simply don’t have the resources to audit the program either. In many cases compliance and cost estimates are done pro forma which means, outside of the small sample of investigations, it’s difficult to tell if there is a bigger problem at hand. However, given the widespread corruption in the mortgage industry leading to the crash in 2008, it’s not hard to imagine that a lot of federal tax dollars are getting sucked out of affordable housing.

Section 8 and LIHTC were programs that evolved after the New Deal/Great Society eras of mass public housing development funded by the federal government. The popular consensus is that those years were a failure of public policy. No doubt many Jacobisan neighborhoods were destroyed by Urban Renewal projects and in their wake highways and lifeless towers concentrated poverty around isolated pockets of cities. Public housing became synonymous with crime and anti-social behavior that crippled those communities for decades. There were absolutely many terrible failures with this approach.

But the truth is more complex and more sinister. The failures with the era’s specific approach to public housing undermined the premise of public intervention in housing overall. Public housing was neglected almost as quickly as it was built, while the federal government intervened massively to create suburban America and its twin pillars of car ownership and home ownership. It wasn’t that the premise of public housing failed, it was the commitment to it that failed. Intentionally.

By the 1970s, the idea that the federal government can, let alone should, intervene in the rental housing market died along with the liberal consensus that controlled domestic politics for 40 years. But the problem of providing affordable housing didn’t go away. Section 8 and LIHTC were follow up neoliberal admissions that the affordable housing problem could not be fixed by the market alone.

However, they were built on a flawed premise that failed to acknowledge how much the federal government intervened in homeownership and how much that intervention fell along racial lines. Under that premise, there is no way these programs could possibly tackle the structures that created the affordable housing crisis to begin with.

In fact, they have made the crisis worse by calcifying the national policy conversation on housing. Both parties (for the most part) continue to point to the two programs as evidence that the federal government is doing all that it can — and that it’s working. This is a politically convenient fantasy for both sides.

The death of public housing as national policy after the 1960s proves two related points: first, the federal government can decide how it wants to house Americans and, second, it can make it a reality. The US decided that post-war economic growth would be based on cars and homes and built policies to guarantee that outcome. It worked.

If the federal government (or more accountably, we as Americans) wants to end the affordable housing crisis, we can. It will never end through Section 8 or LIHTC. It will never end by addressing the flaws in those programs raised by the Frontline documentary. It will never end by subsiding homeownership. It will only end if we commit to the simple concept that housing is a right and start re-imaging our country from there.

Yes, Save LIHTC, But It's Not That Great

Not much in common (newsmax)

Not much in common (newsmax)

The big news this week is obviously centered on the American Health Care Act, but whether it passes or fails in the House, it has massive implications for affordable housing.  That’s because, as President Trump has made clear recently, the real focus of this administration is tax cuts, which will be on the agenda one-way or the other. As it stands, the proposed level of tax cuts would likely kill the Low-Income Housing Tax Credit (LIHTC) program, which has been the most successful vehicle for construction of affordable housing since it passed in 1986 by President Reagan.  That’s a bigger problem and these potential cuts prove why.

The LIHTC was a bi-partisan amendment, basically an afterthought, added to the overall Tax Reform Act of 1986 and was intended to create incentives for building multi-family rental housing.  The original tax reform kept with the long-standing bi-partisan support for homeownership that has wasted billions of taxpayer dollars on subsidizing middle-class and wealthy homeowners.  Rather than tackle this larger problem, LIHTC was designed to share some of the wealth with low-income Americans who were (and are) more likely to live in rental housing.

So perhaps it wasn’t the product of the most rational political landscape, but it has undoubtedly worked at building affordable housing.  A report last year for the 30th anniversary stated that over 2.7 million homes have been built (including over 100,000 units in New York over the last 10 years) which is an average of 90,000-95,000 units a year.  $100 billion of private capital has been allocated through the tax credit.  90% of federally identified “affordable housing” has been created by it over the last 30 years.

The LIHTC program works by pairing investors with affordable housing developers to offset some of the cost of new construction or rehabilitation. An affordable housing developer can find investors directly or, more commonly, through a broker that syndicates different projects into a single equity fund to spread the risk of individual projects.  This funding is usually a precursor to the developer securing traditional loans in the private market.

Tax credits are a pretty sweet deal for participants because, as opposed to a tax deduction, the credit is a dollar-for-dollar trade. This makes them really attractive, particularly to institutional investors.  Of that $100 billion invested, less than 10% came from individual investors.

Now you can see where a drastic reduction in corporate tax rates could kill this vehicle for affordable housing.  If the rates drop from 35% to 15% as the president has proposed, there will be a lot less incentive to park money in affordable housing construction.  There is already a notable decline in projects as firms wait to see what happens on the hill.  There is considerable doubt that the equity value of LIHTC will be worth it after these cuts.

This is, of course, assuming that the LIHTC survives to begin with – something that no one can really say.   Aside from the President’s proposed cuts to HUD in his “skinny budget,” the administration hasn’t been on record with any policy view towards LIHTC.  

It’s quite possible that the Trump Administration supports the idea of LIHTC, it is after all an immensely popular bi-partisan program, but could still manage to undermine it without making necessary improvements to maintain its investment incentive. There is already a bi-partisan plan floating around in Congress to strengthen the LIHTC, but it can’t account for the larger tax reform agenda and won’t move until that agenda takes shape.

Hanging in the balance is the $10 billion ‘affordable housing industry’ and millions of low-income Americans struggling to find or keep their homes.  We simply have no alternative policy tools at scale to impact affordable housing construction anywhere in the country.  Without more clarity on LIHTC, there is no national affordable housing policy.

The fact that we are currently in a crippling affordable housing crisis makes this lack of policy clarity nearly a criminal act.  Rents as a percentage of household income are at their highest levels since the 1960s.  Nearly 50% of Americans who rent are rent burdened – which means spending more than 30% of monthly income on housing.  Housing costs in our most productive urban centers are skyrocketing which is killing economic growth and mobility.  It’s estimated that the lack of affordable housing costs the American economy $1.6 trillion a year.

This shows that relying exclusively on the LIHTC to drive affordable housing policy is a catastrophic mistake for us as a society.  As successful as it has been in many regards, it has also failed in many more.

First, relying on tax policy to drive development policy is inherently unstable, as we’re currently seeing.  Too many variables can impact the relative value of a LIHTC fund to make this a long-term strategy in today’s political climate.  It only works as a policy in relation to other bad tax policy.

Second, relying on private market principles means developments are typically located where land is cheaper, which is rarely where affordable housing is most needed – whether in the local or regional sense.  It also relies on complicated AMI (average medium income) metrics that rarely create enough affordable housing for extremely low-income households.  Though the program’s output is impressive on first glance, these numbers have only made a small dent in the larger crisis as a result.

Third, the complexity of the LIHTC itself, coupled with other state-level requirements, drives up the overall cost of affordable housing relative to private development.  Some estimates suggest that it adds an additional 13% per unit on some projects.  This system counter-intuitively makes itself more expensive.

Many of these issues are by-products of other flawed policies or even good policies working against each other.  They are also the product of a flawed understanding of housing policy in general and what affordable housing is specifically.

Thoughtful people can disagree on how much the federal government should intervene in the housing market, and the LIHTC has in many ways been a rare success in bi-partisan policy making.  But the federal government already has a massive role in housing in the form of subsidizing homeownership to the tune of $135 billion a year.  We don’t really call it “intervention” or “subsidy” but that’s what our current policies do on a massive scale.  It’s so big we don’t notice it.

If we’re honest about how much we already subsidize homeownership as taxpayers, we can start to be more open to direct involvement in affordable rental housing.  Rather than asking the private market to jump through so many hoops, just to produce middling results, we should consider creating a direct federal program to construct affordable housing on the scale that we used to see during the Great Depression. 

That period saw direct investments in public housing with private sector help, which succeeded in building millions of units of housing in major urban areas. I’m not suggesting we repeat the mistakes of that period, but the commitment to building affordable public housing worked in doing so. As much as NYCHA, by far the largest public housing agency in the country, gets a bad rap, much of their portfolio exists as a result of these programs from 70 years ago. That’s a remarkable achievement.

It might seem radical to suggest creating a vast public market for affordable housing in today’s age, but it shouldn’t be.  It makes a lot more sense than quietly subsidizing millions of homeowners while driving up the cost of a flawed affordable housing strategy all in the midst of an unprecedented crisis. The status quo is obviously not working.  We need to think big again in this country.

30 years of some success through the LIHTC program hasn’t adequately addressed the affordable housing crisis philosophically or practically.  Maybe it’s time to dust off policies and thinking that has quietly been working for more than 70 years.