Q: What are some of the key lessons from past U.S. housing programs and policies, including longstanding programs like public housing Section 8 Housing Choice Vouchers, and the Section 42 Low Income Housing Tax Credit (LIHTC), as well as some recent initiatives like the Home Affordable Modification Program (HAMP) and the Home Affordable Foreclosure Alternatives (HAFA) Program. How can we apply those lessons to future policy prescriptions?
This month's question is answered by Stephen Malpezzi, Lorin and Marjorie Tiefenthaler Professor of Real Estate, and Department Chair, Department of Real Estate and Urban Land Economics. His research includes work on economic development, the measurement and determinants of real estate prices, housing demand and the effects of regulation and other economic policies on real estate markets.
Last fall, Professor Malpezzi presented overviews of U.S. housing markets and policy to the Korean Development Institute (KDI) and to Korea' s Ministry of Construction, with lessons for Korea's housing policies. In late March, he'll be visiting Oxford University, joining colleagues from around the world at a meeting organized by Professor Paul Collier, author of The Bottom Billion, to discuss the future research agenda for housing and urban development in sub-Saharan Africa.
A: Wow, those are big questions - so big that my friend Richard Greenand I wrote a book about the answers a decade ago. We're currently writing the second edition of A Primer on U.S. Housing Markets and Housing Policy, along with our new coauthor, Paul Carrillo.
Here are a few robust findings that have held over time for the U.S., and appear to have some applicability to many other countries.
If you're going to provide some public support to keep housing "affordable" to low income households, the serious studies consistently show that you'll get more bang for the taxpayer buck by using "demand side" programs like Housing Choice Vouchers, instead of supply side programs like public housing or the LIHTC (although the LIHTC works better in many ways than old-style public housing). We also know that the money we spend on all these programs together is dwarfed by the money we spend through "tax expenditures," chiefly the mortgage interest and property tax deductions. Furthermore, since the bulk of the benefit from these deductions go to those in higher income brackets with larger mortgages.
Taking all the federal programs in, the average very low income household - under $10,000 annual income - gets about $1,000 in housing subsidies (though some of these households get much more, and many get nothing). The average household with income between $200-500,000 gets about $9,000 in housing subsidies, almost exclusively through tax breaks. The average household in the $40-50,000 range gets about $300, and those around $20-40,000 get less than that.
If we wanted to subsidize homeownership, we'd do better by redesigning vouchers to work better for homeowners (currently they're almost exclusively a rental program), and/or we'd switch from a deduction to a credit, and redesign the interest and property tax deductions to send the bulk of their benefits to the middle class instead of the top decile. If we wanted to help low income households, we'd increase our spending through the Housing Choice Voucher program, and make some changes to the rules that would increase the program's flexibility and efficiency (e.g. by making the leases more landlord-friendly).
What can I say about HAMP that we haven't already said at our website on the Wisconsin Foreclosure and Unemployment Relief (WI-FUR) program? It was a badly designed and executed program that failed to make a contribution to clearing out the housing mess and getting supply and demand back in synch. There were a few improvements on the margin, as when a small program variant addressed the serious problems of unemployed homeowners' facing foreclosure (the Home Affordable Unemployment Program, or HAUP) and the HAFA program, that provides a mechanism for "short sales" or deeds-in-lieu of foreclosures for (mostly) Fannie and Freddie backed mortgages. But to date these variants haven't been applied to enough transactions to make much of a dent in the foreclosure backlog.
Why do we still spend the bulk of our taxpayer's contributions to housing so inefficiently and ineffectively? Badly designed programs can take on a life of their own. Making mid-course corrections in ineffective policies like the supply-side programs, the tax code, or HAMP are especially difficult when bureaucratic inertia meets political gridlock.
What are the lessons for other countries? First, do no harm. Be careful about putting complex project-oriented programs in place, which are hard to remove; thing about a housing allowance system instead. Be very careful how you treat housing in the tax code. And, there are lots of things we can talk about another day, such as how to put in place a system of land use and development regulation that appropriately mitigates the "external costs" of development like congestion and environmental spillovers, while producing enough housing suitable for your country's citizens.
You can continue the conversation on housing policy at the Wisconsin Real Estate and Economic Outlook Conference on June 1st in Madison. The theme is "Building a Housing Policy That Works" and the featured speakers include Karl "Chip" Case, professor and co-founder of the Case-Shiller Home Price Index; Shaun Donovan, Secretary of HUD (invited); and Lawrence Yun, Chief economist and senior vice president of research at the National Association of Realtors.
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