Thomas Peipert/AP Photo
A sprawling neighborhood in Colorado Springs, Colorado, seen on November 23, 2022. Colorado lawmakers have a proposal to free up vacant parcels of state-owned land that could be leased or sold at a discount for affordable-housing projects.
As the Fed considers whether to increase rates yet again in its meetings today and tomorrow, the major question on everyone’s mind is the latest banking crisis. The collapse of several banks is largely the result of the interaction of two failed Fed policies—weakened regulation and supervision combined with an overly aggressive policy of rate hikes and the impact on bank balance sheets.
But another area where the Fed fails to grasp both the deeper sources of inflation and the perverse consequences if its actions is housing. One of the persistent sources of inflation is the relentless rise in the cost of housing, both rental and owner-occupied. This squeezes the middle class and especially the poor, for whom the supply of so-called affordable housing is grossly inadequate to the need.
This has almost nothing to do with macroeconomics. It’s a long-term trend, the legacy of failed housing policy.
In major metropolitan areas, median rents are several times what a household can afford based on median incomes. Home ownership is becoming ever further out of reach for all but those with family money to subsidize down payments.
The Fed’s policy of tight money has depressed housing prices temporarily, but not altered the trend. To the extent that higher financing costs have drastically reduced housing construction, that will only worsen the supply imbalance.
And while higher interest rates have damped down housing prices, the reason is that they result in higher monthly mortgage payments. So homeowners lose either way.
The long-term problem and its remedy lie far outside the realm of monetary policy. We simply do not create enough social housing that is permanently outside market pressures and market prices.
THERE ARE BASICALLY THREE FORMS of social housing, permanently insulated from market prices. One is public housing. Another is community land trusts. A third is limited-equity co-ops. More on these in a moment. All are underutilized and starved for funds.
Rather, America’s basic strategy for creating a (wholly inadequate) sector of affordable housing is to use public money to subsidize commercially developed and privately owned rental housing. As market prices keep rising, this strategy means that government needs to spend more and more per unit, to create less and less pseudo-social housing.
One such mechanism is the Section 8 rent supplement program, which subsidizes about 2.3 million units, housing some five million people, at an annual cost of about $29 billion.
But landlords are free to quit the program whenever they like, using it to keep units occupied until property values rise to the point where they can evict the tenants and charge market rents.
A second failed subsidy approach that also leaves government and tenants captive to rising market prices is a series of programs dating to the 1970s that gave developers below-market interest rates in exchange for capped rentals. But under these deals, the developer was free to quit the program and jack up the rents as soon as the original mortgage was paid off.
So taxpayers spent billions to create a social-housing sector that was only temporary. These units disappeared from the national inventory of affordable housing as soon as developers found it expedient.
The ever-higher cost of available land makes the cost of a belated social-housing sector ever more expensive.
Yet another flawed approach is tax subsidies. Some states and cities, such as New York, give developers exemptions from property taxes in exchange for making some of their units affordable. This does create some low-rent housing, but is wildly inefficient.
And under the federal Low-Income Housing Tax Credit, developers of affordable housing get a tax break that costs the government about $9.5 billion a year. But because nonprofit developers can’t benefit from the tax credit, they sell it to middlemen.
A lot the public money ends up in the pockets of wealthy investors. Why not just subsidize the housing directly? And after the ten-year tax credit expires, some of these units cease to be affordable.
Once, we did have a publicly owned public-housing sector. And once, it was home to working-class people as well as the very poor. But after a number of fiascos, where racially segregated public housing was used to warehouse the poorest of the poor, the whole approach fell into disfavor.
In 1998, Congress capped the total number of public-housing units at about a million. And to add insult to injury, Congress chronically underfunds public-housing maintenance, thus creating a self-fulfilling prophecy of public housing as a failed experiment. The current backlog of basic maintenance is about $70 billion.
In fact, several countries, most notably Austria, have a large and attractive public-housing sector that is prized by the middle class (which pays on a sliding scale) as well as the working class and the poor. In Vienna, about 46 percent of all rental housing is municipally owned.
And the Netherlands has a large and sought-after nonprofit housing sector. The difference between ours and theirs is that in the Netherlands, nonprofit housing is permanent social housing, never subject to rising market housing prices.
As noted, we could create a true social-housing sector. All it takes is money and political will. Unfortunately, the time to have done this was when land was relatively cheap. The ever-higher cost of available land makes the cost of a belated social-housing sector ever more expensive.
The best model is the community land trust, where the land is socially owned and the housing can be rental or owner-occupied. But residents do not get to profit from rising property values. Vermont’s Champlain Housing Trust includes 565 owner-occupied homes, and some 2,200 rental apartments. However, according to Shelterforce, community land trusts and other forms of shared-equity housing account for less than 1 percent of all the housing in the country.
Creating a true, permanent social-housing sector at adequate scale would require government capital grants in the hundreds of billions. That’s a lot of money. But compared to what? Every year, the Pentagon spends nearly a trillion dollars.
In the meantime, we are left with a badly flawed and grossly inadequate sector of subsidized housing. Changing zoning and density rules will help, around the edges; as will the growing movement to bring back rent control. But there is no good substitute for true social housing.
The Fed cannot solve that problem. But it should please not make matters worse.
