Housing can’t be totally solved by the federal government

Can a solution to the housing crisis roiling the nation – especially New York City area and other expensive coastal regions – be found at the national level? Some of the Democratic presidential candidates believe it can. Last week, for example, U.S. Sen. Cory Booker of New Jersey released “Cory’s Plan to Provide Safe, Affordable Housing for All Americans,” receiving some favorable attention in the media. Earlier proposals had been released by Kamala Harris and Elizabeth Warren.

What is the nature of the crisis these plans are trying to solve? Brookings Institution housing expert Jenny Schuetz identifies two overlapping problems. The first is a crisis of low-income stagnation nationwide; low-wage earners’ incomes have failed to keep pace with the cost of renting decent housing in just about every metropolitan area. The federal government provides rental housing assistance to some low-income households. About 5.2 million U.S. households benefit from this assistance. However, an additional 10.7 million households pay more than half their income for rent, but do not receive housing assistance because of funding constraints. Households that pay more than 30 percent of their income for rent are considered by federal law to be paying more than they can reasonably afford, without having to forgo other necessities.

The second crisis is more geographically specific: In a set of high-income metropolitan areas concentrated in the Northeast and the West Coast, including the New York City metro, housing costs are increasingly out of reach even for even middle-income households. Supply restrictions due to zoning laws enacted by local governments are identified as a major cause of these unusually high housing costs.

Thus any national housing policy must top off the incomes of the nation’s poorest households so that they can afford rent, while also unblocking supply constraints in a small number of metropolitan areas. Booker’s plan would address both concerns.

But, ultimately, the zoning problem is probably just not completely solvable by federal action. States, which grant and can take away local zoning powers, and municipalities, which wield them, need to solve it for themselves. And, on support for low-income households, giving people cash for any purpose is more efficient than targeting it towards housing.

Booker proposes a refundable tax credit that would cover the difference between 30 percent of a household’s income and the lower of their actual rent or the fair market rent promulgated by the Department of Housing and Urban Development for each metropolitan area. HUD calculates fair market rents as the 40th percentile of rents for all housing units occupied by recent movers, excluding below-market rents in publicly assisted housing and units in new buildings. For New York City, the FMR for a two-bedroom apartment in fiscal year 2019 (ending Sept. 30, 2019) is $1,831. This rent would be considered affordable (at a 30 percent ratio) to a household making more than $73,240. Under Booker’s proposal, a New York City household with an income lower than this threshold, and living in a two-bedroom apartment, could potentially qualify for the tax credit if their rent exceeds 30 percent of income.

Booker’s proposal would clearly provide subsidies to a very sizable number of Americans; his estimate is 57 million. How would the plan affect housing affordability? While it would ameliorate the rent burden on tenants, it would also direct hundreds of billions of dollars in subsidies with one group of ultimate beneficiaries: rental housing owners. It’s reasonable to expect that subsidizing rents will cause market rents to go up. The cap on rents set by the fair market rent is intended to prevent landlords from receiving excessive government subsidies. But since the fair market rent is calculated based on the 40th percentile of recently-transacted area rents, increases in market rents feed back into larger tax credits and thus greater subsidies to landlords. As the Bloomberg columnist Tyler Cowen pointed out in a discussion of Harris’ proposed tax credit, which has similar elements, the upward cost spiral is likely to be worst in the supply-constrained coastal metros.

It would be better to avoid distorting housing markets by giving poor families cash that can be used for any purpose, rather than cash that can be used only to pay rent. Democratic senators, including several presidential candidates, have also signed on to plans that would expand the Child Tax Credit and the Earned Income Tax Credit, with both being refundable.

Rents could also be restrained by lifting supply constraints so that with more housing available, the market finds a lower equilibrium rent. For that, Booker suggests withholding both Community Development Block Grants, a HUD program, and discretionary federal transportation grants to municipalities that exclude affordable housing, while increasing funding to communities that are making efforts to remove barriers to such housing. Schuetz, however, points out that withholding CDBG grants may be ineffective because these funds are targeted largely to central cities that are receptive to affordable housing, and not to exclusionary affluent suburbs. The same issues exist for transportation funds, which affluent communities may forgo instead of changing land use policies.

Warren suggests using incentives, rather than punishment, to encourage communities to remove housing barriers. She would provide competitive grants that could be used for infrastructure or other community improvements. However, affluent communities could just as easily disregard Warren’s carrots as Booker’s sticks.

The federal government is extremely involved in making housing affordable, even to the wealthy, and could, if it wanted to, get the attention of exclusionary suburban governments. A 2017 Century Foundation study suggested limiting the availability of the tax deduction for mortgage interest in exclusionary communities. One could go beyond that. The Federal Housing Finance Agency establishes limits for home loans to be acquired by Fannie Mae and Freddie Mac. Eligible mortgages generally carry reduced interest rates and thus support higher sales prices. The agency could make exclusionary communities ineligible for the “high-cost area limits” which raise the mortgage ceiling by 50 percent (currently that higher threshold is $726,525).

However, whatever the trigger, some future administration would have to be willing to pull it. With the high-cost coastal metros increasingly solidly Democratic, such an action would mean breaking political ties with affluent communities that undoubtedly have many residents who contribute generously to political campaigns. Spurning such communities’ support would be a dramatic change in the tenor of American politics.