The Urbanist Musings of Pete Saunders

True Housing Policy? It’s Us vs. Them

Source: savingadvice.com
A couple days ago, Daniel Kay Hertz wrote a piece for City Observatory (which later went up at the Atlantic) that points out the fundamental contradiction of American housing policy.  From his article:

Here are two ideas that, if you’re like most Americans, you probably mostly agree with:

1. Government policy should help keep housing broadly affordable, so as not to price out people of low or moderate incomes from entire neighborhoods, cities, or even metropolitan areas.

2. Government policy should protect residential neighborhoods from things that might negatively impact housing values, because homes are an important investment and wealth-building tool.

Having read them together like that, you’ve probably already jumped ahead to the big reveal, which is that these two ideas are almost entirely mutually exclusive. The first essentially says, “Use housing policy to keep home prices down”; the second says, “Use housing policy to keep home prices up.”

It’s no wonder, then, that housing policy is a bit confused.

Presented that way, it does seem contradictory.  Incongruous.  Diametrically opposed, even.  However, if one digs a little deeper, one can see how two seemingly contradictory housing policy truisms can peacefully co-exist for nearly a century.

In practice, it’s far more accurate to see American policy this way:

  • Use housing policy to keep home prices down.  For them.
  • Use housing policy to keep home prices up.  For us. 
Definitions of “them” and “us” have changed over the years, but housing policy has been practiced and implemented in this way since the advent of the New Deal.  Because of recent changes in how we live and what we prefer, the flaws of this arrangement have become evident.
Here’s why these two maxims emerged, and how they were able to co-exist peacefully for so long.  Facing an utterly collapsed housing market in the midst of the Great Depression, President Franklin Roosevelt and a Democratic Congress passed the Housing Act of 1934, which instituted housing policy reforms to make mortgages more affordable.  The Act also led to the creation of the Federal Housing Administration (FHA), and the Federal Savings and Loans Insurance Corporation (which later became the FDIC) to regulate the housing industry and housing finance, and provide insurance to the banks that finance housing, respectively.  A chief assumption with the passage of this act was that housing production and consumption, the building and sale of homes, must be incentivized for the stability of the American economy.  The act was meant to buttress and bolster the American middle class, and create safeguards that would allow homeowners to build wealth.  That was the beginning of American housing policy for us.
It didn’t take long, however, for federal policymakers to realize that not everyone benefited from the housing finance reforms they put in place.  What about housing for renters, particularly low-income residents?  The Housing Act of 1937 led to the provision of subsidies to local public housing agencies to allow for the development of public housing.  The act also created funds that could be used for slum clearance and urban renewal projects, in the name of preparing places for new and improved development.  That was the beginning of American housing policy for them.

Subsequent housing acts, in 19491954 and the fair housing components of the Civil Rights Act of 1968, refined the 1934 and 1937 acts, but the broad practices they established remained.  A set of policies had been enacted to produce housing for the middle class, and the chief beneficiary would be “suburbia” — the open and unencumbered lands where new homes, new communities, could be built.  A set of policies had been enacted to produce affordable housing for low-income residents, and the chief beneficiary would be “cities” — the older, denser places where most low-income people already lived.
This policy contradiction had an unintended consequence.  Value was extracted from older, urban housing and added to newer, suburban housing, because suburban housing now came with supports and assurances that urban housing did not enjoy.   Furthermore, the development of public housing in cities, specifically for low-income people, led to the perception of cities as being our nation’s default affordable housing location.  
Evidence of this was clear in nearly every metro area from the 1930s through the 1990s.  A graph of metro areas over that period would likely show that housing values would rise with increasing distance from the city center, with some exceptions and caveats.  That was true in high-priced areas like New York and San Francisco, and also true in moderately priced metros like Phoenix and Houston.  
Since the ’90s, though, another contradiction has arisen.  Attracted by its affordability, and driven by a shift in living preferences, people have returned to the places that became the de facto affordable housing locations, causing an alteration in the established equilibrium.  These city newcomers brought with them the expectation of maintaining or increasing property values that was the suburban maxim, but had not existed in the wealth-extracted, affordable housing cities for decades.  Hertz notes how the disparities of the contradictory policies grows, and its impact:

This inequality is buttressed by the fact that our homeownership subsidies have worked selectively to the benefit of higher-income homeowners: the mortgage interest tax deduction, for example, gives larger tax expenditures to people who own more expensive houses. The more your home appreciates in value, the more benefit you get from the exclusion of home sales from capital gains tax…

One result of all this is that many white families have built generations of wealth through homeownership, while black families have made barely any progress: In fact, The Atlantic reported on a study suggesting that homeownership has been a net financial loss to African Americans since 2000. In 2013, the median white household held $126,000 in wealth from their home, while the figure for the median black household was just $31,000. That gap, in turn, represents a massive difference in the ability of a family to withstand a big financial shock—unexpected unemployment, for example, or a serious medical crisis—that may go some way to explaining why black middle-class workers are much, much more likely than their white counterparts to fall back into poverty.

(And the resistance of many neighborhoods to growing property values is quite strong indeed: look at how much of central and southern Brooklyn has actuallylost property value since 2004.)

Complicating factors is that there are housing constraints impacting city newcomers.  There’s the well-documented supply constraint — there’s only so much of the preferred housing, in the preferred area, with the preferred amenities, in the preferred places.  There’s only so much housing in cities that’s near public transit, in safe and secure neighborhoods, with the shops and restaurants.  Zoning reform advocates try to address this constraint, but are often stymied by first-generation newcomer pioneers who, having moved in when prices were their absolute lowest, seek to maximize housing value and thwart attempts at adding housing that they believe may negatively impact them.

Yet there is an even bigger constraint — the demand constraint.  There are neighborhoods that have the preferred development type, but remain off the grid as far as city newcomers are concerned.  They may or may not suffer from high crime, poor schools, poor amenities — here, perception drives the poor demand, and this impacts far more of a given city than the supply constraints.

Addressing supply constraints will help affordability slightly in the short term, but lead to long term problems.  Zoning reform that allows more units to be built, at least in cities, will result in more units in the most desirable areas and have little impact in areas that lack demand.  We’ll see an inversion of the poor city/rich suburb dynamic that the contradictory “us” and “them” housing policies created.

Another way of viewing this: the “for them” housing policy of concentrating affordable housing efforts in cities led, as even Hertz noted, to artificially low prices in low-income, and particularly low-income minority, city neighborhoods.  Conversely, the “for us” housing policy of incentivizing housing development in the suburbs created artificially high prices in the suburbs.  It could be argued that as minority migration to suburbs and white migration to cities accelerates on both ends, home prices are finding a new equilibrium.

Addressing the demand constraints will be far more difficult, but far more fair and equitable.  Doing so means cities will have to address crime, school and service concerns where they exist.  It means cities will have to aggressively market parts of cities that are currently beyond the pale (no pun intended) of today’s city newcomers.  It means cities will have to attract and implement the amenities that appeal to newcomers, but it also means that cities will have to find ways to provide assurances to low-and-moderate income longtime residents who desire to stay where they are.

Transitioning from 80-plus years of “us” and “them” housing policy will mean less a change in policy and more a change of heart.  Zoning reform in cities would change the geography but perpetuate the divide, as suburbs become the new place where wealth is extracted and cities where it is increased.  Without an emphasis on fair housing in equal parts with affordable housing, little if anything changes for people, except the location.

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