Published originally on 'Divided We Fall; at How Do We Solve the Affordable Housing Crisis? — Divided We Fall
Housing Must Be Made Affordable and Available for All Income Levels...
By Randal O’Toole, Senior Fellow, Cato Institute, and Charles Ray, Former U.S. Ambassador; Chair of the Africa Program, Foreign Policy Research Institute
Eliminate Affordable Housing Subsidies for Developers
By Randal O’Toole – Senior Fellow, Cato Institute
Since 1987, the federal, state, and local governments have given billions of dollars per year to developers to build affordable housing for people who earn less than 60 percent of a region’s median income. Since that time, numerous economic studies have concluded that this is a highly inefficient way of helping low-income people and that the programs should be eliminated in favor of rent vouchers.
Developers, not low-income tenants, get most of the benefits of affordable housing subsidies. Many new developments get 90+ percent of their funding from various affordable housing funds, out of which developers collect “fees” per project, and then collect rents on the projects after putting up very little of their own money.
There is perhaps no clearer data point against affordable housing subsidies than this: Given regions have a fixed amount of labor and resources for building homes, the construction of five units of affordable housing has been found to be offset by four fewer units of unsubsidized housing. Thus, it costs more than a million dollars to net one new housing unit for the region.
The High Cost of Affordable Housing
Early studies found that subsidized affordable housing costs about 20 percent more per square foot than unsubsidized housing, partly due to developers collecting high fees and government inefficiency. This disparity has increased as affordable housing subsidies grow, while the number of units built has declined. Another drawback of affordable housing subsidies is that most require developers to rent housing at below-market rates for only 30 years. After this period, the owners of those units are released from obligations to rent to low-income tenants, and many, if not most, greatly increase rents.
The real reason housing has become unaffordable for many people is that some states and regions have adopted urban growth boundaries and similar policies that artificially restrict the supply of new homes. Politicians then propose to make up for housing’s high cost by spending more money on affordable housing. Yet affordable housing doesn’t make overall housing markets more affordable and may actually make them less affordable.
A better policy would be to make housing more affordable for everyone by abolishing urban growth boundaries and other land-use restrictions that have made housing expensive. Meanwhile, help for those who truly can’t afford housing should come in the form of rent vouchers, not subsidies that primarily enrich developers.
Rather Than Subsidies or Vouchers, Why Not Cash?
By Charles Ray – Former U.S. Ambassador; Chair of the Africa Program, Foreign Policy Research Institute
The housing crisis is not new. It began during the Great Recession that was precipitated by the 2007–08 U.S. financial crisis. According to a Pew Research Center survey conducted in October 2021, 49 percent of Americans list the availability of affordable housing in their community as a major problem. This represents a 10 percent increase from just three years earlier.
The current problem of affordable housing is the lack of supply. The U.S. needs 3.8 to 5.5 million housing units, and the lack of available housing is most acute for low- and moderate-income renters, first-time homebuyers, and people of color. The per-capita rate of production of new single-family homes dropped drastically and even though the construction rate has gone up, increased construction costs of 14.1 percent year over year still limit the availability of affordable housing for the aforementioned groups.
Rental Vouchers Are not the Solution
While Mr. O’Toole’s criticisms of the housing subsidy program are perfectly valid, simply replacing them with rental vouchers is not likely to solve the problem. Attention should be on increasing the availability of affordable housing for all Americans at all income levels. If developers rather than low-income tenants are reaping most of the benefits of affordable housing subsidies, how will that situation change if low-income people are given rental vouchers?
While the rental voucher program sounds good at first glance, a closer look at how it actually works (or fails to work) gives cause for concern. One of the key problems is that even with a rental voucher, there are not enough rental units to accommodate those needing housing, and the program is so complicated and cumbersome it helps only a quarter of those who need assistance. The Housing Choice Voucher program in 2021 provided 2.3 million households with vouchers to offset the rent on private units, but only one in four people who qualified for the assistance actually received it. The average wait before receiving a voucher was 2.5 years.
Even after families receive the vouchers, their troubles don’t end. They then must jump other hurdles to find landlords willing to accept the vouchers, units with long-term leases, or housing that is habitable. Sky-high rents that force voucher holders to live in the most poverty-stricken neighborhoods, resistance from landlords and neighbors, and scarcity of vouchers due to bureaucratic red tape and inefficiency combine to leave eighty percent of those qualified for federal assistance homeless.
Affordable Housing for All
While it’s important to enforce discipline and fairness in the system, the main goal should be to ensure an adequate supply of affordable housing for all. This means looking at local zoning laws, leveraging public-private partnerships, and making a long-term commitment to solving the problem. There are no quick fixes. Maybe rental vouchers will work in some areas and not in others. Maybe more oversight is needed to ensure that affordable housing subsidy programs don’t become just another way for developers to make bigger profits.
One promising proposal involves giving cash to low-income tenants for their rent payments. A program like this was successfully tested on 14,000 families across 12 cities in the early 1970s but was largely forgotten about in the following decades. Such a program would eliminate much of the red tape associated with the voucher program, as well as the pocket lining of property developers. In addition, it would eliminate the stigma currently associated with voucher programs or designated low-income housing. It’s something worth considering.
Affordable Housing Has Been Captured by “Densification” Ideologues
By Randal O’Toole – Senior Fellow, Cato Institute
Mr. Ray is correct that housing affordability is a problem. However, it is essential to distinguish housing affordability, meaning the general price level of homes relative to income, from affordable housing, meaning subsidized housing for people who can’t afford market-rate housing.
Decreasing housing affordability may increase the number of people who need affordable housing, but building more affordable housing won’t increase overall housing affordability. Unfortunately, many politicians respond to declining housing affordability by spending more tax dollars on affordable housing, which is a waste and potentially counterproductive.
Land-Use Restrictions Must End
It is essential to understand why housing has become less affordable. In 1970, housing was affordable to almost everyone in every part of the country because homebuilders had lots of land on which they could plan and build whole new communities of homes. During the 1970s and 1980s, however, states on the Pacific Coast, the north Atlantic Coast, and Florida began using urban-growth boundaries to restrict the amount of land available for new housing. This drove up housing prices in those states, which is why people today are migrating from states like California to states like Texas, which never imposed such land-use restrictions.
To make housing more affordable, the solution has nothing to do with affordable housing programs, vouchers, or (as Mr. Ray suggests) giving low-income people cash to pay their rent. Instead, the only solution is to eliminate the growth boundaries and other rural land-use restrictions that prevent home builders from meeting the demand for single-family homes.
Mr. Ray may be correct that vouchers are not perfect. Giving cash to low-income people also has its drawbacks unless it is accompanied by some training in basic household finance. Yet my argument is that affordable housing programs are the most wasteful of all responses to high housing prices.
Build Single-Family Homes, Not Apartments
Surveys consistently show that 80 percent of Americans prefer or aspire to live in single-family homes. The same planners who have made housing unaffordable by restricting new housing developments have proposed to build more units by abolishing single-family zoning. But building more apartments that people don’t want won’t housing more affordable, especially if building new multifamily housing requires the destruction of existing single-family homes.
This is important for affordable housing because, in recent years, most affordable housing funds have been spent building four- and five-story apartments with the goal of increasing urban densities. The fact that many such apartments require subsidies shows that most Americans really don’t want to live in such housing.
This is particularly wasteful because four- and five-story buildings are much more expensive per square foot than single-family homes, due to the need for more steel and concrete and elevators to reach the upper floors. This is the main reason why the cost of new affordable housing has more than doubled since 2004. The fact that affordable housing programs have been captured by ideologues who want to force more Americans to live in apartments when they would rather live in more affordable single-family homes is one more reason to object to today’s affordable housing programs.
Housing Availability Is the Key
By Charles Ray – Former U.S. Ambassador; Chair of the Africa Program, Foreign Policy Research Institute
It appears that Mr. O’Toole and I are arguing past each other and that we’re more in agreement than disagreement. Perhaps I need to clarify my position a bit more. The key word in my statement regarding what people see as a problem is “availability.” Whether we call it housing affordability or affordable housing, if it’s not “available,” therein lies the problem.
Addressing the Housing Shortage
According to a 2019 Harvard Joint Center for Housing Studies, the key factor affecting availability was high home prices driven by the skyrocketing cost of land. In Suffolk County, Massachusetts, which primarily consists of the city of Boston, single-family land prices rose from $1.7 million per acre to $2.8 million. Since land represents a large share of the value of homes, rising land values, along with labor constraints, cost of building materials, and regulatory burdens, are key to home price increases and consequently, availability. Land prices are, though, the most significant factor in the cost of a home.
Eliminating growth boundaries and land-use restrictions sounds good—on paper—but the devil’s in the details. Replacing multi-family dwellings with single-family housing in major metropolitan areas is impractical and would result in massive dislocation of current residents. Changing land-use restrictions in rural areas is one possibility, but it would have to be informed by environmental factors and the strength of the agriculture lobby in our legislature. Another factor that Mr. O’Toole fails to mention is that current homeowners will oppose any action that decreases the current value of their properties.
Closing the Housing Gap
I do not disagree with Mr. O’Toole that most government programs have been wasteful and ineffective, but eliminating them is probably not the answer until we’ve determined how to replace them. The factors involved in land-use restrictions are many and complex—partly political, partly cultural, and they will not be solved by fiat. The answer probably lies somewhere in between: open more land for single-family housing construction, while, at the same time, taking action to lower the cost of land. Until we determine how best to do this, we need to find some middle ground that provides adequate housing for all.
Whether we’re talking about housing affordability or affordable housing, the key is to work on housing availability. The United States is simply not building enough homes to accommodate the number of people setting up households. The housing gap from 2012 to 2022 was 6.5 million homes. In late 2021, there was a fast pace of single-family home construction, but midway through 2022, the housing market felt the impact of rising mortgage rates and buyer demand, and builders started to decrease single-family home starts. In the current situation, even if construction of single-family housing increased by 50 percent over the 2022 rate, it would take two to three years to close the housing gap. It is doubtful that ending the affordable housing programs and ending land-use restrictions alone would do anything to achieve this outcome.
Additional Reading:
- The Federal Government’s Support for Low-Income Housing Expanded During the Pandemic
- How Is Affordable Housing Funded?
- U.S. Housing Shortage: Everything, Everywhere, All at Once
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Randal O'Toole
Randal O’Toole is a senior fellow with the Cato Institute and author of Romance of the Rails: Why the Passenger Trains We Love Are Not the Transportation We Need.
Charles Ray
Charles Ray retired from the US Foreign Service in 2012 after a 30-year career. Prior to joining the Foreign Service, he spent 20 years in the US Army. During his 30 years in the Foreign Service, he was posted to China, Thailand, Sierra Leona, Vietnam, Cambodia, and Zimbabwe. He served as deputy chief of mission in Sierra Leone, was the first US consul general in Ho Chi Minh City, Vietnam, and served as ambassador to Cambodia and Zimbabwe. Since his retirement from public service in 2012, he has been a full-time freelance writer, lecturer, and consultant, and has done research on leadership and ethics. He is the author of more than 200 books of fiction and nonfiction. Ray is a trustee and chair of the Africa Program of the Foreign Policy Research Institute.
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