Thinking about Homeownership in Low-Income Neighborhoods

Julia Vitullo-Martin, September 2004

Though Democrats have long championed governmental subsidies for low- and moderate-income rental housing, they've recently been caught flat-footed on homeownership. Perhaps they underestimated the American home owning imperative, or maybe they remembered the disastrous, default-ridden federal ownership programs of the 1960s and 1970s. But whatever the cause, Democrats have yielded the high ground on homeownership to the Republicans over the last few years. When President Bush called for new federal programs targeted at increasing minority homeownership in 2002, the Democrats attacked, arguing that he intended to de-fund the old subsidy programs. And indeed he did. But the more pressing question is: do subsidized, moderate-income homeownership programs work? Is President Bush correct that widespread homeownership can restore once desolate neighborhoods while producing spin-off benefits, such as improved public and private services? And do subsidized homeownership programs then stimulate banks and mortgage companies to make loans on new development, letting government withdraw?

New York City's experience demonstrates that the answers are all yes—so long as some basic principles are followed. Ironically, the most important principle—that buyers must make an immediate financial investment in their homes—may be undermined by President Bush's core proposal of zero-down mortgages. New York's two most successful ownership programs in distressed neighborhoods—Nehemiah Houses and the New York City Housing Partnership—have remained financially sound by insisting on up-front commitments from buyers. Both have also emphasized an approach the president's plan ignores: paring construction costs to the bone.

"A down payment is a positive thing because it helps us make sure that ownership is real," says Mike Gecan, senior organizer for East Brooklyn Churches, which sponsors Nehemiah. "We watch out for 'mental rental,' the idea that you get a house but you don't really feel like you own it, so you keep acting like a renter." One result of their strict financial policies is that Nehemiah's default rate is "statistically near zero," says Gecan—only 8 to 10 households out of the 3900 homes built over 20 years.

Similarly, Kathryn S. Wylde, president of the New York City Partnership and former president of its Housing Partnership subsidiary, says their default rate was consistently lower than Fannie Mae's conventional default rate in part because "once people met that big commitment up front, they hung onto their houses no matter what. There's no doubt but that a down payment is important in terms of predictability."

There's also no doubt but that homeownership rhetoric rings true with Americans.

APPEALING RHETORIC

"As we work for a more secure world, we've got to work for a better world, too," said President Bush, speaking before the St. Paul African Methodist Episcopal Church in Atlanta in 2002. "Part of being a secure America is to encourage homeownership." Denouncing what he called "the homeownership gap," he urged multiplying the number of minority homeowners by at least 5.5 million to 18.5 million by the end of the decade. While a record high 68% of American households own their own homes—up from 40% in 1940—the minority ownership rate languishes at roughly 27 percentage points lower. The current homeownership rate for African Americans is 47% and a slightly higher 48% for Hispanic Americans.

While New York has traditionally been a city of renters, homeownership has increased from 27% in 1993 to 32.7% in 2002—still well below the national urban rate of 49%. Among the five boroughs, Staten Island has the highest rate of homeowners—64.6%—and the Bronx at 22.5% edges out Manhattan at 22.6% for the lowest rate, according to the city’s Housing and Vacancy Survey.

As in other cities, minority ownership lags in New York. While 42.6% of white and 36% of Asian New York households owned their own homes in 2002, only 29.2% of black and 15.2% of Hispanic households were homeowners.

Minority ownership was one of the many problems that Nehemiah and the Housing Partnership identified and hoped to solve, though with somewhat different approaches. Shaun Donovan, commissioner of the city's Department of Housing, Preservation and Development, points out that Nehemiah was about community organizing—building power and strength in neighborhoods by empowering the home buyer—while the Partnership set out to rebuild the locally based real estate capacity that had been wiped out in neighborhoods like Bedford Stuyvesant, Bushwick, Washington Heights, the South Bronx, and others. The result today, says Donovan, is that "without any assistance from either the Partnership or city government, those same builders are now doing market-rate development in those same neighborhoods." HPD also runs some smaller homeownership programs, such as HomeWorks, under which small, vacant city-owned buildings are rehabilitated by builders to create one- to four-family homes for sale at market to individual homebuyers.

RISING FROM THE ASHES

Nehemiah and the New York City Housing Partnership were founded in the early 1980s, when city government owned large swathes of vacant land in the outer boroughs. Some land had been left over from misguided urban renewal projects, but most had been acquired by the city in the financially troubled mid-1970s, when thousands of private owners defaulted on their taxes. Mayor Ed Koch was eager to see the land put to productive use, and Nehemiah and the NYCHP thought they knew how to do it: build houses for moderate-income, working families. They would get the land, regarded as worthless by many, virtually for free, and they would pare construction costs to the bone. They used different methods—Nehemiah built projects of 500-1,000 modest, identical-looking units on large tracts of formerly city-owned land. The Partnership built projects of fewer than 100 units, usually two- and three-family homes, scattered on different sites. By the end of the 1990s NYCHP had built 13,521 new homes in 174 projects, and Nehemiah had built 3200. (Nehemiah recently completed another 700 units.) Both used various government subsidies in addition to the cheap land. Both sold primarily to minority households. And both ran very tight ships.

From its first days Nehemiah was obsessed with costs, fighting with city officials about expensive regulations—such as individual sewer hook-ups—and eliminating all so-called frills from the houses, which ended up looking stark indeed. In the third phase of housing construction, Nehemiah is still obsessed with costs but is now willing to build larger, less austere houses. The new development in the Spring Creek section of Brooklyn's East New York has been designed by Alexander Gorlin, a prominent Manhattan-based architect who is also designing Daniel Libeskind's apartment.

Gecan argues that the major problem for moderate-income housenholds is not the down payment on conventionally built houses so much as the ongoing payments. New York City's construction costs are a third higher than any place else in the country, and moderate-income households cannot afford the resulting exorbitant sales prices.

"The best foreclosure insurance you can find," says Gecan, "is keeping down the cost of construction so that buyers can pay 20 or 30% of their income and not 40 or 50%. Our buyers average payments of around $600 a month, which they can afford while making $32,000 a year as, say, city workers or low- to mid-level bank employees."

But, of course, the costs of construction will stay high so long as development remains subject to New York's highly political, prescriptive regulatory processes. New York already had the highest construction costs in the country before the City Council passed its lead abatement legislation last winter, stalling the construction of many moderate-income housing projects indefinitely. Now the Council is considering a bill to impose mandatory "green" environmental restrictions on all new government-financed projects.

Gecan also argues that the Bush administration is going after the wrong problem. The real problem, he says, is scarcity of land, large amounts of which are being held off the market by the federal government itself. The feds should be identifying sites where affordable housing can be built, he argues, such as unused military bases. New Yorkers may think immediately of Brooklyn’s largely underused Navy Yard.

Nehemiah and the Partnership built homes for some 20,000 lucky households. But the homeowners are not the only who benefited. A study by New York University concluded that property values in the rings surrounding the homeownership projects rose relative to their community districts over the last two decades. Author Michael Schill concluded, "What New York really did differently was use housing policy to rebuild neighborhoods." Banks now routinely give mortgages in neighborhoods once dominated by tax foreclosures.

WHAT’S NEXT

In December 2003, President Bush signed the American Dream Down Payment Act to subsidize households that can afford monthly mortgage payments but not the down payment or closing costs.

The legislation authorizes $200 million a year in down payment assistance to some 40,000 low-income families. New York City has received $2.5 million, which the Bloomberg administration is using for down payments and closing costs of up to $10,000 per household for families of four making up to $50,000 annually. HPD Commissioner Donovan believes the downpayment assistance will help close the homeownership gap for minority New Yorkers. The Bloomberg administration has also introduced a $12 million pilot program to help formerly homeless families buy homes.

In Washington, Congress is considering the Zero Down Payment Act of 2004, introduced by Rep. Pat Tiberi (R-OH). The bill would require the Federal Housing Administration to offer federally insured mortgage loans to eligible moderate-income households to buy a house with no down payment—as opposed to the current requirement of at least 3% for most borrowers. The Congressional Budget Office estimates that the new program would cost the government $618 million from 2006 through 2009.