Testimony to the House Financial Services Committee

Editor's note: The following is written testimony submitted to the House Financial Services Committee in a hearing entitled “Housing in America: Assessing the Infrastructure Needs of America’s Housing Stock.”

Thank you Chair Waters and Ranking Member McHenry for this opportunity to submit written testimony in regard to the committee’s hearing  on the affordable housing inventory as a vital part of the nation's infrastructure. My focus will be on the crucial need to make the best use of our existing affordable housing inventory.

I write in specific regard to the capital needs of America’s 1.1 million public housing.  As members are well aware, for many years public housing authorities had received federal assistance covering only operating costs, while maintenance and capital needs went dangerously unaddressed.  In New York City, where I conduct housing policy research, the New York City Housing Authority has, in fact, been branded a slumlord.  Tens of thousands of its  tenants have suffered from a lack of heat and water in the coldest winter months.

For the first time in decades, however, we are seeing a new approach to funding public housing capital needs come to fruition, and to be implemented by successive Administrations led by different political parties. It’s my hope that the Committee will find avenues to express its enthusiasm for this approach and to urge its expansion.

The Rental Assistance Demonstration project, developed by Obama Administration HUD Secretary Shaun Donovan, has, without increasing federal spending, secured, to date, $7 billion in private investment to support the operating and long-term capital costs of 113,000 public housing units.  It has done through a simple but ingenious expedient.  The conversion of federal rental operating assistance to public housing authorities to a unit, or place-based Section 8/housing voucher, creates a revenue stream against which private investors can obtain financing.  In turn, the federal Low-Income Housing Tax credit creates additional investment incentive for corporate investors. 

The approach has not only been embraced and implemented on a bipartisan basis, it has been enthusiastically received the public housing authorities. In addition to the 113,000 public housing units for which financing has already been secured,   some 200 housing authorities—including such major authorities as New York, Los Angeles, Detroit, Kansas City, Memphis, Newark and Boston—have filed applications indicating they are in the process of arranging development financing under the terms of RAD for an addition 133,000 units.   What’s more, HUD has received letters of interest, the most preliminary stage of RAD participation, that could potentially lead to investment in regard to an additional 100,00 public housing units.

Although less well-known, RAD has also been used, by private owner investors, to secure financing for affordable housing complexes comprising an addition 30,000 units and may be used to finance improvements for 35,000 units in elderly housing apartment complexes.

Concerns about the role of private investors and managers in what have historically been publicly-owned and operated housing agencies are understandable.  I would, however, draw the committee’s attention to what I feel are less-understood advantages and reassurances of the RAD approach.  Consider the New York City Housing Authority, with some 180,000 units. Were it to invest its own operating and capital funds in the new heat and hot water systems it so desperately needs, it would face unforeseen negative consequences.  More efficient systems would, of course, lower its operating expenses—and that would, in turn, by formula, lead to its operating assistance being reduced in the next budget cycle.  A RAD-based investor operator would face no such problem.  Once operating assistance has been converted into a reliable rent revenue stream, management firms have every incentive to make investment that lower their costs—without incurring the risk of receiving less rental income. They would, indeed, have additional revenue to do what RAD requires:  guaranteeing to fund a 20-year capital need account for the public housing development involved. This capital requirement is coupled with a contract that calls for the units to be permanently affordable. Thus, we see the potential for a significant makeover of a significant portion of the nation’s public housing stock.

It is important to be mindful, however, of the limits of RAD as it is currently designed. Private financing, even when incentivized by the Low Income Housing Tax Credit, can only be secured when rental income from public funds is sufficient for investors to secure private construction mortgage financing.  HUD officials believe that the current rent levels will be inadequate to enable the RAD approach to be employed for as many as 500,000 of the nation’s 1.1 million public housing units.

Here one can see the makings of a bipartisan housing infrastructure approach: an increase in federal assistance to public housing authorities based on the understanding that funds would be used to increase rent revenues on which RAD financing is based. This sort of public-private partnership will, in my view, rightly have bipartisan appeal.

In contrast, this is not, in my view, the right time to try to encourage a new housing production program. The Joint Committee has estimated that cost to the Treasury of the Low Income Housing Tax Credit over a five-year time period at some $45 billion.  Unless the value of tax credit authorization were to be increased, any new production program would risk limiting tax credit financing availability for RAD-based public housing repair and modernization.

A good case can be made, in my view, that such repair and modernization should be our highest priority—it’s what we owe to tenants living in substandard conditions in government-owned housing.  Moreover, although high housing costs characterize select U.S. markets, especially parts of California, it’s important not to extrapolate from such markets that a housing crisis is affecting the country at large. Many cities are actually seeing high housing vacancy rates, rather than the bidding wars which characterize our hottest housing markets. According to Census data,  In Cleveland, Ohio, the housing vacancy rate is 20 percent—of 43,000 units. In Chicago, there are 153,000 vacant units, 12.8 percent of all housing. In St. Louis, 36,000 or 20.7 percent of all housing, is vacant. It would, in my view, be ill-advised to subsidize additional affordable housing construction in such locations;  doing so could lead to more vacancies in the private market that would face subsidized competition.  Additional vacancies or abandonment are no good for healthy neighborhoods.

Public housing, of course, should not be the sole focus of housing policy concern. All housing construction will help make housing affordable across the board—more supply leads to lower prices. In the case of housing, however, new production often faces exclusionary zoning barriers, even in some city neighborhoods, as well, of course, in some more affluent suburbs. We have grappled with this problem for decades, confronting the face that federal policy does not override local control.  The federal government, however, can use the carrot and stick of Community Development Bloc grant funds as a means to pushing municipalities to allow for higher-density zoning.  Affordability is always tied to density.  More units on the same acreage leads to lower prices.  HUD, which disburses CDBG funds, should not, however, in my view, insist on zoning tied to income levels.  Its goal should simply be higher-density housing.  Two-to-four family housing is a classic naturally-occurring affordable housing type.  In the pre-zoning era, it successfully accommodated millions of working class American households.  It’s heartening to see that some cities, notably Minneapolis are considering zoning changes which would introduce such housing into areas zoned exclusively for single-family homes. To the extent that federal policy can encourage such changes, it should—without threatening local governments.

I thank the Committee for considering these important issues.