Affordable Housing Institute : US

 

[Continued from yesterday’s Part 1.]

Yesterday we covered four fifty-year trends:

1. Cities move from manufacturing to information and knowledge work.
2. Land use rules proliferate and development becomes more protracted.
3. Houses become larger, lots become smaller.
4. Housing costs more as a percentage of income.

These four physical-market trends stimulated responses in the capital and financial markets:

5. Capital gets ever faster, ever larger, ever smarter. Once upon a time, a loan was something you got from a local bank. (Of course, once upon a time there was a local bank.) The bank, in turn, funded the loan with deposits from your fellow citizens.

 

If a bank failed before the FSLIC came along, all you could do was pointer an accusatory finger.

Loans were personalized things, custom-designed and custom-underwritten by your neighborhood savings and loan. (And as long as we’re strolling down nostalgia lane, remember when banks actually had money in them?)

 

Don’t talk to me about no securitization

Then things changed ….

Banks bought banks. Relaxation of the Glass-Steagall banking laws birthed interstate, regional, and national banking. Securitization was introduced, the GSEs privatized. All this added up to an accelerating maelstrom of capital, faster and faster.

 

Where the money went?

Some of this increase in speed and scale is testament to the GSEs’ success. Some has arisen simply through financial-sector automation and consolidation. Some owes a debt to information technology (without which we’d still by in the paper-money age). Put it all together and it’s been an unmitigated boon to consumers: dramatic spread compression, an explosion of financial products, a proliferation of hordes of specialist entities and individuals, a rise in consumer sophistication and choice … and through it all, a rising homeownership rate.

All good … at some cost.

The local bank? Gone. The non-conforming mortgage? Rarer. Personalized service? Outsourced to India or delivered via a smart-ATM.

 

Think Clyde Barrow’d hit one of these?

(Hence, by the way, the emergence of private banking, for that good old-fashioned simpering the wealthy are used to.)

As capital got faster, it got bigger, and more remote. In the dance between property and capital, the increasing scale gaps between real estate, which is local and immovable, and capital, which circles the globe in a mouse click, have further differentiated the housing finance ecosystem and spawned dozens of new ecota.

 

6. Affordability models migrate from pure-public to private-public partnership. In 1956, about the only form of affordable housing, as we today use the term, was public housing — direct government ownership of low-cost housing.

 

Pruitt Igoe, 1956

There was:

· No HUD. It would not be formed until 1966, when Lyndon Johnson glued together several agencies.

· Almost no urban renewal agencies. New York under iron rule of Bob Moses was creating urban renewal, but the massive slum clearance that would reshape most of our cities did not start until the early 1960s.

· No state housing finance agencies. New York State’s Housing and Finance Agency, the grand-daddy of them all, was founded in 1960. (Its predecessor, the Division of Housing and Community Renewal, began existence in 1939 as a public housing authority regulator.) The Massachusetts Housing Finance Agency, the second one to come along, opened its doors in 1966.

· No Community Reinvestment Act. Enacted in 1977, it forced banks to look in their rear-view mirror at the cities they were fleeing, and marked a turning point in their revitalization.

· Few if any advantaged-hard-debt sources. Even FHA mortgage insurance, for two decades the mainstay of Federal credit enhancement, did not really begin until the 1962 enactment of now-venerable Section 221(d)(3), and even New York’s precursor, the Mitchell-Lama program, only got its start in 1955.

· Virtually no soft debt. Without Federal, state, or local capital sources, who would provide it?

· No soft-equity form of tax-sheltered investment. The Low Income Housing Tax Credit, introduced in 1986, superseded the tax-deductions-based regime that was born, for all practical purposes, with the Tax Reform Act of 1969.

Compared with today’s explosively diversified ecosystem, that first environment was a primordial ooze of unicellular animals.

 

Think of me as FHA insurance …

Meanwhile, that public housing we illustrated earlier was flat rent, not mean-tested rent, with diverse income mixing. Only with the cities’ emptying out in the post-industrial white flight to the suburbs did public housing become the residence of the poorest of the poor.

 

In 1956, all we had was public housing, and a singly lonely bastion of rent control, New York City, as the only judicially enforced affordability by confiscating owner value.

Small wonder, then, that it took the 1960s’ urban riots to jolt the public sector into taking action, and recognizing that both the pure-private and pure-public models of housing affordability were a ticket to gated enclaves and slums.

 

7. The Federal role crests in 1970 and declines thereafter. With hindsight, HUD’s finest hour was the 1968 enactment of the National Housing Act, for at that moment the Federal presence reigned supreme. That 1968 National Housing Act (now pathetically forgotten) kicked off a boom in affordable housing production, something on the order of 200,000 apartments a year. By comparison, today’s LIHTC produces about 100,000 apartments a year, against a nation whose population is 47% larger (300 million versus 203 million). In its heyday, therefore, Section 236 was three times as large, (200,000 / 100,000 x 1.47) bigger per capita than current production.

 

Section 236 was three times bigger than the LIHTC

And it was standardized! One set of Federal statutes, one chunk of regulations. One application mode, and one awarding agency.

 

Two tones we so hep in the Fifties …

By its scale and its standardization, Section 236 created the modern tax shelter industry.

[My old firm was founded in 1970 as a high-sophistication spinoff from Paine Webber using ‘financial technology’ (as equity syndication was then glamorously known), so the Paine Webber Jackson & Curtis Financial Technology Group shortened its name to Boston Financial Technology Group. It would take another decade before those whose partner I became finally had enough of the “what’s technology mean?” question and shortened the name to Boston Financial Group.]

For affordable housing HUD experts, the early 1970s were Boom Town.

It didn’t last.

 

Elsewhere I’ve observed that Democratic administrations tend to give birth to housing programs, Republican ones to kill them. In 1972 President Nixon clamped an administrative moratorium on Section 236 —

Democrats propose … and Republicans dispose.

— and though Jimmy Carter turned the spigot back on with the 1977 Section 8 New Construction/ Substantial Rehab program, Ronald Reagan turned it off for good in 1981.

There you go again, shoving the Federal government into housing.

From that second moratorium HUD never recovered. It is still slowly dying today.

 

8. The decision nexus moves from Washington to states and cities. As HUD waned, something else had to wax. Congress elected not simply to kill programs cold turkey, but rather to transfer funding control from Federal to state. Standardized national programs were converted into block-granted state variants: UDAG begat HoDAG (1983) begat CDBG begat HOME.

 

Other resources too were block-granted. Tax-exempt bonds were capped, shifting that control to the states. The Low Income Housing Tax Credit, with its standard Federal rules but state-level allocation procedures (QAPs), encouraged parallel experiments. With the vigorish they made from funneling these resources, state housing agencies grew large, and rich, and confident.

 

The shift down from Federal was also supported by the growing importance of cities as wealth generators, the growing diversity of city economies, and growing local awareness that not only is affordable housing good for communities, cities must lead, with workforce housing, inclusionary zoning, and other initiatives.

Standardization from the top is now replaced by co-evolved propagating best practice spiced with individual variations, and the place you look for policy leadership is now the state capitol, not Washington.

 

[Continued tomorrow in Part 3.]

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