Transcript General

K.O.R.E. Enterprises, LLC
Evolution of the Market
5/6/08
Evolution of the Market
Roots
of modern housing policy:
– Modern housing policy begins with the Great
Depression, when housing construction fell (95%
over 5 years) and defaults rose dramatically (1/2
of all mortgages in technical default in 1933)*
– Home Owners Loan Corporation created 1933 to
refinance mortgages about to default and make
loans
* Kenneth T. Jackson, Crabgrass Frontiers.
Evolution of the Market
Roots
of modern housing policy (cont.):
– Federal Home Loan Bank system established
» founded 1932
» privately-owned by private member institutions
» comprised of Federal Home Loan Bank Board
(FHLBB) and 12 regional Federal Home Loan Banks,
as well as member banks
» provides loans to member institutions through Federal
Home Loan Bank advances
Evolution of the Market
1930s
-- New Deal:
– FHA created through National Housing Act of
1934 to encourage home building through private
channels
» allowed much lower downpayments
» lengthened terms of mortgages (lowering payments)
» established standards for construction
» interest rates fell due to decreased risk to lenders
Evolution of the Market
New
Deal (continued):
– Fannie Mae created 1938
» provided standardization and liquidity
» eased transition of funds to newly developing areas of the country
1940s
-- Post-War:
– Housing boom in the 1940s and suburbanization through
the 1950s
– The 1949 Housing Act stated the goal of federal housing
policy to be provision of “a decent home and a suitable
environment for every US family.”
Evolution of the Market
1960s
–
–
–
–
to early 1970s:
Great Society and urban renewal
Creation of HUD
Split of Fannie Mae and creation of Ginnie Mae
Creation of Freddie Mac
Evolution of the Market
1934
1938
FHA
(government corp.)
1968
FHA
(part of HUD)
Ginnie Mae
(part of HUD)
Fannie Mae
Fannie Mae (GSE)
Freddie Mac (GSE)
Evolution of the Market
Creation
of Ginnie Mae:
– Fannie Mae divided in 1968 to form Government
National Mortgage Association (Ginnie Mae or
GNMA)
– Ginnie Mae became
» primary secondary market for government-insured
mortgages and part of HUD
– Guarantees MBS backed by FHA- and VAinsured mortgages and issued by lenders
– Backed by full faith and credit of U.S.
government
Evolution of the Market
Creation
of Fannie Mae:
– Fannie Mae founded in 1938 to create a
secondary market for mortgage loans
– In 1968, Fannie Mae became federally chartered but
privately held corporation (GSE)
– In 1970, authorized to purchase conventional
mortgages and in 1981, began issuing MBS
– Today a major portfolio investor and issuer of MBS
– Has provided liquidity to the market and established
market for future commitments of loans
Evolution of the Market
Creation
of Freddie Mac:
– Freddie Mac formed in 1970 to create secondary
market for mortgages originated by thrifts
– Today both Fannie and Freddie compete to serve
all mortgage originators
– Issues MBS; not a major portfolio investor
– In 1992, Office of Federal Housing Oversight
(OFHEO) established to ensure capital adequacy
and financial safety and soundness of Fannie
Mae and Freddie Mac
Evolution of the Market
Fannie,
Freddie, Ginnie enable transition of local
markets to a national market:
– Local banks and thrifts (savings and loans) historically
have made most mortgage loans
– Mortgages made were held in portfolio; little liquidity
– Secondary market developed to provide liquidity to local
sources of financing -- sources of funding come from
capital markets
– Local lenders can now sell mortgages and “recycle” funds
to provide more mortgages
– Result of standardized mortgages
Evolution of the Market
1970s
-- 1980s:
– Late 1970s-mid-1980s: economic recession; high
inflation; high interest rates
– Homeownership rates for young households decline
– Fannie Mae and Freddie Mac issue MBS
– 1974: Rental Assistance Program (Section 8) established
to assist qualifying, low-income renters in making
monthly payments.
– 1986: Low Income Housing Tax Credit established
– 1987: Housing Voucher Program established to provide
rent subsidies
Evolution of the Market
1990s:
– 1990 National Affordable Housing Act
– Decentralization of government programs and
funds to state and local level
– Section 8 crisis
– Future of HUD threatened
– Focus on administrative reform and performance
– HUD 2020 Management Plan
– GSE Housing Mandates
Evolution of the Market
1930’s—The New Deal
1940’s —
Housing Boom
1950’s—Growth of
Suburban America
1960’s-- Urban Renewal;
Development of the
Secondary Mortgage Market
Evolution of the Market
1970—Efforts to Establish
a National Secondary
Market
Mid-1970’s—Mid-1980’s
Economic Recession
Mid-1980’s—Present
Growing Diversity
U.S. Housing Quality
50%
40%
30%
20%
10%
0%
1940
1950
1960
Lacking Plumbing
Source: Census, AHS
1970
1980
GT 1 Person Per Room
1993
Percent of Very Low Income
Families
Two Low Income Housing
Problems
40%
35%
30%
25%
20%
15%
10%
5%
0%
1974
1981
Severely Inadequate
1987
1993
Rent/Income > 50%
Source: Data from John Weicher, HUD Reports. Data comparability subject to verification.
Current Housing Problems
 Physically inadequate housing.
» % of units without adequate plumbing, heat, etc., have been
disappearing since the 1950s.
 Affordability.
» Typical rent burdens have been increasing, esp. for the poor.
 Homelessness.
» Best estimates, around 300,000 homeless nationwide. Is this a
housing problem? An income problem? A public health
problem?
 Racial issues.
» Segregation and discrimination. What are the causes? What
are the cures?
Incidence of Housing Problems
30%
25%
20%
Whites
Hispanics
Blacks
15%
10%
5%
0%
High Rent
Inadequate Unit
Overcrowded
Rent Burdens, Blacks and All
Renters
Median Rent-to-Income
Figure 4.16
0.7
0.6
0.5
0.4
Blacks
All Races
0.3
0.2
0.1
0
<3K '3-7 '7- '10- '15- '20- '25- '35- '50- >75
10 15 20 25 35 50 75 K
Household Income Category
Figure 4.19
Homeownership Rates, By
Income and Race/Ethnicity
Homeownership Rate
100%
80%
White
Black
American Indian
Asian
Hispanic
60%
40%
20%
0%
1
2
3
4
5
6
7
8
Household Income Decile
Source: 1993 AHS
9
10
Discrimination in Housing
Availability
Avg. % Dif. in Units Rec./Shown
(Compared to Whites)
Figure 4.18
Units Shown
Units
Recommended, Not
Shown
0%
-10%
-20%
-30%
-40%
-50%
Source: Turner, Struyk & Yinger
Black Rentals
Black Sales
Hispanic Rentals
Hispanic Sales
Homeless Household
Composition
Single Females
8%
Single Males
76%
Females w
Children
8%
Other Families
2%
Other
6%
Personal Problems of the
Homeless
Mental Hospital
Inpatient Drug Treat.
Jail
Prison
Attempted Suicide
Clinically Depressed
NO INST. HISTORY
0% 20% 40% 60% 80% 100
%
Percent with This History
Source: Burt & Cohen, P. 50
Single Women
Women w Kids
Single Men
B u r t's S h e lte r B e d s P e r 1 0 0 0
Homelessness and Substandard Housing
15
NWK
CIN
NO
BUF
LA
13
CLE
10
OMH
PAT
CHI
MEM
IND
PGH
MIL
8
DET
NFK
SDI
HOU
ORL
SAT
WCH
RVR
5
3
0
70%
ANH
75%
80%
85%
90%
Relative Price of Substandard Rental
95%
100%
Housing Policy
Public
policy has had a major role in
shaping the housing market
Why
might the public sector intervene in
housing?
Housing Policy Objectives
Among
the objectives that can be articulated are the
following:
– Ensuring a minimum level of housing quality
– Increasing the supply of housing by stimulating new construction,
maintenance, and improvement of existing stock
– Stabilizing rents and asset prices
– Stabilizing construction and business cycles
– Maintaining incentives for savings and investment
– Reducing crowding
– Encouraging homeownership
– Reducing racial and economic segregation; and
– Fostering community development
Arguments for Housing Policy
Reasons
for housing policy:
– Economic
– Historical
– Political
Arguments for Housing Policy
Economic
–
–
–
–
–
–
reasons for housing policy:
Large capital investment, difficult to finance
Supply inelastic in short run
Construction and business markets are cyclical
Correct market failures
Redistribute income
Housing is a public good with positive
externalities
Arguments for Housing Policy
Historical
reasons for housing policy:
– Primary vehicle for household savings/
investment
– Stability of banking system
Arguments for Housing Policy
Political
reasons for housing policy:
– Housing industry off-budget tool for social
policy makers
– Incentive for local politicians
– Big business
Arguments Against
National Housing Policy
Interference
with the market through policy:
– Will decrease efficiency
– Allows people to occupy too much house
– Takes resources from other investments (national
savings)
– Assumes housing makes better environments
– Impedes market’s cyclicality, which is actually
good
– Subsidizes the wealthy
Key Players
Who
makes housing policy?
– Federal Government: Congress, Federal Reserve,
Treasury (IRS), HUD (including FHA and Ginnie Mae)
– State Government: State Legislatures, HFAs, DHCDs
– Municipal Government: DCPs, Building Depts., ED
Agencies, Local HFAs
– GSEs: Fannie Mae, Freddie Mac
– Private Sector: bankers, builders, realtors
– Non-profit sector: advocates, associations
Housing Policy Instruments
The
set of potential policy instruments for
meeting policy objectives include the
following:
–
–
–
–
–
Defining and enforcing property rights
Subsidy and direct public provision
Taxation
Finance
Regulation
Major Housing Programs
 Public
Housing
 Section 8 New Construction/Rehabilitation
 Section 8 Certificates
 Housing Vouchers
 Section 42 Low Income Housing Tax Credits
 Many others, including state and local programs
» Mortgage revenue bonds and block grants to state and local
governments
Change in Selected Federal
Housing Programs, 1985-96
Sec. 8 Existing/Vouchers
Public Housing
Section 8 New
Section 8 Mod Rehab
Section 236
Section 42 LIHTC
-100
0
100
200
300
Thousands of Units
400
500
600
1985 Federal Housing Subsidies
by Household Income
$35
$1985 Billion
$30
$25
$20
$15
$10
$5
$0
LT
$10K
$1020K
Outlays
Source:C. Dolbeare, in Urban Institute (1987).
$2030K
$3040K
$4050K
Tax Expenditures
GE
$50K
Two Overarching Approaches to
Housing Subsidy
 Supply
Side Subsidy: Subsidize the unit ("bricks
and mortar" subsidies).
–
–
–
–
Public housing
Section 236 interest subsidies to landlords
Section 8 New Construction/Rehab
Section 42 LIHTC
 Demand
Side Programs: Subsidize the tenant.
– Section 8 Existing Certificates
– Housing Vouchers
Housing Subsidies
Housing
Subsidies: Demand Side or Supply side
– The largest debate in American housing policy since the 1930s has
been the choice between supply-side and demand side subsidies.
– That is, should we subsidize houses, or should we subsidize people?
– From 1930s to the 1960s the federal government focused on
subsidizing units.
– Since 1970s there has been a shift to subsiding people.
– Despite the shift to demand-side programs, supply-side programs do
exist, ranging from those that maintain and manage existing stock of
public housing to new supply-side program such as the Section 42
Tax Credit Program.
Housing Subsidies: Supply Side

Supply-Side Policy: Public Housing
– Public housing is publicly constructed and publicly owned and is
rented to tenants at highly subsidized rates
– About 1.5 million US households live in public housing, or less
than 2 percent of the population
– Compared with Europe’s,
» US public housing is much more targeted to low-income households.
» Currently only households with incomes below 50 percent of the area
median are eligible.
» Virtually all public housing tenants are poor.
» Public housing tenants are not ethnically representative of the US
population.
» Slightly more than 50 percent of public housing tenants are black,
and 12 percent are Hispanic.
Housing Subsidies: Supply Side

Supply-Side Policy: Public Housing
– Federal government budget outlays for public housing included
» $3.1 billion for operating subsidies (to cover the gap between rent
collected from tenants and the cost of operating the project) and
» $3.8 billion for capital expenditures (for repair, upgrading, and
demolition)
– Since the Nixon and Carter administrations, government has been
shifting money away from public housing to other programs.
– No new units have come on line since the early 1980s except those
that were already in the pipeline.
– Yet the existing stock of public housing is too big to be ignored.
Housing Subsidies: Supply Side
 Supply-Side
Policy: Public Housing
– Current controversies include
» how much government should spend rehabilitating these units,
» the role of tenant management, and
» whether the units can and should be sold to tenants.
– Public housing is more expensive than private housing
for two reasons:
» the private sector can build new low-income housing more
efficiently than the public sector.
» there is plentiful supply of low-quality housing, so even the
least costly new housing cost more than new housing.
Housing Subsidies: Supply Side
 Supply-Side
Policy: Public Housing
– Current controversies include
» how much government should spend rehabilitating these units,
» the role of tenant management, and
» whether the units can and should be sold to tenants.
– Public housing is more expensive than private housing
for two reasons:
» the private sector can build new low-income housing more
efficiently than the public sector.
» there is plentiful supply of low-quality housing, so even the
least costly new housing cost more than new housing.
Housing Subsidies: Supply Side
 Living
Conditions in Public Housing
– Public housing projects suffer from a number of
problems,
» including high rates of drug abuse and crime.
– The crime rates in housing projects are relatively high
for three reasons.
» First, the residents of the projects are relatively poor and crime
rates are higher among the poor.
» Second, many of the units in the projects have been abandoned
by the city and have been taken over by drug abusers and
gangs.
» Third, the physical layout of the typical projects—a cluster of
high-rise buildings—may contribute to crime.
Housing Subsidies: Supply Side
 The
Market Effects of Public Housing
– In the short run, the supply of housing from the private
sector is perfectly inelastic.
» Consequently, all housing consumers gain from public
housing program:
» some household occupy subsidized public housing, and
» others pay lower prices for private housing.
– In the intermediate or long-run, the supply curve is
positively sloped.
» The decrease in price of housing caused by public housing
decreases the profitability of private dwellings,
» so fewer low-quality dwellings are supplied.
Housing Subsidies: Supply Side
 The
Market Effects of Public Housing
– The supply response takes two forms:
– More retirement:
» more low quality dwellings arte retired from the housing
market. The retired dwellings are either converted to another
use or abandoned.
– Slower downward filtering.
» As the price of low-quality housing decreases relative to the
price of medium-quality housing, landlords hold their
dwellings in the medium-quality submarket for a longer period
of time
Housing Subsidies: Supply Side
 Supply-Side
Policy: Subsidies for Private Housing
– One alternative to public housing is a system of
subsidies to encourage the private sector to build and
maintain low-income housing.
– There are two subsidy programs for the rental housing:
Section 236 and Section 8-Project based.
– Under both programs,
» the government pays property owner the difference between
the household’s contribution to rent and the “fair market rent”
» In most cases the household’s contribution is 30 percent of its
income.
Housing Subsidies: Supply Side

Supply-Side Policy: Subsidies for Private Housing
– The fair market rent is determined by the cost of building and
managing the property (Section 236) or the prevailing rent in the
area (Section 8).
– Under these two subsidy programs, the federal government sign
long-term contracts to provide annual payments to property
owners.
– Under the contracts, the owner was guaranteed the fair market rent
on all units occupied by eligible households.
– Together these programs accommodate about 1.8 million
households.
– In recent years, no new contracts have been signed, but the
government continues to pay property owners under the terms of
old contracts. In addition, many contracts have been renewed.
Housing Subsidies: Supply Side
 Supply-Side
Policy: Subsidies for Private Housing
– Section 8 has substantial supply-side elements to the
extent that program rents exceed fair market rents.
– The physical quality standards, tenant’s inability to
pay more than FMR, and the disincentive for tenants to
shop for units below the FMR mean that tenant benefits
per dollar of program expenditure are smaller than they
could be.
– Still, most housing economists consider the program
more efficient than public housing and new
construction programs .
Low Income Housing Tax
Credits





0.50 in investable LIHTC (after TRA 86) aims to provide incentives for
private sector production of low income housing. $$$ from tax code,
administered by states, bypasses HUD.
Present value tax credit of 70% of the cost of new construction or 30% of the
cost of acquisition of existing low income housing, in return for limits on rents
charged. Credits allocated over a ten year period.
Either 20 percent of available rental units must be rented to households with
income less than 50 percent of the county median income (adjusted for family
size), or 40 percent of the units must be set aside for households with income
less than 60 percent of the county median income.
The maximum gross rent, including utilities, paid by households in qualifying
units may not exceed 30 percent of maximum qualifying income. Unit must
be maintained as low income unit for 15-30 years.
Very high cost program. Roughly $resources for every $1.00 of tax credit.
Other Programs

Block Grants: Grants to states, and thence to local
governments, which can be used for local housing
initiatives:
– Community Development Block Grants (CDBG)
– HOME Block Grants (Since 1990)
– HOPE Block Grants (The "Republican" Version of HOME)


Mortgage Revenue Bonds: States pass on their tax free
interest rate to a few first time homebuyers.
Other implicit housing programs: AFDC, the tax code, the
housing finance system.
Housing Subsidies: Demand Side

Demand-Side Policy: Consumer Subsidies
– Supply-side housing policies help the poor by building more lowincome housing.
– An alternative approach is to give subsidies directly to the poor
and let then choose their own housing.
– Under a demand-side policy, low-income households are given
housing coupons that can be redeemed for housing.
– Like the food-stamp program, the housing-coupon program allows
the poor to make their own consumption choices.
– Coupons have two advantages over public housing.
» First, under some circumstances, the coupons are equivalent to cash
so they generate a larger increase in utility than an equal expenditure
on public housing.
» Second, the coupon can be spent on used dwellings, which are
typically less expensive than new dwellings.
Housing Subsidies: Demand Side

Demand-Side Policy: Consumer Subsidies
– There are two types of housing coupon programs:
» rent certificates and housing vouchers.
– Housing vouchers has been the centerpiece of housing program since the
Reagan Administration.
– Like Section 8 Existing benefits (rent certificates), vouchers are housing
allowances, but with several important differences.
– The voucher check goes to the tenant, not the landlord; tenants may pay
more or less than the FMR.

Most economists like vouchers because they are generally more
efficient than other programs (higher tenant benefit per dollar spent).
But in the US, political support is generally stronger for programs tied
to the consumption of specific goods (housing, food, and medical
care) than for income support.
Housing Subsidies: Demand Side
 Market
Effects of Consumer Subsidies
– Consumer subsidies for housing increase the
profitability of moderate-quality dwellings, increasing
the quantity supplies, for three reasons:
» Downward filtering. Dwellings filter down more rapidly from
the medium quality submarket to the more lucrative moderatequality submarket
» Increased maintenance. Te owners of moderate quality
dwellings spend more on maintenance and repair to keep their
dwellings in the market for a longer period of time: downward
filter is slowed.
» Upward filtering. Dwellings from low-quality submarket are
upgraded to serve the more lucrative moderate-quality
submarket.
Supply vs. Demand Side Policies
 Supply
versus Demand Polices
– From the perspective of the recipient, the voucher
program has two advantages over subsidized public
housing.
» First, the voucher is equivalent to an income transfer, so it
generates a larger increase in utility per dollar spent on
housing programs.
» Second, the voucher allows tenants to occupy relatively
inexpensive used housing, so a fixed budget provides more
housing per budget dollar.
– The disadvantage of voucher program is that it
increases the price of housing.
Supply vs. Demand Side Policies

Supply versus Demand Polices
– What are the tax payers’ and nonrecepients perspective toward
public housing and housing vouchers?
– Two factors contribute to public support of public housing over
housing vouchers.
» First, tax payers seem to care about housing consumption of
recipients, not necessarily their utility levels. If public housing
generates a larger increase in housing consumption, it is considered a
superior policy.
» Second, nonrecepients pay a higher price for housing under demandside policy, and a lower price under supply-side policy.

For these two reasons, tax payers and nonrecipients may
prefer public housing over housing vouchers even if
recipients are better off under the voucher program.
Community Development

Community Development and Urban Renewal
– Two principal purposes of community development policies:
» (1) revitalize declining areas of the city, and
» (2) improve the housing of poor households.
– Community development policies are neighborhood-oriented in the sense that they
concentrate spending in relatively small geographical areas.
– First community development program in the United States was urban renewal.
– Established under the Housing Act of 1949, it was dropped in 1973.
– The national government provided local governments with power and the money
to demolish and rebuild parts of their cities.
– Local agencies acquired property under the right of eminent domain, cleared the
site of “undesirable” uses (like low-income housing and small businesses), and
then built a public facility or sold the site to a private developer.
– The local agencies charged the private developer less than the cost of acquiring
and clearing the site, and the federal government covered two thirds of the local
government losses.
– The private developer built housing (usually for middle-income and high-income
households), government buildings, or commercial establishments
Community Development

Community Development and Urban Renewal
– Urban Renewal has the following effects:
– Demolition.
» A total of 600,000 dwellings were demolished, displacing about two million
people, most of whom were poor.
– New housing.
» A total of 250,000 new dwellings were built, most of which were occupied by
middle-income and high-income households
– Public facilities.
» The total floor space of new public facilities was 120 million square feet
– Commercial facilities.
» The total floor space of new commercial facilities was 224 million square feet
– Property assessments.
» The assessed value of property on renewed sites increased by 360 percent
Community Development
 Community
Development and Urban Renewal
 Urban renewal
– displaced poor households,
– but provided housing for middle-income and rich
households,
– allowed the construction of commercial and public
facilities, and
– increased tax revenue
Community Development

Recent Community Development Programs
– More recent programs are
» executed on a smaller scale, so they displace fewer households, and
» they place a greater emphasis on providing housing for the poor.
– The bulk of funding for community development is for a program
called Community Development Block Grants (CDBG).
– In 1997, the CDBG budget was $4.7 billion, with about 70 percent
of the funds going to central cities and urban counties, and the
remainder going to smaller localities.
– The funds are used to improve housing, support public services,
promote economic development, and clear land for new
development.
Community Development

Recent Community Development Programs
– Under the Urban Development Action Grants (UDAG), funds are
used to leverage private investment in community development,
and clear land for new development.
– UDAG funds are used to leverage private investment in
community development. The government provides small subsides
to transform slightly unprofitable private development projects
into profitable ones.
– CDBG funds that support housing projects supplement federal
housing programs (public housing, subsidized new construction,
housing vouchers).
– The difference is that the city gas more control over the spending
of community development funds. Other CDBG funds support
local economic development projects.