Affordable housing’s great unsolved problems
Mathematics has long had famous ‘unsolved problems.’ Perhaps the most famous is Fermat’s Last Theorem, which Fermat boasted (at least to himself) that he’d knocked off in 1630:
“I have discovered a truly marvelous proof of this, which this margin is too narrow to contain.”
In fact, it resisted proof for 365 more years. The tantalizing four-color problem was cracked three decades ago, albeit by brute force, and the Goldbach Conjecture remains still unproven. More recently, MIT’s Clay Mathematics Institute has named seven more millennium prize problems, each proof being worth $1,000,000:
That makes it worthwhile to crack the Poincare Conjecture!
In like spirit, affordable housing policy today faces several critical policy problems, the solution to each of which will be worth at least a billion dollars in government outputs. One might think, therefore, that massive efforts are being made to solve them. One would be disappointed — but in the spirit of casting a bright light on the challenge, let me present the Seven Unsolved Millennium Problems in US affordable housing today:
1. Workforce housing. As extensively chronicled on this blog (and in Recap’s Web Update 58), workforce housing is the principal ‘bottom-up’ (locally driven) housing issue throughout the country. Virtually every week there’s an article describing how a particular metropolis, city, or town is grappling with a shortage of key workers.
We could always do it with robots, who need no housing.
Today there is absolutely no Federal presence, either programmatic or financial, in workforce housing. Nor are there replicable prototypes. There is an enormous political pressure building up.
Political pressure rising
2. Public housing’s recapitalization. I’ve previously posted, in The Ghost of Christmas Yet To Come (and in Web Update 55), that the public housing delivery system is breaking down, even as the inventory is facing an $18-20 billion capital backlog. More recently, I’ve posted about the current regulatory and funding Gordian knot (see also Recap’s Web Update 60. I’ve recommended the bold stroke of cutting all ties to the old schema — dump operating subsidy and modernization funds, convert to an apartment-based sustainable rent, and think like an owner.
Think like an owner, walk like an Egyptian
For public housing, there is not a moment to lose.
3. Rural rental ownership. Even as
· Smaller HUD properties, often elderly (Section 8 )
· Farmers Home 515 family complexes
· Section 202/ 811 (all-elderly non-profit owned)
· Rural public housing
Nothing built recently, but a lot built twenty years ago
Typical 515 property
These properties are:
· Successful, established, sustainable affordable housing.
· Typically 15 to 35 years old, and gradually becoming physically obsolescent.
· Small (anywhere from 24 to 75 apartments), and thus cannot afford an on-site resident manager. (The rule of thumb is that a complex can afford one at 125 apartments.)
· Owned by original developers, usually smaller local entities (either for-profit or non-profit). These owners, despite the best will in the world, are not keeping up with scaling, information technology, increasing administrative entropy, and their properties’ aging.
These properties need recapitalization, revitalization, and a change of ownership. Yet the financial tools to do this at any scale are lacking. So the properties slowly atrophy.
A major government commitment is required, and as far as I can tell, with the single prominent exception of the hyperactively capable Russ Davis at the Rural Housing Service, virtually nobody in government is thinking about this.
4. Consolidating mission ownership. Over the last fifteen years,
Yet, as noted in the previous point, individual-property ownership is increasingly un-economic. Everything about the business is driving to larger scale — financial complexity of new transactions, administrative entropy and programmatic administrivia, information technology and cost efficiency, property management best practice. In the for-profit conventional sector, efficiency and massive scaling upward arrived in the Nineties with the REITs explosive growth. Nothing remotely similar has occurred in the affordable sector ; if anything, large candidates (like NHP) have been consumed by conventional owners, their assets disaggregated, their skill bases dispersed.
Encourage the urge to merge
Ownership of these properties needs to be consolidated into a single larger-scale more capable entity, perhaps a statewide or larger affordable housing trust. Yet individually or even if combined, they are generally uneconomical to property-manage.
5. Exiting tax-motivated investors. Ever since 1968,
Raise your hand if you’d like to sell your tax credit interest
The investors should exit. But they generally don’t. Current tax law generally prevents investors from exiting, because it triggers a contingent Federal capital gains tax (relief from non-recourse debt leading to a loss of basis, and gain equal to the negative capital account).
So they’re stuck, doing no one (including themselves) any good, so much economic ballast inhibiting other desirable recapitalization transactions.
6. Service-enriching elderly properties. When HUD first got into the elderly-housing arena, the minimum qualifying move-in age was 62. Just as the properties have aged, so too has the resident population. Today a typical elderly property’s resident averages 79 years in age and more than four-fifths of them are women.
From society’s perspective, the absolute best thing we can do for these residents is help them live healthy and largely independent lives in these Federal properties. Yet as the residents become more frail, they need additional services. Common sense says (and both housing and health-care experience confirm) that we should bring the services to the frail elderly, not make the frail elderly travel to the services. These cost money (another problem we have not cracked; see below) and require special resident community centers that can be retrofitted into existing properties, if the money is forthcoming.
Community center,
The logical payor is Medicare, whose $395 billion budget dwarfs anything in the housing sector (it’s roughly 12 times HUD’s budget). Yet the sole cross-subsidy possible now is via the cumbersome individual Section 1115 Medicare waiver, which has been used so seldom, and with so little strategy to innovate, that for housing purposes it might as well not exist.
7. Making social services profitable. When social services are provided, residents benefit. When they are provided at a property, taxpayers benefit because the cost per customer is lower. A great many mission owners — among them Century Housing and its More Than Shelter, National Community Renaissance and its Hope Through Housing, Mercy Housing, National Church Residences, to name four with whom I have worked — provide social services effectively and well.
But not profitably. Every single provider in my experience loses money on its social-service provision. Every single one.
There are some glimmers.
Under the No Child Left Behind Act, property managers that provide after-school tutoring may be paid for each qualifying student, in amounts that make it a breakeven proposition for classes of twenty-five or more.
Those are my seven great unsolved problems.
These are my guys.
Got solutions we should be examining? Got other major problems I forgot to list?
It gets lonely waiting for email
Email me at davidalexandersmith {at} yahoo {dot} com.
