Affordable Housing Institute : US

The conquistadores scoured Mexico and Latin America for the fabled seven cities of gold, including El Dorado, the land where gold and precious stones were to be found in abundance. 

 

 

They never found it, but in the process they discovered the Pacific Ocean, tobacco, and the New World.

 

Every government or policymaker I’ve ever encountered thinks of affordable housing as a temporary challenge, something that arises out of unusual current circumstances, but will cure itself if just we can get through this interval.  As I wrote a few years back:

 

Today’s affordable housing production and preservation programs set a goal of ‘permanent affordability.’  But though this objective is laudable — indeed, it is the right programmatic design parameter — it is unattainable.  Because the future is infinitely complex, with more things in heaven and earth than are dreamt of in our policymaking, programmatic cohorts experience steady attrition on the upside (conversion) and downside (default) — and those rates of attrition tend to increase over the years, as fickle reality diverges ever more from the original program-design environment.  

 

Indeed, government thinks that if there is an affordable housing problem, we can just create new homes, and they will provide for our population:

 

Fortunately, from time to time government does inaugurate a successful program that gives birth to a property cohort: hundreds or thousands of properties with a very high degree of similarity because they were all developed more or less contemporaneously under a standard production program.  Creation of that successful cohort is the triumph of production. 

 

Every one of us is identical, and perfect

 

When a program turns into production, with ribbon-cuttings and smiling happy families —

 

Always let the elected official wield the big scissors

 

— policymakers understandably tend to declare victory, slap dust from their palms, pat each other on the back, and move on to the next crisis.  Meanwhile, the Aristotelian perfection of their creation immediately starts to dissipate:

 

Almost immediately after its creation, the cohort of properties starts to diversify.  How and why it does creates profound challenges for enduring sustainable affordability. 

 

Though properties start out similar, they rapidly diverge:

 

Imagine a race of a thousand identical rubber ducks, utterly alike except in their numbering, all dumped into a slow-moving river at the same point and the same time. 

 

That’s what happens when you create a big new funding program

 

At first they move in a jostling mass, but inevitably a few are in front, catching the narrows and shooting ahead.  Those to the sides may be caught in small eddies. 

 

 

Some may become entangled in shorebank branches.  Bit by bit they separate from one another, until they are stretched the length and breadth of the river, some clustered in independent flotillas, others completely isolated. 

 

 

Consider a portfolio’s performance over time as being represented by a two-dimensional graph:

 

·         The vertical axis ranks the properties from best (at the top) to worst (bottom). 

·         The horizontal axis measures time from original production. 

 

Then we can draw two lines indicating property viability:

 

·         Conversion viable: A top line heading down indicating that some properties become more valuable as conventional real estate than they are as affordable housing. 

·         Affordable non-viable: A bottom line heading up, indicating that some properties no longer work.  They are headed for default and foreclosure. 

 

Above the top slanting line, the properties can go market.

Below the bottom slanting line, they are non-viable without help.

 

At inception, everybody is alike:

 

Little boxes, little boxes …

 

Yet differences of location, construction, rentup, operations, ownership, management, and random local events, all mean that each property becomes distinct.

 

But sooner or later, the original cohort will have divided into three basic groups:

 

·         Conversion.  Properties economically viable for market conversion. 

·         Equilibrium.  Properties that are neither conversion nor non-viable. 

·         Non-viable.  Properties that are no longer viable as affordable housing. 

 

Naturally enough, policy makers view both changes are losses of affordability, so they both try to intervene to prevent loss and design contingent rights into the original documents:

 

Policymakers, recognizing this, have in most programs sought to cap the exit of conversion-viable properties.  Typically, the financing instrument requires the owner to waive the legal ability to convert for some (long) time.  In the short run, this is fine, because it suppresses conversion …  but the instant the lock disappears, there is a burst of pent-up demand that sometimes turns what would otherwise be acceptable conversion triage into a stampede, as shown conceptually in Figure 2:

 

Once the bell rings, out they go!

 

Meanwhile, even as policymakers are trying to prevent loss from market conversion, they also create rescue programs for properties that are failing:

 

“Help!  I need some money!

Help!  Not just any money!

Help!  You know I need some one to he-elp!

 

When a cohort hits a systemic problem (such as 1974’s utility-cost spike), legislators often design a programmatic intervention.  Most such interventions do mitigate the loss of viability, as shown in Figure 3:

 

 

In the last 35 years, we can count at least seven significant program interventions:

 

1970: Birth of modern era in US affordable housing.

1976: Loan Management Set Aside workouts.
1981: The Economic Recovery Tax Act and resyndication.
1986: Tax reform and real estate pricing collapse (also led to the S&L bailout and FIRREA).
1989: Preservation (ELIHPA or LIHPRHA).
1995: Mark to Market (demonstration; permanent legislation in 1997).
1996: Preservation repealed; prepayment and opt-outs.
1999: Mark Up to Market and renewed affordability.  See Mark to Market, a Fundamental Shift in Affordable Housing Policy. 

 

Seven interventions in thirty years.  And each intervention further subdivided the portfolio. 

 

What does it all mean?

 

 

[Other than that we’re overdue for major program reform in the United States, as I’ve posted on many occasions.]

 

 

There is no such thing as the perfect program.  Every so often, program rules have to be redesigned.  Experience shows this can be as frequently as every five years, but if we assume they alternate between bad (workout) and good (conversion) interventions, the half-life of a typical stimulus is about ten years. 

 

Since perfection is impossible, does that make all striving pointless?

 

Godel couldn’t decide

 

Paraphrasing Robert Louis Stevenson, we should travel hopefully, but expect never to arrive, instead periodically making changes.

 

Policymakers should recognize and accept that no matter how robust, any program will need periodic adjustments as its property cohort ages and diversifies.  This represents a huge challenge for government, because (a) government may be slow to recognize that what seem to be isolated failures are instead harbingers of the need for systemic change, (b) when the time comes to make changes, chances are it will be different individuals from those who created the original program, and they may lack historical context, and (c) often the key elements needing change are embedded in statute, and thus very hard to change. 

 

Statutes should specify less, not more: outcomes and boundaries, not processes or breakpoints.  Statutes should allow regulations and administrative guidance room to make periodic tweaks in program parameters, consistent with the broader objectives.  In effect, this principle reduces the cost of program modification, and thus increases a program’s practical flexibility. 

 

Related to the idea of administrative flexibility is participant flexibility:

 

Since environments change, programs may actually be more robust if they embed one or more options for either the public or private sector.  This is counterintuitive — how can creating a sunset make something more long-lasting? —

 

— but opening options raises public consciousness and creates the useful anticipatable turbulence that enables managed change. 

 

 

I’ve previously posted that affordable housing always costs money.  Related to this is the idea that to preserve existing affordable housing, government must from time to time provide financial incentives using three complementary strategies:

 

·         A property-level goal of durable sustainable affordability (that is, not permanent but decade-plus in half-life) to create a high degree of near-term stability in a fairly homogenous cohort of properties. 

·         Periodic property-specific interventions because, no matter how homogenous properties may begin their lives, they are affected by individual circumstances that need individual solutions. 

·         Periodic program redesign to adjust program parameters (based on What Works and What Doesn’t) to accommodate unexpected major events. 

 

As T. S. Eliot wrote, in Little Giddings:

 

We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.

 

A similar spirit must animate the quest for the perfect affordable housing program.  It may be El Dorado, fabulous but mythical, yet our search for it is endless, and endlessly rewarding.

 

Just keep looking

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