Affordable Housing Institute : US

Maybe it’s because the dollar’s down.  Or maybe it’s our ever-swelling reputation as a global guru. 

 

Al mod-con’s, room with a view

 

One way or another, I’ve had a flurry of inquiries, some on the phone, some via email, from among others South Africa, Egypt, Nigeria (really, they didn’t ask for money!), and Swaziland.  While some come with specific questions, others ask the more open-ended, “What is there in the American system that we can use back home?  What are the lessons learned?”

 

Have you learned how to play the financing scales?

 

Aside from the unutterably profound “Things cost money!“, which was taught to me by my British guests a year ago, few things about the US system are universally applicable – indeed, AHI is founded on what might be called the pastiche Abraham Lincoln premise that some things about the US experience are good for most people some of the time – you just have to match the recommendations to each country’s ecosystem.

 

“A house refinanced without equity cannot stand.”

 

Still, as a starting point, let’s divide current American experience into three categories: must-haves, might-fits, and better-nots.

 

Must-have’s

 

I highly recommend the following four elements:

 

1.         Three levels of government.   Effective housing policy requires intervention and wise decision-making at the national level and the local level, and in any large country, the gap between the two of them is too great to be spanned without an intermediate level of government – the state (or province, depending on your heritage).  In the endless waltz between capital and property, capital is the fastest asset, property the slowest.   As I put it before:

 

Housing has three critical elements: property, people, and capital, and each level of government naturally attaches itself to one of them:

 

Capital is a national issue.

People are a state or regional issue.

Property is a local issue.

 

Each follows the others

 

Which leads to this logical division of responsibility:

 

 

 

Accustomed as I have been to working on US policy principally at the national level, I have tended to presume that this is the best nexus for housing policy change.  Yet in recent years, with the housing policy innovation inversion, I’ve changed my mind.  Now, the more I work outside the US, the more convinced I have become that this three-layer hierarchy, which we take for granted, is of vital importance. 

 

Of the three levels, in most places I work the national is over-developed and the local is woefully under­-developed.

 

“You’ve got an overdeveloped sense of nation.
It’s going to get you into trouble one day.”

 

In every country that I’ve worked so far, I’ve wanted to see local government strengthened and made more autonomous, independent, and accountable for housing outcomes.  Why so?  Because, when all is said and done, I go away, capital goes away, national policy goes away or gets distracted, companies can move away.  In the end, the only two certainties about a community are that the houses will be there, and local government will be there.

 

If local government’s not invested, nobody else will be.

 

2.         Credit enhancement at the affordability margin.  Among the great initiatives Franklin Roosevelt undertook during the Depression was his creation of the Farmers Home Administration and Federal Housing Administration.  Each of these brought credit in to marketplaces where the private sector had withdrawn.

 

We’re about to cut off your credit

 

The credit crunches that ensued were driven in part by fear – the industries had just suffered major losses, and the very financial ground under their feet had dropped away – and partly out of class prejudice.  If we are losing money lending to rich or middle-class people, ran the thinking, we will surely take a bath lending to anyone poorer than that.

 

There are lots of reasons why, F. Scott Fitzgerald notwithstanding, the rich are no different from the poor, but that’s irrelevant.  To make lending to the poor look as creditworthy as lending to the rich, government can provide mortgage insurance, in one of many several forms, and thus take away the perceived risk of the unknown and the unquantifiable non-commercial risk of lending into a new sector.

 

Perhaps he meant, “The rich don’t need the same financing the poor do”

 

FHA mortgage insurance solved the credit problems, and was vital in preserving farm and home ownership in the Depression.  Since then – and in concert with their fellow agency the Veterans Administration — the FHA and FmHA (now Rural Housing Services) have continued to provide long-term fixed-rate financing.  It’s significant that today, with the subprime mess continuing to melt down in unexpected ways around us, FHA and VA are once again being moved to the fore as potential bulwarks or refinancing outlets for reset loans and other marginal debt books. 

Using the government’s credit as a buttress against credit shrinkage is one of the most logical and effective activities off government.  It’s hard to imagine a successful national housing policy in any country that does not use this most effective tool of the government’s credibility for some level of income and some form of tenure.

 

“I’m not going to melt down!”

 

3.         Public-private housing finance agencies.  Though housing is an integral part of successful communities, it’s also an asset class unique unto itself. 

 

In a related vein, affordable housing requires conscious government policy, which means the deployment of public resources, and therefore an inherent accountability back to the public interest and the public trust.  At the same time, however, finance is complex, markets move faster than government, and those who use public resources to create financing instruments have to have an entrepreneurial bent.  The result is public-private partnership, expressed in the case of HFA’s in the form of a publicly owned, publicly accountable, but privately operated entity. 

 

While the US’s HFA’s are usually more conservative than the market, and  do not always pass along to consumers the full benefit of the vast public resources Congress has seen fit to bestow upon them, their track record is very strong from a credit perspective.  HFA’s are the subprime lenders that worked, and the availability of their balance sheets and affordability mandate means that more and more states are expecting their HFA’s to take action to protect subprime homeowners.  If that means bailing out a few who do not deserve it, so be it – that should not obscure the value of having a publicly accountable entity that is in the business of lending, and geographically focused on a single state (see Three levels above). 

 

I could really use being bailed out right about now

 

HFA’s are a success story.  I’m surprised more nations don’t emulate the model.

 

It always helps to have endless government revenue streams

 

4.         Inclusionary zoning and similar set-aside or linkage concepts. 

 

The great beauty of inclusionary zoning, at least from the perspective of elected officials, is that it’s both locally controlled and off-budget.  As I have previously written:

 

In economic terms, inclusionary zoning is a tax upon development rights, assessed against the increase in value between (1) undeveloped and unzoned land, and (2) that same land still undeveloped but now zoned.

 

Rather than being cash, it’s paid in-kind – taken in the form of housing affordability or ongoing price/ rent bargain. Being in-kind is not a bug, it’s a feature — and one with curious, unexpected, but meaningful benefits.

 

Because inclusionary zoning taxes development rights, and is not direct cash, it’s one of the few products from the government factory that has economic value but doesn’t require an appropriated line item.

 

Busy churning out laws

 

By definition, inclusionary zoning operates in jurisdictions that require approval before development. Beyond that legal requirement, which applies almost everywhere in America, there’s a further economic condition: inclusionary zoning works only when zoned land has substantial value above unzoned land. Because land value is a residual, inclusionary zoning is economically potent in landlocked urban communities, preferably those sustaining economic growth — precisely the fact pattern where housing affordability is most expensive and thus most valuable.

 

Striking to me is that one of the few cities in the global south that has an active market in new production of affordable housing is the megacity of Mumbai (Bombay), where the locality uses Transferable Development Rights (TDR’s) that are essentially a super-potent version of inclusionary zoning.  (I’ll have more to say about Mumbai’s TDR’s in some future post; they’re fascinating and important.)

 

Completing the must-have’s.  The acquisitive foreigner traveling throughout the US can reliably pick up four items. 

 

Did you list all the ideas you picked up in America?

 

In looking over the list, I note with some surprise that the first of them lauds the three levels of government, and the next three come one apiece from each level:

 

National – credit enhancement

State – housing finance agencies

Local – inclusionary zoning

 

Surely there’s a lesson in there.

 

“I don’t know what the lesson is, and don’t call me Shirley.”

 

With these essentials, what next?  What’s on the might-fit list?

 

I can’t read my own writing

 

[Continued tomorrow in Part 2.]

 

 

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