Monday, March 6, 2017

HUD Secretary Ben Carson Should Cut Back on Section 8 Housing

Last week, retired neurosurgeon Ben Carson was confirmed as the Secretary for the Department of Housing and Urban Development (HUD). What makes Carson's confirmation interesting is that for someone who is going to head the HUD, we know very little about where he stands on such issues as public housing vouchers. We can postulate and take some guesses based on some past statements. In 2015, Carson wrote an op-ed piece in which he criticized an Obama administration fair housing law and called it social engineering and failed socialism. He analogized Section 8 housing to policy in communist countries. Even so, this is not indicative of how he would actually oversee and manage HUD. Rather than ask how he will approach public housing vouchers (because we still don't know), let us ask what he should do.

Before answering that question, let's get into a bit of history about federal government housing in the United States. The federal government really started to provide for public housing through the National Housing Act of 1937. The federal government's role expanded more gradually into President Lyndon Johnson's creation of HUD in 1965. Ever since, HUD has been responsible for providing public housing. One of the biggest programs for federal housing assistance for low-income households is the Housing Choice Voucher (HCV), also known as Section 8 housing. The reason it is referred to as Section 8 housing is because the initial provision comes from Section 8 of the National Housing Act of 1937.

The rationale behind the HCV was that the poor could not afford housing in the private sector. The tenant pays up to 30 percent in rent and utilities, whereas the voucher covers the rest to make the rental more affordable. The voucher pleased liberals because it provided seemingly adequate funding, and conservatives were happy with the voucher because it seemed like a market-oriented approach to steering the private sector to help with a public policy goal. Section 8 housing has existed since 1937, so the question is how well Section 8 housing has done to fulfill its primary mission. The Left-leaning Center for Budget and Policy Priorities (CBPP) unsurprisingly argues in its report on the topic that the HCV provides more good than harm, but I have some reasons to remain skeptical of claims of success.

Cost of Housing Vouchers
According to a Congressional Budget Office (CBO) report from 2015, HUD spent $18 billion on the HCV program (p. 2). This amount is about a third greater than in was in 2000 [in real dollars] (CBO, p. 3), which signals greater government spending for these vouchers. If HUD eliminates Section 8, it would save the federal budget $118 billion over the next ten years. To  expand the HCV to everyone who qualifies under current rules, that would cost $410 billion over the next ten years (CBO, p. 46).

Waiting Lines and No Time Limit on Vouchers
The average stay in public housing for those on the voucher system is 8.3 years (Sieg, 2016). The average stay is so high because the HCV has open benefits, i.e., there is no official time limit. The lack of time limit not only disincentivizes those on the HCV to look for new housing, but it also creates a waiting line. Speaking of that waiting line, about three-quarters of the 20 million people eligible do not even receive assistance (p. 12). Even more interesting, 7.7 million people HUD defines as "worst-case housing needs" did not receive assistance in 2013, which is 50 percent higher than the previous decade (ibid.).

The Effects of Regulations on Housing Prices
I worry about how much regulation adds to the price of a home. Homes that cost under $200,000 only account for 19 percent of the U.S. housing market, which is about half of what they did just five years ago. Tighter land use regulations have made it more difficult for people to migrate in search for better work. Regulations slow down construction projects and exacerbate housing inflation. The question is to what extent. The consultants and analysts over at McKinsey took a look at that question in October 2014, and figured that up to 48 percent would be mitigated by removing a series of regulations. One of the bigger issues with the McKinsey finding is that it pertains to the global market, not the U.S. market. What that means is that other U.S.-specific regulations, such as the Low-Income Housing Tax Credit, are not included in McKinsey's finding. Even so, it still illustrates how much impact that regulation has on making housing unaffordable.

Affordability of Housing, Poverty, and Crime Rates
The HCV picks up the rest of the bill once the tenant pays a maximum of 30 percent of the rent and utilities. However, what the voucher can cover is based on a formula in which the maximum amount covered varies city by city. What does seem to be constant in cities (e.g., Los Angeles) is that it is difficult to afford housing beyond that in bad neighborhoods. This is because the fair-market cutoff point in the formula often cosigns tenants to poor neighborhoods. The dilapidated and run-down public housing throughout the country reminds us the government's failure in housing, and the fact that vouchers concentrate the poverty more so than without vouchers enforces that (Kucheva, 2011). Even if the voucher can cover decent housing, the other challenge is finding a landlord that will accept the tenant, which is easier in theory than in practice.

All of this has bearing on the crime rate. Voucher receipt increases violent crime arrests (Carr and Koppa, 2016), assumedly because of the concentrated disadvantage that results from the HCV. An alternative explanation is that the voucher system is so poorly set up that it drives voucher recipients to neighborhoods with high crime rates because that is all they can afford (Ellen et al., 2012).

Another facet is that of what the vouchers do to the real estate in surrounding areas. Typically, voucher recipients pay rent at market value, although in some cases, they pay even more. One would think that the price of rentals skyrockets because the vouchers artificially increase demand, but a study from the Federal Reserve of Atlanta shows that is not the case (Erikson and Ross, 2013). What keeps the downward pressure on the prices is that the landlord lacks the incentive for upkeep. The reason for this disincentive is the combination of guaranteed flow income along with the waiting lines that perpetuate the inferior quality of housing.

Postscript: I recognize that Housing Choice Vouchers are but one piece of how government policy attempts to make housing more affordable. There is also rent control, the Low-Income Housing Tax Credit, the FHA loan that greatly contributed to the Great Recession, amongst other pieces of the housing market regulation bubble. What I do know is that looking at Section 8 housing by itself (never mind other pieces of HUD's overreach into the housing market), HUD does not have a record of making housing more affordable.

It would be easy to say that the vouchers should be scrapped. After all, the private sector can help provide affordable housing, much like it has in the past. Even with a president who is potentially looking to abolish certain bureaucratic agencies, I cannot assume that eventual dismantlement of HUD is inevitable, even if I personally think that such a behemoth should not exist in the first place.

There are policy alternatives that can at least lead us into the right direction. We cannot create new land, so controlling for the supply of land is more difficult. However, there are other reforms that can be pursued. Add a time limit for receiving vouchers. Increase the share of rent that tenants have to pay. Create more conditions for qualifying for Section 8. Spend less per person while covering more people. Again, there are multiple variables in play. See reports from Urban InstituteBipartisan PolicyAmerican Enterprise Institute, and the Heritage Foundation for more on housing reform.

One last point to make. Even when looking at housing policy, the government cannot look at housing within isolation, but within greater context of living and economic wellbeing. An Urban Institute study shows that those accepting housing vouchers also accept other forms of welfare (see below). The conversation can be taken at three levels: the housing vouchers, the housing market, and the welfare system as a whole. Whichever level you decide to look at the situation, one thing is clear: we need to remove the red tape so that homebuilders can be encouraged to build more. A greater supply of housing means that prices will decrease, thereby making housing more affordable.

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