Don’t Need More Rental Subsidies

At Tuesday’s congressional hearing on the future of Fannie Mae and Freddie Mac, Rep. Barney Frank (D-MA) said that “It’s a mistake for the government heavily to subsidize homeownership.” Coming from one of the biggest cheerleaders for federal homeownership subsidies, and an architect of the housing meltdown, a conversion from Frank would be welcome.

Unfortunately, Frank followed the comment with a call for more rental housing subsidies:

We are much better off trying to subsidize rental housing, because when you put people into decent rental housing, you do not confront the problems we have seen putting people inappropriately into homeownership.

Frank is correct that tying oneself to a mortgage is much riskier than renting. The federal bias toward homeownership has been predicated on its alleged civic virtues, but there’s no virtue in being a slave to an expensive mortgage, especially when one’s house is worth less than the note.

But the government’s dismal experiences with rental subsidies, including public housing, demonstrate that more federal interventions are unwarranted. In addition to abolishing homeownership subsidies, the federal government should also abolish rental subsidies, as a Cato essay by Howard Husock argues.

The following are some key points from the essay:

Before federal subsidy programs were begun, and before the widespread use of detailed housing regulations and zoning ordinances, private markets did a good job of provided housing for lower-income Americans. During the period from 1890 to 1930, for example, vast amounts of new working-class housing were built in American cities. Data from that period show that a significant percentage of residents of poor neighborhoods did not live in overcrowded tenements, but instead lived in small homes that they owned or in homes where the owners lived and rented out space.

Since the 1930s, the federal government has funded one expensive approach to low-income housing after another—without seeming to notice that the new approaches were made necessary less by market failure than by the failure of past public policies. Public housing projects erected to replace slums soon became severely distressed, housing vouchers meant to end “concentrated poverty” instead moved it around, and the low income housing tax credit program provides large subsidies to developers and few benefits to low-income families.

A major social benefit of private and unsubsidized rental and housing markets is the promotion of responsible behavior. Tenants and potential homeowners must establish a good credit history, save money for security deposits or downpayments, come with good references from employers, and pay the rent or mortgage on time. Renters must maintain their apartments decently and keep an eye on their children to avoid eviction. By contrast, public housing, housing vouchers, and other types of housing subsidies undermine or eliminate these benefits of market-based housing.

Federal housing subsidies are very expensive to taxpayers. In 2010, the federal government will spend about $26 billion on rental aid for low-income households and about $8.5 billion on public housing projects.

Government Program Competes with First-Time Home Buyers

Posted by Mark A. Calabria

If there should ever be a great time to be a first-time home buyer — it should be now. Mortgage rates are at historic lows. Prices have fallen almost 30% across the country since the peak. Builders continue to add supply into already saturated markets. Yet, as the Wall Street Journal reports, potential first time home buyers are facing stiff competition from investors…and from the government.

Congress has appropriated about $6 billion to local and state governments to buy foreclosed properties. President Obama is proposing to add another $1.5 billion that could be used for similar purposes. The argument is supposed to be that these funds would eliminate the negative impact of foreclosures on communities, while also providing shelter to needy families. Part of the program’s rationale is that local governments’ will select a better group of tenants and purchasers that would private investors (the history of public housing should rebut that assumption).

With the exception of cities like Detroit, Cleveland and Buffalo, many of the country’s boom areas still have significant population and other amenities (like sunny weather). Many people would continue to choose to live in these areas, if only they were more affordable. After all these years of massive subsidies for home-ownership, there seems a great irony in having the government now be one of the largest barriers to families achieving home-ownership — by using tax dollars to bid up and compete away existing homes.

Mark A. Calabria • February 23, 2010 @ 1:31 pm
Filed under: Finance, Banking & Monetary Policy

Public Housing for the Dead

Posted by Tad DeHaven

The HUD Inspector General’s Office released an audit earlier this week on the department’s progress in making sure local public housing agencies aren’t subsidizing the deceased. According to the report, local “agencies made an estimated $15.2 million in payments on behalf of deceased tenants that they should have identified and corrected.”

The audit found the following “significant weaknesses:”

HUD and local agencies did not have effective policies related to deceased tenants.
Local agencies did not provide accurate and reliable information to HUD.
HUD and local agencies did not safeguard assets to ensure correct assistance payments.

This report is a small illustration of the fundamental problems with the federal government subsidizing local governments. The local public housing agencies are supposed to be monitoring how money is spent and reporting to HUD. HUD is supposed to be monitoring the local public housing agencies. But no one does a very good monitoring job, despite the piles of regulations and paperwork that every level of government has to deal with for such subsidies. The muddled web of responsibilities also makes it easy for fraud artists to take advantage.

Last week, HUD’s IG reported that the department is sending $220 million in stimulus funds to local agencies already known to misspend taxpayer dollars.

From USA Today:

The government is sending millions of dollars in stimulus aid to communities and housing agencies that federal watchdogs have concluded are unable to spend it appropriately, increasing the risk that the money will be wasted.

Since July, auditors working for the Department of Housing and Urban Development’s inspector general have scrutinized at least 22 cities, counties and housing authorities in 15 states and Puerto Rico to measure whether they can handle stimulus funds effectively. Only six, they found, could do so.

The rest — in line to receive more than $220 million in stimulus aid — had shortcomings ranging from poor management to inadequate staffing that threatened their ability to spend the money quickly and appropriately, a series of audit reports show.

According to a HUD spokesperson, the department is “spending millions of dollars to help local officials spend stimulus money effectively.” Maybe that’s true, but all monitoring help is a pure loss to taxpayers and the private sector economy.

Even when the federal oversight does find problems, the money often keeps flowing anyway. As the article notes:

USA TODAY reported in April that HUD planned to send $300 million in stimulus money to public housing authorities that had been repeatedly faulted by outside auditors for mishandling other forms of federal aid. Congress gave the Obama administration permission to withhold stimulus money from some of those agencies, but HUD opted earlier this year not to do so.

For more on fraud and abuse in federal programs, including housing subsidies, see this essay.