Paul Williams is a fellow at the Jain Family Institute and a student of economics at CUNY’s John Jay College.
The modern American housing crisis is both frustratingly multifaceted and childishly simple. In short, we are overpriced and underbuilt. But peeling back just a single layer of the onion reveals troubling complications: Not only are we underbuilt generally — we are also exceedingly underbuilt where jobs are located. And not only are we overpriced — our incomes are also stagnant.
The issues fractal out into disarray when you try to draw a nationally generalizable picture of the problem. Income supports alone will not solve planning and supply issues. Density alone will not solve everyone’s cost issues. Some condos and cooperatives are vulnerable to problems that contributed to the Surfside condo collapse, especially a resistance to investing in necessary — but expensive — repairs.
Getting out of this mess will take no less than 20 years, and anyone who tells you otherwise is a politician. There are immediate steps we can take to provide fast relief for those most in need: rent controls, income supports and putting an end to redlining’s stepchild, the single-family zoning cartel. But to fully exit our current disaster and move toward something resembling a fair society, we must do three things: plan, spend and build. We must become the developer.
In fact, our local governments would be wise to mimic the successful models found in the private real estate market. A system of public, municipal and state-owned enterprises that build and operate housing presents both an off-ramp from our reliance on rent-seeking investors and laissez-faire “planning,” and an on-ramp to the socialization of our vast land wealth — and perhaps even a social and ecological urbanism for our march toward climate adaptation.
Like any process of production, before we can get started, we must lay out a bit of groundwork in our “great struggle for the better day,” as Eugene Debs, the all-American trade unionist, put it so plainly in his famous speech in Canton, Ohio a century ago. We must define what it is that we want to produce, locate our factors of production and devise a scheme to combine them into our desired goods — homes for the many.
A Universal Approach
Any apartment building has costs: capital costs like roof repairs, energy upgrades and electrical work, or operations costs like staff, groundskeeping, bills and taxes. There are really only two sources for the money to pay for that: rents or government subsidies. In market-rate housing, rents that an owner collects should cover all of those costs (and then some — after all, that’s what rent means in the economic sense). But with low-income housing, rents are not sufficient to cover the bills. That’s where subsidies come in.
For multifamily rental housing, the two biggest housing subsidy programs in the United States are the Low-Income Housing Tax Credit, or LIHTC, and public housing. The LIHTC gives community developers the ability to compete for funding to help them cover the cost of operations and capital work during a 15-year period. For public housing, or Section 9 housing, the Department of Housing and Urban Development (HUD) provides local public housing authorities with funding in the form of grants.
The intent of these subsidy programs is simple: make up the difference between rent revenues and the cost of running and maintaining the building. They work, but slowly and with drawbacks. For example, what if Congress decides it doesn’t want to give HUD money for the public housing capital grants program? This is not a hypothetical — it is our current reality. The backlog of public housing capital work needed is estimated at over $80 billion. There needs to be another way to make up the difference.
A 2018 paper from the People’s Policy Project, a small-donor funded think tank, proposed an alternative structure for publicly funded housing. The authors, Saoirse Gowan and Ryan Cooper, argued that public housing should be available to all, not just the poor. The math that undergirds their paper is straightforward: If you build a 100-unit apartment building and restrict access only to households in poverty, rents will never meet the costs of debt payments, operations and maintenance, so the owner has to rely on a future subsidy to keep the property afloat. But if you set aside, say, a third of the homes for people below the poverty line, a third for people near the area’s median income and a third for people above it, you can break even — or even come out on top, bringing in funds to help finance another mixed-income project. A mixed-income model also pushes back on several difficulties the LIHTC and HUD models face: segregation, poverty concentration and often virulent opposition from nearby homeowners — though that opposition is often not only to new low-income residents but also to the prospect of any denser housing at all.
From there, it’s not hard to extrapolate this model to not just a single building, but to a whole portfolio of social housing properties. Some properties could be run at cost, with rents affordable to people making around the median income. Some buildings with a mix of very low-income people, like the formerly homeless, could even be run below cost — just as LIHTC and public housing properties are today — but instead of depending on a favorable political climate and the goodwill of Congress for additional funding down the road, the building could be “subsidized” by other buildings in the portfolio with a mix of higher-income tenants.
Think of it this way: If a municipal housing company built or bought a luxury apartment building, instead of those rents going into, say, MetLife’s life insurance fund (MetLife is a big real estate investor), they could instead flow into the municipal housing development fund where they help finance low-income and mixed-income housing. Instead of hoping Congress will support a big new grant every few decades, you’d be setting up a stream of passive income by just collecting high-income households’ rent checks every month. Private real estate companies already do this — and they love it. Why are we letting them hog all the pie?
While the mixed-income buildings approach is relatively straightforward, some might scoff at the idea of the government constructing, owning or operating luxury apartment buildings on the public dime. But that’s just the thing — it’s not really on the public dime if the public is actually making a profit. It’s for the public dime. And believe it or not, a model like this is already functioning right here in the U.S.
At 469 West Huron Street, in Chicago’s upscale River North neighborhood, is a 221-unit “boutique luxury high-rise apartment property” that is wholly owned by the people of the state of Alaska. Every month, 221 tenants in Chicago pay their exorbitant rents to L&B Realty Advisors, which takes the requisite cut for operations, management, savings for capital work and so on. But the rest — the profit — flows right to the Alaska Permanent Fund, the account set up 10 years after Alaska began managing and investing the profits from oil and gas exploitation. At the end of each fiscal year, the Permanent Fund assesses its profits, takes some out for dividends and cuts it up into equal payments that go out to every Alaskan. In 2019, those checks were $1,606 per person.
Alaska, in effect, has devised an ingenious way to tax the rich. But shouldn’t, say, the city of Chicago be the one doing this if the building is in Chicago? To be sure, for municipal and state governments looking to get into the social housing game, the approach is somewhat different. Instead of just collecting rents from a few luxury properties here and there and paying the returns out to residents, what we need to build is a self-sufficient social housing portfolio with enough housing for everyone, at all income levels.
But How Are You Going To Pay For That?
It’s not just operating housing that’s expensive — building it is expensive too, and it requires a lot of money upfront. HUD funding is limited by the whims of Congress, as is the LIHTC, a complicated public-private partnership operated by the IRS, with tax credits going out to states (and a few cities) for developers. These tax credits are limited, so agencies run competitive application processes for developers. The housing need in the U.S. today is, however, for all intents and purposes, unlimited. Where could we find a source of financing to meet that need?
One way, as Alex Yablon wrote in The New York Times, would be by extending the Federal Reserve’s pandemic-era program, the Municipal Liquidity Facility, to normal times. During normal times, when cities need money for projects like bridges, subway lines or a new public hospital, they issue bonds at the going interest rate. Investors then (hopefully) buy up those bonds, giving the city an influx of cash, which is then paid back over the term of the bond — in effect, a crowdsourced loan.
What the Fed did during the pandemic was backstop this municipal lending market by offering to buy those municipal bonds at a penalty rate. The banks — the ones normally buying the bonds — understood the signal, which disincentivized them from going overboard with interest rates or refusing to buy bonds, like in 1970s New York City. And it worked — the municipal bond market stayed relatively healthy, despite the pandemic.
But the Fed was not only sending a signal to the market — it also bought a few bonds itself. For example, when the New York MTA (a notoriously “risky debtor”) was looking for financing to keep its transit system afloat last August, it went out on the market looking for the loan. Banks came back with offers carrying interest rates of around 2.8%. The Fed offered about 1.9%. For a local government, that’s a no-brainer: money is green, and the cheaper the better.
It’s not hard to see how a future program like this could be used to help grease the wheels not just for climate adaptive infrastructure, as Yablon called for, but also new social housing construction. After all, the two go hand in hand. Local and state leaders would be far more willing to explore and plan new projects if they knew that financing would be easy and relatively cheap. This tracks closely with the best practices of other countries that do social housing well. In Finland, for example, the largest landlord in the country is the city of Helsinki itself, and when the municipal social housing company (in Helsinki’s case, Heka) takes out a normal loan from a bank, the national government covers all the interest payments. The mechanism is slightly different, but the effect is the same: The national government pushes the effective interest rate lower (in Finland’s case, to zero), making it easier for governments to build needed projects by cutting some unnecessary surplus out of the equation.
Of course, there are other ingredients, like a strong welfare state, that allow the Finnish social housing system to flourish but are absent in the U.S., making an expansion of the welfare state here a critical part of any housing platform. For one, the generous set of social insurance programs in Finland provide residents with cash resources (that is, generous income supports) for a base standard of living far beyond what households here are provided. Those welfare system payments, including specific allocations for housing, allow the social housing companies to rent their apartments for prices that keep the company cash flow positive. This is markedly different from the U.S., where low-income housing is almost always cash flow negative and thus requires periodic subsidies to stay afloat.
And in Singapore, a similar model works for owner-occupied housing. The state developer, the Housing & Development Board, finances its multifamily developments and then “sells” the individual homes, or rather, leases them long-term, allowing the household to accrue a reasonable amount of equity when and if they later sell.
A big part of what hampers state and local governments trying to build big is, of course, the money. Any builder will tell you one of the most important things about financing is predictability — knowing where the money is coming from, how much interest you will have to pay, the terms and the timelines. Just ask anyone working at New York City’s housing authority: Will Congress send the $40 billion needed for basic repairs and upgrades? Who knows!
That’s where some kind of financing facility, such as a municipal bond program at the Fed, could come in. The sure knowledge that, if needed, there is a way to fill a financing gap would make putting deals together and buildings in the ground all the easier. In fact, bond financing already pays for portions of many housing projects across the country.
But it’s not just the financing that requires work, administrative capacity and gumption. Local governments must also invest in an expansion of real, honest planning. In concrete terms, what that means is staffing up; holding onto publicly owned land and building housing on it instead of just selling it to the highest bidder; becoming a player in the real estate market and being ready to pounce on — or acquire by eminent domain — land or housing; and connecting the work of the housing portfolio to the vast existing networks of public infrastructure, particularly transit and parks.
Pushing this work to the edge of the bureaucratic apparatus, like by giving the necessary authority to a municipally sponsored corporation (like Heka, in Finland) or a state-sponsored corporation (like the Alaska Permanent Fund Corporation) would enable two important things. First, it would allow for some of the nimbleness necessary for a successful operation, like making quick decisions. Second, it would help to insulate the social housing portfolio from unfavorable political winds that might seek to thwart, dismantle or privatize it.
A future like this, however strong and concerted an effort it may take to achieve, is not as far off as one might think. There are already teams of financial underwriters, land-use planners and lawyers, some of them operating small-scale social housing-like programs, in some local government offices. Proto-forms of social housing live in county economic development departments, state university systems, municipal corporations and state investment funds.
For example, California’s university system, a public entity, develops, builds, owns and operates housing for students on its campuses. The Alaska Permanent Fund Corporation purchases, develops, builds and collects rents from its own housing. The Housing Opportunities Commission in Maryland’s Montgomery County recently funded a program that will result in thousands of county-owned mixed-income apartments over the next decade, using a creative financing scheme of their own. These are kinds of socialized housing.
The trick is to scale up the administrative capacity of these programs and give them a leg up on the financing market, too. This is by no means an overnight solution — it requires careful planning, competent bureaucracy, an expansion of state capacity and decades of time to grow our portfolios and house the many. But it is a way out of the mess we are in.