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«reNtal HousiNg Policy iN tHe uNited states Volume 13, Number 2 • 2011 U.S. Department of Housing and Urban Development | Office of Policy ...»

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The most recent work on the housing voucher program has focused more on its effect on labor markets than its effectiveness as a housing program per se. On the one hand, vouchers should outperform other types of housing subsidy regarding labor markets, because they allow for mobility, at least within metropolitan areas. On the other hand, as household income rises, the value of vouchers gets clawed back, until, ultimately, households lose their eligibility altogether. Because households are required to pay 30 percent of their gross income in rents, those who receive vouchers effectively pay a 30-percent marginal tax rate on income.17 The reality is that the share of the subsidy going to renters in Kings County is smaller, because AMI for metropolitan New York is $77,000, whereas, for Kings County, it is a shade under $50,000. Therefore, 30 percent of 60 percent of AMI—the point at which rents are affordable—is higher, and so the subsidy to renters is lower.

Clawbacks are a problem with all rental subsidy programs.

–  –  –

Studies of the labor market effect of vouchers have shown mixed outcomes, which is informative:

they suggest in total that the portability feature of vouchers does not, on its own, solve labor market problems for the poor, but also that the marginal tax rate does not seem to strongly discourage labor participation either. Ludwig, Duncan, and Pinkston (2005: 131) found that— …providing low-income families living in public housing units with private-market rental subsidies that can only be redeemed in very low-poverty neighborhoods reduces rates of welfare use by around 15 percent. Most of this reduction appears to be explained by differences in welfare-to-work transitions. [But they also found] that providing families with unrestricted housing vouchers has little effect on economic outcomes beyond the first year.

All housing assistance programs produce implicitly high marginal tax rates, through clawbacks, that can discourage work. But because vouchers are not site specific, they do not impede labor mobility as much as project-based assistance and so appear to have a smaller effect on work incentives.

Olsen et al. (2005) similarly found that all housing assistance discourages labor participation, but also that tenant-based subsidies discourage labor participation less than other kinds of subsidy.

Having said all that, a comprehensive study of vouchers as housing policy per se, such as the Experimental Housing Allowance Program, is long overdue. The most important recent study on vouchers comes from Susin (2002), who maintained that vouchers push up rent enough that the costs to nonvoucher recipients is greater than the benefit to voucher recipients. This argument is not necessarily against vouchers but suggests that, when vouchers are not distributed comprehensively, they can harm those individuals who do not receive them.

The question of the effect of vouchers on rents is what economists would call an elasticity question.

Susin (2002) noted that locations with more vouchers had higher rent increases than those with fewer vouchers. But disentangling this observation from other market characteristics—such as differences in supply elasticities across metropolitan areas––is very difficult. Susin’s results are also inconsistent with previous literature (Barnett and Lowry, 1979).

When thinking about rental subsidies, it is therefore important to consider elasticities: how sensitive housing markets are to changing quantities in response to changing rents, and how sensitive housing costs are to changing incomes. If housing quantities are quite responsive, then subsidies will have a small effect on rents; if they are not responsive at all, rents will rise. If rents rise and not everyone gets a subsidy, those who do not get the subsidy can be made worse off by the subsidy program. To understand how the benefits of vouchers are distributed among tenants and landlords, studies of housing elasticity—especially elasticity around the bottom one-half of the rent distribution, is crucial.

Conclusion This article argues that in a second-best world, one in which the federal government provides substantial benefits to owners and local zoning is often hostile to renters, rental subsidies may be appropriate on both equity and efficiency grounds.

–  –  –

Not all rental subsidies are created equal, however. Rent control is inefficient and often inequitable.

Tax credits may encourage low-rent housing in places it is least needed and may be very “leaky”; a large share of the subsidy does not find its way to renters. Vouchers are the most promising form of rental assistance, but when they are not entitlements, they may produce perverse results.

HUD could develop better measures of housing market characteristics—especially supply elasticities for low-cost housing—and tailor housing policy based on that research. Reducing funding for tax credits and redirecting it to vouchers may also produce better outcomes. It would be worth at least testing the effect of rental subsidy entitlements for vouchers in small markets. A comprehensive study of the effectiveness of current large housing programs, including Housing Choice Vouchers, Section 8 project-based assistance, and Low-Income Housing Tax Credits, akin to the Experimental Housing Allowance Program,18 is long overdue.





Acknowledgments The author thanks Ingrid Ellen and two referees for useful comments. The author assumes responsibility for any remaining errors.

Author Richard K. Green is a professor and Lusk Chair in Real Estate at the University of Southern California.

References Ashey, Thomas, and Thomas Kean. 1991. Not in My Backyard: Removing Barriers to Affordable Housing.

Washington, DC: Advisory Commission on Regulatory Barriers to Affordable Housing.

Barnett, C. Lance, and Ira S. Lowry. 1979. How Housing Allowances Affect Prices. Santa Monica, CA:

The RAND Corporation.

Birnbaum, Jeffrey, and Alan Murray. 1987. Showdown at Gucci Gulch. New York: Vintage Press.

Colwell, Peter, and Carolyn Dehring. 1999. “The Value of Zoning,” Illinois Real Estate Letter 13 (1):

4–7. http://www.business.uiuc.edu/orer/V13-1-2.pdf (accessed May 4, 2010).

DeNavas-Walt, Carmen, Bernadette D. Proctor, and Jessica C. Smith. 2009. “Income, Poverty, and Health Insurance Coverage in the United States: 2008.” U.S. Census Bureau website: http://www.

census.gov/prod/2009pubs/p60-236.pdf (accessed June 1, 2011).

de Tocqueville, Alexis. 1835. Democracy in America. Translated by Henry Reeve. New York: George Dearborn; Adlard and Saunders.

Ellen, Ingrid Gould, Michael Schill, Amy E. Schwartz, and Ioan Voicu. 2007. “Does Federally Subsidized Rental Housing Depress Property Values?” Journal of Policy Analysis and Management 26 (2):

257–280.

For a summary, see http://www.huduser.org/search/Bibliography.asp?id=179.

–  –  –

Federal Housing Finance Agency (FHFA). 2010. FHFA Report to Congress 2009. FHFA website:

http://www.fhfa.gov/webfiles/15784/FHFAReportToCongress52510.pdf, tables 5 and 13 (accessed February 14, 2011).

Federal Reserve. 2011. “Balance Sheet of Households and Nonprofit Organizations.” http://www.

federalreserve.gov/releases/z1/Current/z1r-5.pdf (accessed June 1, 2011).

Follain, James, and David Ling. 1991. “The Federal Tax Subsidy to Housing and the Reduced Value of the Mortgage Interest Deduction,” National Tax Journal 44 (2): 147–168.

Glaeser, Edward, and Jesse Shapiro. 2003. “The Benefits of the Home Mortgage Interest Deduction,” Tax Policy and the Economy 17: 37–82.

Green, Richard K., and Stephen Malpezzi. 2003. A Primer on U.S. Housing Markets and Housing Policy. Washington, DC: Urban Institute Press.

Green, Richard K., and Andrew Reschovsky. 1999. “The Design of a Mortgage Tax Credit.” In Proceedings, the 91st Annual Conference of the National Tax Association. Washington, DC: National Tax Association: 401–410.

Green, Richard K., and Kerry Vandell. 1999. “Giving Households Credit: How Changes in Tax Policy Could Affect the Homeownership Rate,” Regional Science and Urban Economics 29: 419–444.

Gyourko, Joseph, and Todd Sinai. 2003. “The Spatial Distribution of Housing-Related Ordinary Income Tax Benefits,” Real Estate Economics 31 (4): 527–575.

Hendershott, Patric H. 1987. “Tax Changes and Capital Allocation in the 1980s.” In The Effects of

Taxation on Capital Accumulation, edited by Martin Feldstein. Chicago: University of Chicago Press:

259–294.

Ludwig, Jens, Greg J. Duncan, and Joshua Pinkston. 2005. “Housing Mobility Programs and Economic Self-Sufficiency: Evidence From a Randomized Experiment,” Journal of Public Economics 89:

131–156.

Malpezzi, Steven. 2002. “Does the Low-Income Housing Tax Credit Increase the Supply of Affordable Housing?” Journal of Housing Economics 11 (4): 360–380.

Mills, Edwin. 1987. “Has the U.S. Overinvested in Housing?” Real Estate Economics 15 (1): 601–616.

Olsen, Edgar O., Catherine A. Tyler, Jonathan W. King, and Paul E. Carrillo. 2005. “The Effects of Different Types of Housing Assistance on Earnings and Employment,” Cityscape 8 (2): 163–187.

Poterba, James. 1992. “Taxation and Housing: Old Questions, New Answers,” American Economic Review 82 (2): 237–242.

Proxenos, Soula. 2002. “Homeownership Rates: A Global Perspective,” Housing Finance International 17 (2): 3–7.

Rosen, Harvey. 1979. “Housing Decisions and the U.S. Income Tax: An Econometric Analysis,” Journal of Public Economics 11 (1): 1–23.

–  –  –

Rosen, Harvey, and Kenneth Rosen. 1980. “Federal Taxes and Homeownership: Evidence From Time Series,” Journal of Political Economy 88 (1): 59–75.

Scanlon, Rosemary. 2008. “Raise the Roof, Lower the Costs: Construction Costs and Housing Affordability in New York City.” Manhattan Institute website: http://www.manhattan-institute.org/ html/rdr_04.htm (accessed on May 4, 2010).

Susin, Scott. 2002. “Rent Vouchers and the Price of Low-Income Housing,” Journal of Public Economics 83 (1): 109–152.

Taylor, Lori. 1998. “Does the United States Still Overinvest in Housing?” Federal Reserve Bank of Dallas Economic Review second quarter: 12–18.

Woodward, Susan, and John Weicher. 1989. “Goring the Wrong Ox: A Defense of the Mortgage Interest Deduction,” National Tax Journal 42 (3): 301–313.

–  –  –

56 Rental Housing Policy in the United States Rental Housing: Current Market Conditions and the Role of Federal Policy Denise DiPasquale City Research Abstract This paper examines the impacts of the recession, the foreclosure crisis, and the freeze in the credit market on the rental housing market and the resulting implications for federal policy. In some markets, high rental vacancy rates, falling rents, and declining renter incomes threaten the financial viability of many rental housing properties. Rental housing property values have declined and delinquency and foreclosure rates are increasing. Fannie Mae and Freddie Mac now dominate the multifamily mortgage market. The reconstruction of the nation’s housing finance system must include consideration of the financing needs of the multifamily mortgage market. The widespread recognition of the risks associated with homeownership demonstrated by the foreclosure crisis provides the opportunity to move to a national housing policy that levels the playing field between owning and renting.

Scarce subsidy dollars should be more targeted to the neediest citizens.

Introduction In the historic foreclosure crisis and the collapse of housing prices, policymakers and the press have focused virtually all of their attention on the owner-occupied housing market. Conditions in the rental housing market are also very difficult. Rental vacancy rates are at historic highs, rents are falling in many markets, and the incomes of renters are falling. Multifamily property values are falling and delinquencies and foreclosures in the multifamily mortgage market are on the rise. A growing number of properties have outstanding mortgage balances that exceed current property values; the number of rental properties with negative cash flows is growing. Most of the major providers of multifamily mortgages (commercial banks and commercial mortgage-backed securities [CMBS]) have exited the market. In the past 2 years, Fannie Mae and Freddie Mac have been responsible for funding 80 to 90 percent of new multifamily mortgage originations.

Cityscape 57 Cityscape: A Journal of Policy Development and Research • Volume 13, Number 2 • 2011 U.S. Department of Housing and Urban Development • Office of Policy Development and Research DiPasquale The current rental housing market conditions pose serious policy challenges. As the United States works through the housing crisis, many households that go through foreclosure will transition from homeowners to renters. With fewer homeowners, some portion of the foreclosed homeowner stock will enter the renter market. Who will own and manage those properties? The precarious financial position of rental properties could lead to disinvestment and, if these conditions persist, eventual abandonment. The biggest challenge facing the multifamily market is the credit crisis. As policymakers reconstruct the nation’s housing finance system, consideration must be given to the credit needs of rental housing providers. The emerging consensus that homeownership is not for everyone provides the opportunity to rethink the roles of homeownership and rental housing in federal housing policy.

The next section of this article provides a description of current conditions in the rental market followed by a discussion of the effects of the foreclosure and credit crises on the rental market. The article then examines the expected changes in the housing stock to accommodate the decrease in homeownership. The article concludes with a discussion of short-term policy options to address current problems and suggestions for revamping the nation’s housing policy over the long term.

Rental Housing Market Nationwide, more than 35 million households (one-third of total households) live in rental housing.



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