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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 answer is yes and the strategy is obvious: make the federal subsidy depend on how healthy the location is. For most programs, the subsidy should decrease dollar-for-dollar with the increase in the total cost of health-related problems associated with the site. For instance, the penalty per housing unit for a project located near a congested highway should equal the sum of private health costs the tenants will bear because of their exposure to the highway (their willingness to pay to To be fair, HUD also requires that housing authorities determine that units rented by families assisted under the HCV Program have rents that are “reasonable” in comparison with similar unassisted units in the market area. So, landlords cannot automatically charge the fair market rent for all units.

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be free of the morbidity and enhanced mortality associated with the pollution) plus the medical costs that third parties and governments will bear. The same penalty is relevant for HCVs where the tenant is not paying anything on the margin. For HCVs where the rent is greater than FMR, the landlord is already bearing some of the health costs; the penalty should equal only the external costs in this situation (although “external” may, for instance, include most of children’s costs).

Notice that nothing in this proposal necessarily raises or lowers aggregate subsidies. HUD can either penalize unhealthy locations, reward healthy locations, or do a combination of both. Some combination will be expenditure-neutral. In some ways, this proposal just asks HUD to calculate FMRs in a way that recognizes location, not just structure: the FMR for an apartment in a lousy location is not the same as the FMR for an apartment in a great location, and HUD should recognize this.

This basic proposal does not specify whether changes in subsidy should manifest themselves as changes in payments to landlords or changes in rents paid by tenants. As further complications are introduced, this issue will be resolved.

One may also ask whether this problem would be better addressed by rules than monetary payments.

HUD uses rules to establish minimum structural standards, which every subsidized housing unit must meet; why not use minimum location standards too? There are many interesting economic arguments around this question in general, but in this case the advice of practicality is pretty direct.

A very large fraction of currently assisted housing would probably fail any minimum location standards that HUD could with good conscience promulgate. Rather than mandate healthy living, this proposal “nudges” tenants and landlords toward it.

Endogenous Nuisances The previous argument treats the locations of noxious activities as fixed. The locations are not fixed, and efficiency may require that the noxious activities move or lower the intensity of their operations.

Nuisance corrections in housing assistance formulas make these efficient outcomes more likely.

Consider first a Coasian world. The Coase theorem implies an efficient outcome if the parties can bargain costlessly. Efficiency still fails in the current system because children and third-party payers of medical costs are affected parties who are unlikely to take part in any bargaining with the nuisance source. Nuisance corrections in this sense set the table properly for Coasian bargaining.

Transactions-cost reasoning also implies that nuisance corrections should affect landlord payments, not tenant rents. If the landlord internalizes all the nuisance costs that the tenants (and others) bear, she becomes the proper person to negotiate with the nuisance source; the free-rider problem is mitigated or eliminated.

Much of this Coasian reasoning carries over into a world where nuisances are regulated by state and local governments, not by Coasian bargains. A landlord who has internalized the nuisance externality has good reason to lobby for stricter regulation of the nuisance, since she will gain from any mitigation. Big landlords and PHAs often lobby well.

(An alternative approach would be for HUD to tax nuisances near subsidized housing. Efficiency would be achieved if nuisance sources could pay subsidized housing decisionmakers not to locate near them. Such a system would probably be legally and administratively unworkable.)

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Tenants Without Subsidies Imposing a system of nuisance corrections will have three possible outcomes for any apartment that is now subsidized.

The first outcome is that it continues to be subsidized. In that case, no efficiency is gained, unless the nuisance is abated, since the physical fact of harm will continue.

The second outcome is that the apartment ceases to be subsidized, but continues to be a residence.

In that case, there is no efficiency gain either; only the name of the household being harmed is changed. But the landlord bears the private cost of the nuisance in lower rent, and so has a greater incentive to bargain or lobby for abatement than a subsidized landlord under the current system does (although not as great as a subsidized landlord in the improved system would have).

Finally, nuisance corrections may cause the site to be abandoned for residential use; it might become a parking lot or a warehouse. This is clearly an efficiency gain if the nuisance is large and cannot be abated; it cuts exposure.





Thus, under any outcome there is potential for efficiency gains. The fact that under some circumstances nuisance corrections will only change the name of the household getting sick does not vitiate the scheme’s utility. Over time, moreover, the efficiency effects are likely to grow: for instance, as stores or single-family houses are built where multifamily subsidized housing might have been built.

Equity Are there equity impacts as well as efficiency impacts? Definitely, but they depend on many important details of how the programs are implemented and how the market responds.

If the nuisance is abated, there are likely to be equity gains as well as efficiency gains. The people the nuisance would have been harming are low-income, and those who bear the ultimate cost of abatement are probably not all low-income. In many cases, moreover, the nuisances are local public bads, and so their abatement may benefit unsubsidized households as well as subsidized, at least until rents adjust. If the nuisance is not abated, but the area it affects becomes a parking lot or warehouse, the equity implications are similar.

If the nuisance is not abated and subsidized tenants continue living next to it, there is little equity impact. Taxpayers gain and the landlord loses if the subsidy goes down.

The case where the nuisance is not abated and unsubsidized tenants replace the subsidized tenants is slightly more complicated. The equity implications depend on how the subsidies account for externalities—whether the reform punishes unhealthy locations relative to the status quo, or rewards healthy locations. If the reform raises average subsidies by rewarding more than punishing, then the gap in well-being between subsidized and unsubsidized tenants widens—a result that is probably undesirable from an equity viewpoint—and landlords gain at the expense of taxpayers. If the reform punishes bad locations instead of rewarding good ones, on average, the result is the opposite, generally. This is what you would expect intuitively.

136 Rental Housing Policy in the United States Rental Housing Assistance for the 21st Century How does this work out on the ground? Consider a reform that only rewards good locations. The subsidized tenant moves to a healthier apartment because the new apartment’s landlord is now willing to accept the larger subsidy HUD is offering. The nonrecipient who would otherwise be renting that apartment is worse off, and possibly less healthy, too. The landlord of the new apartment is better off. Some nonrecipient ends up in the old apartment, but it is not known whether that nonrecipient is healthier or not, since it is not known where that household would have been living otherwise. So in this case, the gap between recipients and nonrecipients widens.

In the other case, when the reform punishes bad locations, the subsidized tenant leaves an unhealthy apartment because the landlord can get more from an unsubsidized tenant than from the subsidy. The new unsubsidized tenant is no worse off than she would have been in the absence of the reform, and probably is better off, because she moved willingly from her old apartment, even though she may be less healthy. The subsidized tenant is living somewhere else and is probably healthier, but it is not known whether she is better off or not. In this case, the gap in well-being between low-income recipients and nonrecipients does not necessarily widen, and nonrecipients become better off. Existing subsidized landlords lose.

Job Access and Commuting Cost The arguments about job access and commuting cost are similar to the arguments about health and need not be repeated. In the private market, apartments with better job access and lower commuting costs command higher rents, and so land prices absorb these advantages. Subsidized landlords realize no such premium, at least in the short run, and so have little incentive to choose locations that are near jobs or more convenient commuting. HUD is likely to do worse than the market.3 The solution is for HUD to pay greater subsidies for apartments with better job access (calculations very similar to those involved in such subsidies can be found in Fisher, Pollakowski, and Zabel [2009]). Note that HUD should compensate for external benefits of job access, too, such as increased taxes, reduced commuting, better role models for others, and psychological well-being (Phelps, 1997).

Education To the extent that educational quality depends only on school inputs, observed or unobserved, the same logic applies to health and job access. HUD should pay landlords more for apartments near great schools, less for apartments near lousy schools, and the correction should be greater than the premium that the private land market reflects, because education produces considerable external benefits. PHAs and landlords under such a system would become active advocates for better schools. (They have little or no stake in good schools now, and so school districts with large amounts of subsidized housing do not feel the same sort of economic pressure to perform well that other school districts feel.) Private owners of subsidized rental housing typically retain a right to convert their development to market-rate housing after the subsidy expires.

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Education, however, is more complicated than health or jobs. Peers may matter, not just school inputs, for both cognitive and noncognitive outputs. Yet the U.S. Department of Education seems dedicated to developing measures of school quality, independent of student body composition, and so HUD can use their conclusions. It is important for this program that the measures of school quality be independent of student body composition. The purpose is not to induce the children of subsidized tenants to run away from other low-income children.

The interesting question in this case is whether the subsidy should depend on what the inhabitants of the apartment do. Should a PHA be rewarded for locating senior housing in a great school district, or be penalized for lousy neighborhood schools if most resident kids go to good charter schools? Since the goal is to spur education, not to imitate the land market, the penalty or reward should depend on the actual children and the actual schools. This promotes efficiency. A PHA, for instance, faced with poor neighborhood schools will decide for itself whether to try to improve these schools or give its residents incentives to send their kids elsewhere. Buildings closest to the worst schools will end up being predominantly for seniors, as they should be.

Other Kinds of Externalities Effects on Neighbors Subsidized housing affects the value of surrounding properties. John Quigley reviews the literature that examines this phenomenon. To the extent that the external benefits are the same across locations, they are an argument for subsidized housing per se, not for any changes in formula. But if the external benefits differ in different settings, then HUD subsidies to landlords should reward settings that are more beneficial to neighbors.

These externalities interact with those previously discussed. If PHAs or subsidized landlords become advocates for cleaner air, more frequent bus service, and better schools, the neighbors will gain too. Subsidized housing tenants may also gain if neighboring properties are more valuable—for instance, they may be less likely to be rented to fast-food outlets or to be taken over by drug-dealers.

This is only speculation, however.

Tenant Selection Who receives subsidies can also affect what taxpayers are asked to cover for other programs and how other citizens experience the world. The big issue here is homelessness. A tenancy that reduces homelessness is more valuable than one that does not, ceteris paribus. Since homelessness is intrinsically hard to predict and because existing tenant selection processes are formalized, basing payments on probability of homelessness is not likely to be a good idea. But practices that alter the mix of tenants in the direction of high-homeless-probability people should be encouraged. The best predictor of future homelessness is current homelessness, and so landlords and PHAs should be encouraged to select tenants from shelters and streets (through programs like Housing First). They should also be encouraged to serve more single nonelderly adults, since most homeless people are single nonelderly adults (another reason why tenant-subsidy formulas should be sharing-neutral). Current income may not be terribly accurate as a predictor.

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Crime and Safety Concerns about crime and safety have dominated discussion of subsidized housing during the last two decades. This article begins with the easy issues and progresses to the harder ones.

Long-Run Criminogenic Influences The traditional concern in housing discussions has been how the circumstances under which children grow up affect their propensity to commit index crimes in adolescence and adulthood.



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