«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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Abstract The worst-case housing needs of low-income households arise largely from their high rent burdens, not from physically inadequate housing. Thus, the programs of housing assistance for these households initiated in the Great Depression should now be recognized as a part of the nation’s welfare system, not as an infrastructure investment program. This paper considers the most important implications of these facts for the design of housing assistance programs and for the administration of housing subsidies.
Introduction Should the public sector provide assistance to very low-income renters? Of course it should. For three quarters of a century, the federal government has provided assistance to low-income renters, beginning with the Public Housing Act of 1937 and extending to the most recent budget proposal of the U.S. Department of Housing and Urban Development (HUD). It is also difficult to imagine that some form of assistance to low-income renters would not be available in the future.
This brief article discusses the rationale for programs that provide renter assistance, the choices about the possible forms assistance may take, and the ways of judging programs’ success. Not surprisingly, none of this discussion is about what can be done tomorrow. Instead, it is intended to be relevant to strategic choices by the executive and legislature over some longer time horizon.
Why Subsidize Rental Housing?
Why should the federal government take an active role in policies of subsidizing rental housing?
The initial rationale for the provision of public housing during the Great Depression was the acute shortage of decent housing coupled with the recurring unemployment of the time. An unemployment level twice as high as the current rate, along with a lack of effective demand arising from a calamitous recession, launched a program of government-sponsored housing production.
With the post-war boom in the American economy, the comprehensive Housing Act of 1949 emphasized the goal of providing a suitable living environment and decent, safe, and sanitary
housing for all Americans. Improved housing conditions formed the rationale for subsidy policies, and progress could be measured by noting the extent to which inadequate housing was eradicated.
In 1975, about 2.8 million renter households lived in severely inadequate housing, representing almost 11 percent of renter households. By 2001, the number of inadequately housed households (by Housing Act of 1949 standards) declined by 60 percent (Quigley and Raphael, 2004). This number has subsequently declined by another 15 percent. The fraction of renters living in severely inadequate housing was less than 3.5 percent of the population in 2004, and it is now below 3 percent. Among dwellings that are affordable to the poorest households (those earning less than 30 percent of the median income of the local area), the fraction of severely inadequate housing was about 5.3 percent in 1999, according to the Bipartisan Millennial Housing Commission (2002).
Among dwellings affordable to low-income households (those earning between 50 and 80 percent of local median income), the fraction classified as severely inadequate was 2.9 percent. More than a decade later, physically inadequate housing is certainly a concern for some households, especially the poorest renters. But even for the very poorest households, less than 5 percent of those who pay less than 30 percent of their incomes on rent live in severely inadequate housing conditions.
Thus the maintenance of housing quality (decent, safe, and sanitary housing) does not provide a very convincing rationale for extensive public subsidies for rental housing in the 21st century.
Indeed, this seems to be recognized now (at least implicitly) by politicians, scholars, advocates, and interest groups. For example, the worst case housing needs, reported by HUD to Congress (HUD, 2000), emphasize high rent burdens as the source of worst case housing needs. In 2000, the Senate directed HUD to compile and report the extent of worst case housing needs annually.
Because the extent of substandard housing is so small, these reports are essentially estimates of the fraction of households in various demographic groups paying more than one-half of their incomes for rent and estimates of the fraction of households living in overcrowded conditions. Worst case housing needs have evolved into another way of describing poverty.
Affordability is clearly the most compelling rationale for polices subsidizing rental housing. The high cost of rental housing, relative to a low-income household’s ability to pay for housing, leaves these households with few leftover resources for expenditures on other goods—such as food, clothing, and medicine—which are also necessities. Because housing represents a large share of household expenditures in market-based economies—for the middle class and the poor—small changes in the rent burdens that households face can have large effects on their levels of well-being.
Improved well-being, along a variety of dimensions, will almost certainly arise if housing programs provide increased discretionary resources to recipients by reducing their rent burdens. In addition, rent burdens are reduced if recipients of housing assistance choose to spend proportionately less of their transfers on housing relative to other necessities. The affordability of housing is certainly a legitimate rationale for housing subsidy policies. Indeed, as noted previously, it seems to be the only surviving rationale for a large-scale subsidy program for rental housing in the United States.
This perception suggests that rental housing programs for low-income households ought to be thought of as a part of the U.S. welfare system—in the same way that we think of income transfers, food stamps, and the Earned Income Tax Credit (EITC) as components of that system. Receipt of food stamps has a miniscule effect on the food consumption of poor households (the transfers are inframarginal), but the program frees up household resources for consumption of other necessities.
Transfers for housing assistance have positive effects on housing consumption (they are not quite inframarginal), but their principal success is a reduction in the high rent burdens that recipient households face.
Some consider this welfare system to be inferior to a system that instead transferred unrestricted cash to poor households. But it is hardly unreasonable to suppose that donors’ preferences place more weight on the food and shelter available to the poor than upon the other consumption items available to them. Others may note that since transfers are largely inframarginal, they do not distort recipients’ choices very much.
This perspective highlights the most conspicuous failure of the current system of historically evolving housing subsidy programs—the horizontal inequity accorded to similarly situated, otherwise identical, households. Under current programs, qualifying households obtain rental housing subsidies through some random process. Households apply for housing assistance through local housing authorities. Despite widespread presumptions to the contrary, virtually all local authorities have long waiting lists. Indeed, in many housing authorities, waiting lists themselves are often closed.
This means that qualifying households can wait years before obtaining rental assistance. Independent housing authorities have their own systems for ranking eligible households. Most authorities adopt some sensible procedure for granting priorities, but selection onto the waiting list and selection from the waiting list has many of the characteristics of winning the sweepstakes.
Compare this procedure with the process of obtaining food stamps or medical assistance under Medicaid. Households are deemed eligible on the basis of income, household size, and other demographics (such as disability), and all eligible households qualify for assistance. The only form of welfare assistance that is awarded under the sweepstakes model, rather than the eligibility model, is rental housing. And, as noted previously, housing expenses consume a large fraction of low-income households’ incomes. So the inequity of the sweepstakes model is even more glaring.