URBAN ECONOMICS

D. Urban Housing and Public Policy

1.  Unique characteristics of housing

• Housing differs from other products

a.  Housing is durable

• Has longer life than most commodities - deteriorates over time, but at slow rate

• Can provide housing services for decades

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b.  Housing stock is heterogeneous

• Each dwelling offers a different bundle of housing services

• Dwelling characteristics - size, layout, quality, interior design, structural integrity

• Location is part of housing bundle

• Site characteristics - accessibility, local public services and taxes, environmental quality, appearance of neighborhoods

• Hedonic approach:

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• Housing market is a set of interdependent submarkets

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c.  Housing is the most important means of wealth accumulation for many households

• Changes in housing prices have relatively large effects on household wealth

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2.  Filtering

• If maintained, housing can provide services for decades

• Will deteriorate if not maintained

• Filtering - housing moves from one quality level to another (usually downward)

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a.  Stock of high vs. low quality housing

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b.  Impact of price changes

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c.  Supply of high and low quality housing

(1)  High quality housing

• Assume new housing is high quality

• Also assume that it is difficult to upgrade low quality housing to high quality

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 (2)  Low quality housing

• Housing that filters down adds to supply

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d.  Impact of limit on building permits

(1)  High quality market

• Suppose a complete ban on new construction

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(2)  Low quality market

• Low quality market impact through filtering, shift in demand

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e.  Gentrification

• Influx of high-income households into low-income neighborhood

• High-income households want high quality housing

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3.  Housing policy

a.  Housing conditions

• American Housing Survey

• Inadequate - incomplete plumbing or kitchen, structural problems, unsafe heating or electrical systems

• Crowded - more than one person per room

• Cost burdened - more than 30% of income spent on housing

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• Neighborhood conditions - junk, abandoned buildings, crime, rundown buildings, noise

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b. Supply-side policies

• Increase supply of housing for low-income households

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(1) Public housing

• Built and managed by local government

• Federal involvement - capital and operating subsidies ($6.4 billion in 2012), tenant selection (< 80% of median income in area)

• 1.1 million households lived in public housing in 2012

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(a)  Efficiency

• Value of public housing is two-thirds of subsidy

• More expensive than private housing

- Private sector can build new housing more efficiently than public sector

- Plentiful supply of used low-quality housing.

•  Production efficiency = market value / production cost = 0.50 for public housing

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(b)  Living conditions

• Lower income => more crime

• Units abandoned, taken over by drug abusers and gangs

• Layout (high-rise buildings) lead to sociological problems - high density, difficult to supervise

• Low-rise buildings better, more costly

 

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(2)  Subsidies for private housing construction

(a)  Project-based rental assistance program

• Section 8 - Project Based

• Government specifies maximum rent that can be charged to an eligible household, covers gap between market rent and tenant contribution

• $9.4 billion in 2012 for 1.2 million households

• Ex. - 

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(b)  Tax credits for low-income housing

• Tax credits to companies that build low-income housing

• $6.5 billion in credits in 2012

•  20/50 set asides - at least 20% of rental dwellings occupied by households with less than 50% of median area income

• 9 percent tax credit for project cost related to low-income housing

• Maximum rent = 30% of qualifying income

  • Each dollar spent produces $0.62 worth of housing

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(3)  Market impacts

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• Reduction in price "crowds out" unsubsidized housing

• More retirement of housing, less downward filtering

• Crowding out estimated to be 1/3 to 1/2

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c.  Demand-side policies

• Give subsidies to poor, let them choose housing

(1)  Housing vouchers

• "Rent certificates"

• Section 8 Tenant Based Rental Assistance

• $19.2 billion for 2.2 million households in 2012

(a) Income standards

- Must have income < 80% of area median

- Bulk to very poor (< 50% of area median)

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(b)  Dwelling must meet minimum standard, cannot spend more than fair market rent (45th percentile of rent)

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(c)  Government pays difference between actual rent and 30% of eligible household's income

- Face value = Fair market rent - 0.30 * Income

Ex. -

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• Recipient can spend more than fair market rent on housing

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(d)  Market effect

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• Price driven up for non-recipients

• Lower retirement rate

• Higher filtering rate

• Voucher equivalent to income, more utility

• Allows tenants to occupy inexpensive used housing => more housing per budget $

• Taxpayers seem to support public housing rather than voucher, care more about housing consumption than utility

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(2)  Subsidies for mortgage interest

• Mortgage interest is tax deductible

• Benefits increase as income increases

- Increasing marginal tax rate

- More itemizing of deductions as income increases

- Housing is a normal good - more housing consumed as income increases

• Leads to inefficiency

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d.  Homelessness

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• Person is considered homeless if they lack a fixed nighttime residence and have a primary nighttime residence that is:

- a supervised public or private shelter designed to provide temporary living accommodations

- an institution that  provides temporary residence for individuals intended to be institutionalized

- a place not intended to be used as a regular sleeping place

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(1)  Characteristics of the homeless population

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(2)  Causes of homelessness

(a)  Relatively high prices for low-quality housing

• Elasticity of homelessness to rent on low-quality housing = 1.25

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(b)  Weak labor markets, slow employment growth

(c)  Low institutionalization rates for the mentally ill

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(3)  Policies to deal with homelessness

(a)  Improve functioning of low end of housing market

(b)  Continuum of care (CoC) model

• Treat substance abuse and psychiatric issues first, then move into permanent housing

(c)  Housing-first approach

• Move people directly into housing first, then go with treatment

• More successful than CoC model