Housing: America’s Skewed Priorities
Architectural Record, December 2000
While the Federal government generously subsidizes homeowners, the system that assists low-income Americans is stressed to the breaking point–just as a new affordability crisis looms.
To buy a home, most people go to a bank or other mortgage lender, do the paperwork, get approved, and close the deal within a month or two. Consider another financing scheme, however, in which no bank could give you all of your mortgage, forcing you to go to five or six sources, then apply for one or more government grants, each of which is awarded only once a year. Since each funding source has its own application requirements, and makes decisions on its own schedule, you have to keep track of which funds have been committed, and monitor their time limits, in case your authority to use funds expires while you wait for other money to arrive.
Sounds incredible? Unfortunately, the complicated scenario described above is a simplified version of what it takes to fund low-income housing construction today. San Francisco architect David Baker find himself awestruck by the tenacity the system requires of his nonprofit clients: “They literally move heaven and earth” to put their projects together.
While much progress has been made in successfully designing housing for those not served by the private market, the government-assisted housing-finance system has long been stretched to the breaking point, a victim of years of public and official neglect.
Yet it is being tested anew because in the last couple of years a new affordability crisis has erupted as skyrocketing land and house prices have begun driving housing out of financial reach of more people–not just the very poor, but working people. In some cities, decent housing is no longer affordable to policemen, clerical staff, teachers–even housing-resourceful architects.
The current system is completely unprepared to handle the developing proportions of the problem. Without a concerted public effort to both increase the availability of affordable housing and help people pay for it, the crisis could become much worse.
While architects rarely take on financing responsibilities in the housing they design, the capriciousness of the system frequently forces architects to revise designs as rules change or delays wreak havoc on already tight construction budgets. Financial and artistic rewards tend to be hard won, so it’s a system that attracts architects who want to make a difference in peoples’ lives. “It’s incredibly rewarding emotionally,” says architect Baker. “People you’ve housed tell you that you saved their lives.”
An emerging crisis
What crisis, you might ask. After all, homeowning for much of the ’90s actually became accessible to more people, thanks primarily to declining interest rates. Homeownership is at record levels nationally, and more middle- and lower-income people have been able to buy.
Analysis of recent housing-price data by Architectural Record and extensive interviews with experts points to a number of circumstances that have conjoined recently to reverse this trend in many markets. While interest rates were going down, home prices were rising, outpacing inflation for the last six years. In fast-growing metro areas, prices have risen at from 18 percent to 27 percent over only four years (with some evidence that in desirable submarkets, prices have gone up from 15 to 20 percent annually). In the last two years, though, interest rates have crept upward without a dampening effect on housing prices.
The widespread nature of price gains means that even formerly lower-cost places like Seattle, Portland, and Atlanta have significantly closed the gap with such traditionally high-cost locations as San Francisco, New York, Los Angeles, Boston, and Washington. Even low-cost locations face significant housing challenges. In Las Vegas, faded tourist motels converted to daily or weekly rentals, are now one of the prime sources of housing for the casino capital’s army of service workers. “It’s neither safe nor secure, and offers no sense of dignity,” says Will Newburn, president of the Tomhom Group. That’s why the city invited the for-profit developer of single-room residences for low-income workers to build a 319-unit project in the city.
According to the Low-Income Housing Coalition, 40 percent or more of renters cannot afford what HUD regards as a fair market rent in almost half the states and more than half of all metropolitan areas. The coalition annually calculates what it calls the housing wage, which is the hourly earnings it would take to pay a fair-market rent on a two-bedroom apartment. Nationally it was $12.47 in 1999, more than twice the minimum wage. But it is much higher in the urban areas where there is a reasonable diversity of job opportunities and increased from 10 to 20 percent in more than 100 local jurisdictions in just the last year.
In a hot housing market, low-income people see their options vanish. HUD tracks what it calls “worst case” families, those who earn less than 50 percent of area median income and pay more than 50 percent of their income in rent. The number hit a new record of 5.4 million last year. That’s because the supply of private-sector units available to low-wage earners declined by over two million units between 1973 and 1995 while, since 1980, government programs for those people who can’t afford market-rate housing contracted to a fraction of their former size. There’s been a net decline in public housing units as dilapidated units are torn down. Only a small percentage have been replaced [November 1999, page 76].
The Federal Section 8 program, which is the biggest source of low-income subsidies and is the linchpin for many low-income housing projects, has also shrunk. New section 8 vouchers and certificates, which help people make up the difference between fair-market rents and what they can afford to pay, have declined precipitously from their peak of about 300,000 annually in the 1970s to zero from 1995 to 1999. Because of the abundance of unsubsidized renters, as many as 1 million units may be lost from the Section-8 system in the next few years.
The Low-Income Housing Tax Credit, another financial support of affordable housing production, has also lost value over the years, since Congress capped it in 1986. The number of units produced using tax credits has declined by almost half just as rising prices have increased the need.
Who is losing out on housing?
What happens to people shut out of decent housing? Those with mental disabilities or who abuse drugs or alcohol can end up on the street or in shelter systems, but many more make do by illegally living in garages (renting for $400 a month or more in places), or dividing up basements. They live in their cars or commute to jobs by bus for hours because they can’t afford a car. The housing supply is so tight and the desire for decent dwellings so high that people hoping to be selected for the few subsidized units that come on the market will buck enormous odds. According to the Low-Income Housing Coalition, it would not be unusual for a big-city voucher-distribution cycle to attract 25,000 applicants, with 5,000 placed on a waiting list as a result of a lottery, only 1,000 of whom would actually receive a voucher. A New York City project received 29,000 applications for 198 apartments.
It’s no easier for housing advocates whose projects must be assembled through the highly competitive panoply of government and private financial sources. “We can only get a project done here or there,” Roseanne Hagerty confessed as part of a panel at New York’s Van Alen Institute. “If you didn’t think that was worthwhile, I don’t know how you could go on.” She is executive director of Common Ground, a nonprofit developer of transitional housing for the homeless.
Over much of the country, housing prices remain reasonable and have not increased greatly. But one of the most pernicious and hardest-to-quantify aspects of the housing-price crunch is that the largest advances have occurred in those large metropolitan areas that have rapid job growth and offer jobs with real advancement potential.
In these urban areas it is not just jobless welfare recipients who struggle with unmet housing needs. Working people, some with substantial salaries, can’t find homes they can afford within reasonable commuting distance of their jobs. “Even middle-class, double-income families have few options in our city right now,” explains James Lima, of the New York City Department of Housing Preservation and Development. It targets homeownership aid at family incomes as large as $89,000 annually. In California’s Silicon Valley, the nation’s worst housing case, The $500,000 median home price takes annual earnings of about $110,000. It is not surprising, then, as the New York Times reported last year, that teachers, police officers, firefighters, and commissioned salespeople have sought the services of area homeless shelters. California housings costs, Anthony Downs, a senior fellow at the Brookings Institution writes in the October issue of Urban Land, are contributing “to the generation of large-scale slums.”
Skewing subsidies upward
Even as government resources have declined at the lower-end of the housing spectrum, Congress and some states have offered steadily more generous subsidies to homeowners, subsidies that have become especially valuable to the affluent. Interest paid on home mortgages has long been deductible as have property taxes. In recent years, Congress extended interest deductibility to home-equity loans. No other kind of personal debt is treated so kindly by the tax code. Capital gains realized from a sale also are no longer taxable for all but a fraction of owners.
An affluent homeowner’s annual tax subsidy could readily equal $15,000 according to an analysis done for Record, while a typical Section 8-subsidized renter costs the treasury $6,400 a year. There’s something deeply skewed about the nation’s housing priorities when it so generously rewards well-heeled owners, while subsidizing only about one-fourth of low-income urban residents eligible for aid. Indeed, because homeowner subsidies come in the form of tax deductions, there’s no limit to how much they cost the treasury. (They’ve been running at about a $100-billion annual rate, however, about four times HUD’s entire budget.) No one is denied a deduction because this year’s allocation has been used up. While owners can ride the price-inflation wave (they may have to pay more, but can sell for more too), people who choose to rent as well as people who cannot afford to buy get squeezed. If they aren’t chosen for extremely competitive rent subsidies, they get no government housing assistance at all. “The long-term premise of Federal housing policy,” says Nicholas P. Retsinas, the director of the Joint Center for Housing Studies at Harvard University, “was that if you worked you could afford a decent place to live. That was the social contract.”
That contract is today a tattered document, but there is a gathering realization that the housing crunch is real and that it has substantial destructive potential. Welfare-to-work programs have foundered when clients could not find decent housing, for example. Groups as diverse as the Silicon Valley Manufacturers’ Association and the “Chicago 2020” report of the area’s Commercial Club advocate much-expanded affordable housing initiatives. Their member businesses find competitiveness threatened because staffers won’t drive two and three hours daily to jobs from less-costly locations. Without some means of making housing more affordable for those who earn median income and below, only a sustained economic downturn, driving down the last few years’ price gains, is likely to keep the housing crisis from becoming much worse.
Pumping up affordable production
While some states and localities have increased their support for low-income housing (New York City claims to have aided some 65,000 units alone since 1994), none could hope to raise the kind of funds the Federal government once supplied. Even in its current much-trimmed size, HUD’s budget is still per capita much larger than that any state or city dare devote to housing. Only a few years ago, a Republican Congress hoped to eliminate HUD. Today, there is a quiet but bipartisan coalition that has modestly boosted low-income housing aid. Congress has just approved 79,000 new Section 8 vouchers for the 2001 fiscal year, up from zero in 1998. It may also boost the value of the low-income housing tax credit.
Rapidly worsening affordability conditions could spur further government action, but it will take more than money to fix what ails the low-income housing production system. Many of the changes developers and managers would like to see would save the government money and also help architects do a better job.
¬Ä Make it simple. The complexity of the affordable-housing finance system is so daunting and so delays projects that only highly sophisticated community organizations and developers dare take it on. It is not unusual for a project to take 10 years from initial inception to occupancy. A recent project by Oakland, Calif.-based Michael Pyatok is regarded as highly innovative, but required the assembly of 20 funders. The system is also costly. A battery of consultants, attorneys, syndicators, and accountants must become involved, with accumulated fees that can easily exceed architects fees–a scandalous amount to spend on soft costs that in the end benefits neither the project nor its tenants.
As the funding process drags on, rule-changes by funders or extensive delays can wreak havoc with-already tight budgets. One of San Diego architect Rob Wellington Quigley’s slow-moving projects ended up with such a tenuous budget that “the subcontractors’ choice was either to supply substandard work or walk away from the job.”
The complexity does have a rationale. It replaces the top-down, bureaucracy-driven urban-renewal methodology of 40 years ago with a process that requires government agencies to partner with developers and reach out to neighbors. It stretches Federal dollars by involving more private-sector participants (some of whom are in effect bribed by tax breaks, however). “In this way, we have a lot of people watching the store,” explains Elinor Bacon, HUD’s deputy assistant secretary of public housing investment. But has such partnering gone too far? “Think layers,” comments Marilyn Melkonian, the President of Telesis, which redeveloped Washington’s Ellen Wilson public housing project into the award-winning Capital Townhomes mixed-income development. “You have to combine all those layers into a harmonious financing package and that takes time and expertise.” She and other advocates would like to see a one-stop funding process to “make it easy for the developers on the ground in this business to access capital in a more efficient manner.” Bacon says HUD prefers the checks and balances built into the current system.
¬Ä Make it easier to mix. There is broad consensus in the housing community that even the best designed building cannot remain viable when poverty families are concentrated–whether in housing projects or in poor neighborhoods isolated from the economic mainstream. So almost every unit of low-income housing is placed within a development housing people with a range of incomes. Some schemes mix-in revenue-generating uses, too, offering job-training opportunities while offsetting costs. But mixing families is not easy. Tenants must be carefully screened. In desirable well-located neighborhoods, ones that can attract working families at higher incomes, land costs are often prohibitive. Advocates also must often overcome restrictive zoning and community opposition. And funding sources often underwrite one kind of tenant–a homeless person with mental illness for example–so developers must seek a different source if they also want to house working poor.
¬Ä Support people and projects. Some subsidy sources, like the low-income housing tax credit, support housing construction. Others, like Section 8 vouchers and certificates, help people afford housing. Advocates say too often they can get one or the other, when what they often need is both. There’s not yet a methodology that coordinates the two.
¬Ä Consider the cost of homeownership subsides. Homeowner tax breaks have been regarded as politically untouchable, but they deserve a more critical look. So generously subsidizing homeownership actually primes home- and land-price inflation and exacerbates sprawl, creating ever-larger distances between “have” communities, which have a surplus of jobs, and “have not” ones filled with people who need jobs. Even the Congressional Budget Office says the social value of homeownership could be realized at a fraction of the current subsidies’ cost to the treasury. Of course, any substantial decrease creates a dilemma for architects. They directly benefit from the current system, because affluent owners can spend more on their homes. Like everyone else, though, they also suffer from price distortions encouraged by that system.
A place for architects
Ambivalence by architects toward housing policy has reduced the influence they could wield, say some advocates. They credit architects for the benefits their designs bring (integrating once separated populations, reducing neighborhood opposition). But housing policy is almost always highly politically charged, and it has been easy in the past to sacrifice design as a frill in the name of opportunistic “cost effectiveness.” Architects also could do more to assuage the often knee-jerk community opposition to affordable housing because they understand the issues that fuel the debates–costs, parking, zoning, density. With housing issues becoming only more challenging, architects willing to immerse themselves in policy will have more opportunities to craft solutions.
The good news is that clients and government agencies now widely appreciate the value design adds. “The old ‘do it cheap’ way obviously didn’t work,” says HUD’s Elinor Bacon. “You want to build in a quality that will make people of all incomes want to live next to people of low income. We’re definitely stressing design.” This new focus is necessary in part to counteract the well-entrenched image of low-income housing as bleak towers jammed with drug dealers and gangs. The fear can be palpable and unreasoning: “We went to a council meeting in one city the day after we had been hired,” says architect Rob Wellington Quigley, “and someone stood up and said how ugly my design was. I had yet to put pencil to paper.”
But the means to deal with this fear are now well developed. Quigley’s project eventually sailed through the same council, but only after numerous community workshops and a highly participatory design approach. Such outreach is now becoming typical. “Good design can lift neighborhoods,” says Melkonian of Telesis. “First, though, you have to recognize that you are building a community, not just a project. You’ve got to work in partnership with others: the community, investors and public officials. And you have to look at the community as a whole–education, health needs, job training, cultural and recreational activities.” If that sounds like a tall order, it is, and not all architects are cut out to do their part. “It was a major civics lesson,” comments Amy Weinstein the architect of the Capitol Townhomes project. It was her first project of this type, though she had long received neighborhood-oriented commissions. “It took real tenacity on everyone’s part.”
A well-designed project also helps solidify the track record of nonprofit developers which helps speed approval of subsequent projects. But the design itself must often walk a fine line. Local activists may demand more from affordable projects than from market-rate ones; funders may expect construction costs of low-income projects to come in below market rate ones; managers want more costly institutional-quality finishes because they may not have the maintenance resources all-private projects do. “Market-rate developers often don’t care about maintenance costs because they figure it will be someone else’s problem,” says David Baker. “Your budget won’t allow high-quality windows, but low-quality ones fall apart,” he says, “and nonprofits don’t have the money to replace them.”
Adds Weinstein, “You spend a lot of time figuring out how to create an affordable level of detail.” Having designed a special brick shape, she used it in a number of different ways to get a shadow play and sense of heft in the veneer in the Capitol Townhomes project. “We used a lot of vinyl siding,” she adds, but sales representatives weren’t initially helpful, since so few users apparently seek to disguise the crudeness of many standard details.
Affordable housing is not a market to be entered by the faint of heart. Nor is it particularly lucrative. “It’s a living,” is about the best architects will say about the fees. Baker puts it succinctly: “If you don’t learn to manage these projects efficiently, you’ll go broke.” Then there are the problem clients. “Some developers are more professional than others and more adept at threading their way through the process,” says Quigley. “If we get hooked up with someone who is not adept, we have to solve many more problems within the same fee structure.” Quigley sets higher fees for lower building budgets. “The lower the budget, the more time it takes in architectural hours. The better developers understand this, and realize it is cheaper to pay more to the architect.”
One of the rewards, however, is the opportunity to collaborate with clients on innovative solutions. Some tasks are prosaic: negotiating a legal status for new kinds of single-room occupancy residences, which have long been discouraged by local codes as nuisances, for example. Occasionally a project offers the opportunity to redefine a housing type. In a new Oakland project, Michael Pyatok has combined low- and middle-income rentals with a co-housing scheme augmented by a childrens museum of art, stores, and a farmer’s market. “It’s as much an economic-development project as a housing project.” Pyatok explains.
Common Ground, a nonprofit that creates innovative programs to promote independence and stability for homeless or near homeless people, had defined a need for housing that fit between the established models of overnight shelters and subidized long-term housing. New York City architects Marguerite McGoldrick and Gans & Jelacic designed a prototype living pod intended to ease the transition for homeless people who are frightened of shelters or resistant to traditional outreach efforts. The architects invited some potential users to evaluate their prototype. “Ninety-nine percent of the guys who walk in here will say, ‘this is home,’" offered “Bruce,” an alcoholic who makes money running errands for fellow residents of the lower Manhattan flophouse he lives in. “One percent will destroy it just because it’s so nice.” Another day in the life of America’s low-cost housing economy.
Architectural Record gratefully acknowledges Allen Braverman, of Braverman/Finkelstein Accountants, New York City, who provided accounting services related to the preparation of this article.