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Affordable Housing
A generation of government partnership with housing
providers has changed the way we provide subsidized housing. "Public
housing" was provided directly by the federal government for returning
World War II veterans, at a time when the nation was in a transition from
depression to a development boom. In the 1960s, government largely got
out of direct development in favor of subsidies to private sector providers.
"Mobile" rent subsidies, carried by tenants, were installed in
the '70s in an attempt to reduce concentrations of poverty. Mixed income
and scattered site developments have become more prevalent in recent years.
Today, affordable housing encompasses not only rent relief for those in
economic need but projects that target persons with disabilities and some
that offer transition to home ownership: the American dream.
The "affordable" in "affordable housing" refers
not to the development cost of the real estate but to the reduced rent
burden for its tenants. HUD calls housing costs affordable when a household
pays no more than 30% of its income for rent (or mortgage and taxes) plus
basic utilities. A single wage earner household at minimum wage and a 40
hour work week can "afford" a housing cost of less than $250
per month. Even a two wage earner household at minimum wage can devote
not quite $500 per month to housing costs. $500 is still well below the
average for rent rates in most of the Northeast.
How best to provide assistance to households of this kind is a matter
of constant debate. Not surprisingly, in an era of federal downsizing and
privatization, the talk is of less government involvement, not more. One
plan with strong support is to take the federal government out of housing
entirely. A proposed reorganization of HUD and other agencies calls for
the merging of over 550 programs into three block grant funds for transfer
to the states, as well as conversion of the FHA to a government owned corporation.
FHA would then in theory focus on market driven approaches and risk sharing.
In addition to the change to block grant funds, proposals call for a
transition from project to tenant based assistance. Under the project based
system, a developer can plan on a certain rent and, in exchange, commit
to house a low or moderate income household. Under the proposed system,
assistance travels with the household, and, should a household vacate,
assistance does, too. Project based subsidies spur housing development
by providing owners with government guaranteed rents. In turn, the guarantee
makes projects bankable and creates a stream of income sufficient to assure
a level of quality over time. This income often provides the first rungs
of an economic ladder toward a financially feasible project. Without these
rungs, and particularly in a growing economy, private market interest is
likely to turn elsewhere. The loss of project based income is particularly
devastating to Cornerstone projects developments to kick start economically
or physically blighted areas.
Conversion of the FHA to a corporate form akin to Fannie Mae and Freddie
Mac will necessitate a restructuring of FHA insured loans. Appraisers will
be called upon to evaluate projects as these can be expected to compete
in the marketplace, without subsidies. The certainty of government guaranteed
income and occupancy will be removed; commitments to long term maintenance
and oversight will be gone. Because the operating histories of these formerly
subsidized projects would be made largely irrelevant, market based analysis
would be required. As complex program guidelines and special assumptions
are put aside, the expertise and knowledge of the appraiser become more
important. The academic exercise of risk rates derived from layers of special
funding and grants will be replaced with market derived data. Local market
familiarity, market research, and "in the street" data gathering
will become the true basis for valuation. These appraisals will be critical,
as an inadvertent over valuation could result in loan defaults and risk
for the newly reformed FHA.
The affordable housing industry is no stranger to change. The question
is, can the changes now proposed be implemented to improve the industry,
or will the changes simply lop off productive programs for a lack of political
preference. Providers of affordable housing have learned from experience
what does and does not work. That expertise is applied daily in decisions
of funding, construction, and management. It is to be hoped that, in the
course of restructuring, what has been learned is not lost.
Sharon L. Anderson, Anderson Development Group,
Inc.
The Reenstierna Associates Report is published as a service to the clients
of Eric Reenstierna Associates and other real estate professionals. The
views expressed are those of the articles' authors and do not necessarily
reflect those of other members of the organization. Copyright 1996. All
rights reserved.
Eric Reenstierna Associates
24 Thorndike Street
Cambridge, Massachusetts 02141
(617) 577-0096
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