The radical way cities are tackling affordable housing

Cities across the country are buying up buildings as a way to increase affordable housing stock and take more control of the market.

This story is part of Home Bound, a series that examines Americans’ fraught relationship with their homes—and the once-in-a-lifetime opportunity to hit the reset button. Read more here.ADVERTISEMENT

The affordable-housing crisis in America was bad enough before the COVID-19 pandemic. Nearly a third of households in the U.S. are renters, and almost half of those households pay more than 30% of their income for housing. Before a federal moratorium was put in place last fall, up to 40 million people were at risk of eviction due to the economic shock of the pandemic. That risk may not be going away anytime soon.

One of the reasons for these stark numbers is the shortage of housing that’s actually affordable to those with low incomes. The stock of permanently affordable public housing has been dwindling since its mid-century heyday, with just 1.2 million federally built public housing unitsleft. Other affordably priced housing—much of which is developed by the private sector through tax credits and government subsidies—falls far short of providing the roughly 7 million homes needed by people with very low incomes. Of the 20 million cost-burdened households in the U.S., only about a quarter receive government housing assistance in any form.

A growing number of cities are stepping up to meet this need by exploring new ways of building affordable housing and preserving what already exists. The pandemic has created the conditions for cities to more boldly invest in their own affordable housing stock and take more control over the market forces that have caused prices to skyrocket.

Filling the supply gap is critical. But for decades, and especially during this pandemic, more attention has been focused on stopping the bleeding.

“We have not kept pace with production really since the early ’90s,” says Priya Jayachandran, president of the National Housing Trust. “We’ve minted more new low-income renters during COVID than we’ll ever be able to produce units for. So we’re still going to be in a hole, and a worse hole than when this started last March.”ADVERTISEMENT

New possibilities are emerging with the Biden administration’s agenda, and this may be the most opportune moment in decades for cities to start filling their affordable housing deficits. There are several promising models—both longstanding and cutting edge—that show how. It starts with cities taking literal ownership of the problem by buying more of the housing within their borders.

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“I’m going to go radical on you,” says James Stockard. A former longtime commissioner of the Cambridge Housing Authority, in Massachusetts, and a lecturer on housing studies at Harvard, he has been thinking about the housing crisis for decades. “If we really want to solve the housing problem in this country, we have to get as much of the private housing stock as we can out of the hands of for-profit owners and turn it over to nonprofit owners and public owners,” he says.

As radical as that sounds, it’s actually quite simple. Just like any other actor in the marketplace, all a city would have to do to get this housing stock is to buy it.

It’s happened in Dallas, where last May the city’s housing authority bought a 347-unit apartment building right next to a commuter rail station. It’s also happened in Missoula, Montana, where the city’s housing authority prevailed in a bidding war to buy and preserve an affordably priced 96-unit apartment complex. It’s even happened in cash-strapped Gary, Indiana, where the city’s housing authority bought a disused elementary school and plans to convert it into affordable housing.

Despite funding barriers and political challenges, cities across the country have shown that this can work. But not nearly enough realize that it’s an option. “It just isn’t on their radar. ‘We provide police services, we pick up the trash, we pave the streets, we don’t buy houses,’” Stockard says.ADVERTISEMENT

In Cambridge, the housing authority has been particularly aggressive in adding to the city’s affordable housing stock by buying existing properties and also paying a large sum upfront to building owners so that they extend the affordability period on housing built using federal subsidies, periods that sometimes last only 15 or 30 years. “The city’s affordable housing trust fund just gave the owner of a building a huge check, but it bought 50 more years of affordability for 500 homes,” Stockard says. “Clever, determined cities, and especially those with some resources, can buy that affordability for a number of more years.”

The costs of doing this are not insignificant. Stockard notes that well-resourced cities such as Cambridge have an easier time carving a slice out of their budgets to make such purchases, but that even less-wealthy cities can find ways. One example is redirecting short-term resources, such as part of the budget of an emergency shelter, to fund permanent supportive housing for the chronically homeless. The funds have similar goals, and rerouting some of them can provide longer-term benefits.

Low-rent housing developments on the open market are a straightforward way for cities to buy and preserve affordable housing. In King County, Washington, the housing authority has created or preserved 7,000 units of housing since 2000. Minneapolis and St. Paul have an affordable housing preservation fund that’s in the process of buying 1,500 homes in the two cities. And in Los Angeles, the city council just approved a plan to expand its effort to buy and preserve affordable housing, setting a goal of buying up 10,000 units by 2030. With about 10 million households nationwide paying more than 50% of their income on rent, these numbers are far below the overall need, but they represent a start.

“Landlords are struggling; they’re uncertain about whether they’re ever going to be made whole in terms of the rent that hasn’t been paid,” says Stockard. “I’m certain that in many cities around the country, the city could pick up some rental properties for much less than they could have two years ago or than they will be able to two years from now.”

The Department of Housing and Urban Development has been trying to help, with a new way of governing the public housing authorities that many big cities use to manage their public housing and affordable housing stocks. Previously, housing authorities were tightly restricted in how they could use federal funding, with pools of funding dedicated to specific purposes, such as maintenance or housing vouchers, and funding from one pool couldn’t be used to meet shortfalls in another. Through a new demonstration program called Moving to Work, a few dozen housing authorities have been given more flexibility in how they use their federal funding, enabling authorities such as Cambridge’s to buy and preserve existing housing and even develop new affordable projects. HUD plans to expand that program to another 100 housing authorities by 2022. But for now, most housing authorities, which Stockard likens to property managers, are highly constrained in how they can use their funding.ADVERTISEMENT

“Our focus now is assembling the tools to give housing authorities more ability to acquire properties and to bring to neighborhoods other types of affordable housing,” says Sunia Zaterman, executive director of the Council of Large Public Housing Authorities. HUD’s more flexible rules can help, but there are still challenges, Zaterman says. “Money. You may have heard this before—money is the key obstacle.”

With extra pressure added by the pandemic, Congress has made some notable efforts to offset housing challenges, including the temporary eviction moratorium and the distribution of roughly $47 billion in short-term rental assistance. New funding commitments from the Biden administration could accelerate and spread these efforts. “Housing is being put at center stage in a way we haven’t seen for some time,” says Zaterman.

Building on a campaign platform that proposed roughly $85 billion in affordable housing funding and incentives, Biden’s administration has also taken the big step of including $213 billion in funding for affordable housing in the new $2 trillion infrastructure bill. The plan would build, preserve, or retrofit a total of 2 million homes and would also put $40 billion toward long-standing maintenance and infrastructure needs in the public housing system. “The appropriations level and the central position in the legislation reflects an acknowledgment that housing stability is totally intertwined with economic recovery, COVID recovery, racial equity, and climate change issues,” Zaterman says. Compared to a typical year, when HUD’s entire budget hovers around $50 billion, the current plan is a massive increase in funding specifically addressing housing affordability.

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When cities own more of their housing, more of it is affordable.

One example can be seen in Berlin, Germany, where state-owned housing companies own and manage more than 325,000 units of housing across the city. Partly a product of postwar rebuilding and former East Germany’s communist past, state ownership of housing has long been part of Berlin’s housing market, as well as the housing market in Germany in general.ADVERTISEMENT

“Altogether these state-owned housing companies have a stock of roughly 17% of all rental units, which is definitely a high share,” says Matti Schenk, a researcher at the global real estate company Savills who’s written a report on the German rental housing market.

Because the city controls the housing companies, it can also control the price of housing.”Their role is generally a stabilizing aspect in the market,” Schenk says. “It’s not only the fact that state-owned housing companies are offering affordable rents, but the long-term strategy in Berlin is that by owning more units, the municipality is getting more and more control over the entire market.”

But this state participation in the housing market isn’t simply a holdover from East German communism. It’s a direct response to skyrocketing housing costs, which have been on the rise for several years. Part of the way the city has been able to increase its housing stock is through a state law that allows it right of first refusal on residential properties being sold. Technically possible in other parts of Germany, the law has been used only sparingly until recently, when one district in Berlin began using it to prevent the loss of affordably priced housing. Since 2017, it’s bought hundreds of units a year.

Though Berlin’s approach is more aggressive than others, state-owned housing makes sense in Germany because so much of the population rents, according to Schenk. His report shows that there are 21 million rental apartments nationwide, and that in some cities, such as Berlin, Frankfurt, and Hamburg, the proportion of the population that rents rather than owns is above 70%.

Things aren’t actually that different in U.S. cities. According to a 2018 analysis from Zillow, renters made up more than 60% of households in New York, Los Angeles, San Francisco, Oakland, Miami, Boston, and Washington, D.C. Of the largest 50 cities in the U.S., 29 have renter households in the majority. City-owned housing meets only a tiny fraction of this renter demand. In Los Angeles, a city of 4 million people, the housing authority owned fewer than 7,000 public housing units as of 2019. The New York City Housing Authority has the largest public housing stock of any U.S. city, but it still only owns about 170,000 housing units—accommodating just 5% of the city’s roughly 3 million households.ADVERTISEMENT

These cities may have lessons to learn from Germany’s system, according to Willow Lung-Amam, a nonresident senior fellow in Governance Studies at the Brookings Institution. “In many European countries, the state does own a large portion of the housing, and that’s how housing is protected. For some reason, that’s a really unpalatable conversation or has historically been in this country, and I think we need to change that,” she says.

Some cities in the U.S. now have the legal framework to make it easier to buy up housing. In Washington, D.C., a right-of-first-refusal law gives the city or a development partner the ability to buy properties at market rate when they come up for sale. A related law allows tenants the same right when the owner of their home or apartment building is proposing a sale. Other cities, including San Francisco and Portland, Oregon, have made similar moves.

Like Stockard, Lung-Amam believes that cities have the power to start changing the way their housing systems work. More cities are starting affordable-housing trust funds, which can be tailored to local needs and funding sources in order to buy or develop affordable housing. Cities are also looking at making city-owned land available for development and requiring that whatever gets built has a high rate of affordable housing units. These types of policies can be implemented anywhere.

“It takes a lot of resources to be able to invest in affordable housing, but it’s absolutely possible. There are a ton of tools that municipalities can take advantage of, a ton of great examples of cities that are doing wonderful things,” Lung-Amam says. “But most cities don’t do it because they don’t have to, and there’s not always a huge outcry if they don’t.”

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The federal government remains the primary funder of affordable housing—through Low Income Housing Tax Credits given to developers and rental subsidies, formerly known as Section 8 vouchers, given directly to renters. That means it has the power to distribute the resources to meet more of the growing demand for affordable housing. But since the federal government essentially stopped building public housing projects in the 1960s and passed a ’90s-era law that prevents it from building more, cities have been left to determine how that funding gets distributed and where projects are either built or preserved.ADVERTISEMENT

With a historic amount of federal money being put on the table, the onus is now on cities to act. In many cities, there is plenty of opportunity, particularly housing units from the early 1990s that were developed using the Low Income Housing Tax Credit and that could soon be converted to market-rate housing after their 30-year affordability requirement. Cities should consider themselves viable bidders when building owners look to cash out of their investments and sell on the open market. “Cities could be more aggressive about buying these properties from for-profit owners at the end of their affordability period. The best method is to buy them and turn them over to a nonprofit or the housing authority,” Stockard says. “There is no question that housing operated well by a public agency or by a nonprofit body is less expensive than housing operated by a for-profit organization.”

He argues that housing authorities benefit by not having to pay real estate taxes, passing along savings to residents. Owning affordable housing can even be profitable, with some housing authorities able to build up a pool of funding to do new development. Most don’t do this, though, for reasons including HUD rules that prevent the funds from being used for development, a perceived (or real) lack of funding to buy or develop a project, or a lack of political will.

The private sector is starting to fill the void, and it’s reaping benefits. In Charlotte, North Carolina, where growth is putting pressure on the housing market, social impact investors have funded an effort to buy and preserve naturally occurring affordable housing for the next 20 years. And in Arlington, Virginia, the nonprofit Washington Housing Conservancy plans to preserve or create 1,300 units of affordable housing near the new Amazon HQ2, using below-market financing from Amazon’s new $2 billion Housing Equity Fund. These efforts are successful as much for their innovation as for the slow pace of action at the city level.

Jayachandran of the National Housing Trust says policies such as giving a city right of first refusal on properties coming to market do get some pushback, especially from the mainstream real estate community. “[Their argument is] cities are interfering with market dynamics,” she says. “I would argue there’s a market failure and there’s an externality that the right of first refusal is solving. The owner is not sacrificing. You’re matching that price.”

There’s also the challenge of gathering political support for big changes in housing policy. “In many municipalities, it’s not a platform that a lot of people run on to protect affordable housing, to protect public housing, to invest more in poor people, and generally poor people of color,” says Lung-Amam.ADVERTISEMENT

And most cities will face the inevitable limitation of funding. “There’s no city you’re going to go to where they’ll tell you we’ve got plenty of extra dough and we can’t figure out what to do with it,” Stockard says. These budget challenges have only been exacerbated by the pandemic.

But even without the huge infusion of funding proposed in the Biden administration’s infrastructure plan, creative cities and housing authorities can tap existing funding sources. Stockard suggests they can use their less restrictive Community Development Block Grant funds to buy properties or partner with nonprofit developers and redirect some of their federally funded housing vouchers to bake place-based affordability into new projects.

Cities may not suddenly start buying up massive amounts of affordable housing or aggressively encouraging its development at the scale needed to quickly address the housing shortage. But still, there are a few simple things they can do to lay the groundwork. Jayachandran points to policy changes such as zoning reform that lifts onerous restrictions on more affordable multifamily development, improved permitting processes that let accessory dwelling units be built in backyards, and allowing prefabricated or modular housing to be more easily approved. Focusing development near transit and reinvesting in neighborhoods where affordability exists but jobs don’t can also have long-term benefits. “Lots of little things add up—it’s not one thing,” Jayachandran says. “I think it just has to be a comprehensive, holistic approach to housing.”

There are many proven approaches and piecemeal solutions. But if cities want to take a big first step toward solving housing affordability issues, it may be time to start buying it.

“For my money, this is the moment in history to start buying those buildings,” Stockard says.

Source: Fastcompany