In 1957, an Asian Flu pandemic spread from Hong Kong to Europe and then the United States, killing more than a million people. Like the new coronavirus, this pandemic triggered a global recession. In order to end that recession in the United States, the federal government stepped in, as it has with most recessions, and boosted government spending. In 1957, the administration used this stimulus spending to construct vast stretches of our national highway system.
As Congress and the Vermont Legislature debate how to revive the economy and where to spend public money, they might be wise to consider building more affordable housing. Even before the coronavirus, there was a desperate shortage of affordable housing in Vermont and across the country. Now that national unemployment has soared from 3.2% to 14.7% and climbing, the need is dire.
The government defines “affordable” as what an individual or family can afford to pay in rent and utilities or for mortgage and taxes and still afford necessities like food and clothing. The recognized standard is up to 30% of gross income. So, if a family earns $40,000, it can afford a monthly rent, including utilities, of $1,000 a month.
Unfortunately, developers cannot earn even a modest return building multifamily housing in Vermont, and most other parts of the United States, if the rent is $1,000. In addition to the cost of land and construction, real estate taxes, utilities and other property management expenses absorb so much of this $1,000 rental payment that there is little left over to pay a mortgage or provide a return to the owner.
To bridge this gap between the cost of developing housing and what many families can afford, the government provides a subsidy. We have systems in place to ensure that these subsidy payments are carefully monitored and effectively used.
Here are four steps the government could take to increase the supply of affordable housing and, in the process, create jobs and economic activity. Housing could once again serve as a catalyst to get us out of a recession.
Increase the low-income housing tax credit.
In June 2019, U.S. Sen. Maria Cantwell and U.S. Rep. Suzan DelBene, both from Washington state, introduced the Affordable Housing Credit Improvement Act of 2019. This bill targeted the shortage of affordable housing by expanding and strengthening the low-income housing tax credit. The bill calls for a 50% increase in the tax credit over five years and also makes a number of useful modifications to the existing program. Given the change in the economy since last June, perhaps this 50% increase could happen immediately.
In a typical affordable housing project, the tax credit provides 50%-60% of the capital. Since 1986, the low-income housing tax credit has financed more than 3 million affordable rental housing units, representing more than 90% of the affordable, multifamily units built in the United States. The default rate on these credits is less than 1%. Having learned valuable lessons from the mistakes in earlier housing programs, the tax credit program has a great track record of providing quality housing to low- and moderate-income people that remains affordable long term.
Enable individuals to invest in low-income housing tax credits.
If the government increases the supply of low-income tax credits, it also needs to ensure that there is sufficient demand. Otherwise, the amount paid for these credits will be reduced, meaning a worse deal for taxpayers and less money for housing.
In 1986, when the low-income housing tax credit legislation was written, provisions were included so that wealthy individuals could not use these tax credits to offset their tax liability. The government wanted businesses, and especially banks, to be the primary investors.
Now that investors have 35 years of experience with the tax-credit program, maybe it is time to rethink who can invest. Many banks have a successful track record investing in low-income housing tax credits and have developed considerable expertise in analyzing, underwriting and monitoring these investments. On the other hand, banks may experience reduced profitability in the next few years and therefore have less appetite for investing in tax credits. If we also allow individuals to invest in the tax credits to offset their tax liability, we will increase competition and raise the price so that more money goes into housing.
This change might incentivize banks to set up investment funds for their wealthy clients, who might appreciate a low-risk, 4%-5% after-tax return on their investment. Two other attractive features of a bank-sponsored low-income housing tax credit fund would be the fact that it is a social impact investment helping low- and moderate-income families live in quality apartments and that the bank co-invests in the fund.
■ Do not weaken low-income housing tax credit incentives in the Community Reinvestment Act.
Since it was enacted in 1977, the Community Reinvestment Act has provided an incentive for banks to invest in low- and moderate-income neighborhoods. Many banks invest in housing tax credits as a way to meet this requirement and as an effective way to help local communities. The last time the act received a significant revision was 1995, and the banking world has changed considerably since then.
In 2014, the Office of the Controller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve conducted a review of banking regulations. That review lead to a proposal to change the act’s rules. Updating the Community Reinvestment Act is definitely warranted. Current regulations reward banks for making loans and investments in areas near their branches. How does that apply to internet banks with no branches? How does such a geographic definition help rural areas that have no bank branches?
Unfortunately, the proposed rule change does not simply address these outdated problems, it broadens the criteria for investments for which the banks receive credit. For example, banks could invest in bonds backed by city and state governments for roads, mass transit or water supply systems if they include some benefit for low- and moderate-income individuals and communities or other areas of need. While these public infrastructure projects may be worthwhile, expanding the scope of the projects for which banks receive credit will lessen the incentive for them to invest in affordable housing in general and in low-income housing in particular.
■ Invest some of the federal funding from the coronavirus relief bill in affordable housing.
Even if the government increases the allocation of credits through the low-income housing tax credit program and expands the competition for those credits, it will not be enough to bridge the gap between what it costs to build housing and what many families can afford. We need additional subsidies.
Why not use some of the $2 trillion from the coronavirus aid package? The infrastructure is in place to invest this money wisely. For example, agencies like the Vermont Housing and Conservation Board have been successfully investing federal money in affordable housing in Vermont for more than 30 years.
Another example of how some of the coronavirus relief money could be invested in affordable housing is the proposal recently presented to the housing committees in the Vermont Legislature. Some leading housing groups proposed using $106.5 million of the $1.25 billion in coronavirus relief that Vermont received. Of that money, $79.3 million would fund the construction of permanently affordable housing for the 1,200 homeless families who are living in motels. Some of that money might even be used to purchase, renovate and enlarge these motel units and turn them into permanently affordable rental housing.
In order to restart the economy, federal and state governments will need to continue to spend vast amounts of money. If they follow these four steps, they could make significant progress toward reducing homelessness and creating needed affordable housing.
One thing we have learned from this pandemic is that one person with the new coronavirus can infect many others. We will only be safe in public places if we take care of our neighbors. A big part of that is making sure everyone has a decent and affordable home where they can shelter in place, and shelter thereafter.
John H. Vogel Jr. is a retired Tuck School of Business professor and the chair of the board of Housing Vermont.