Are High Rents Inevitable?

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Experts tackle the problem of preserving affordable housing in booming real estate markets.

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The allure of shows like Seinfeld, Friends, and Sex and the City is unquestionable: they provide witty banter, lovable characters, and perhaps most importantly, the fantasy of rent-controlled housing. After all, situating these characters in cramped apartments would chip away at the escapism that makes television entertaining.

Although rent-controlled units remain rare in “hot markets” like New York City, demand for affordable housing in booming markets continues to grow. To tackle the question of how policies can preserve affordable housing in rising real estate markets, Lance Freeman, a professor at Columbia University, and Jenny Schuetz, an economist with the Federal Reserve, recently published a paper evaluating state and municipal programs focused on producing affordable housing.

Affordable housing—defined as any housing that must be rented or sold at below-market prices or that is limited to occupancy by people with incomes below certain thresholds—continues to be a pressing issue in many areas with rising housing markets, Freeman and Schuetz note. However, a lack of affordable housing becomes especially conspicuous when formerly depressed areas become gentrified. As a neighborhood gentrifies, capital flows in and increases property values like a “magic elixir.” Yet it can also leave negative side effects in its wake: expensive housing, rising property taxes that can hurt homeowners on fixed incomes, displaced residents, and a feeling among long-term residents of being “pushed out.”

Local, state, and federal actors have adopted a number of policy proposals to preserve and develop affordable housing, but not all policies have been equally successful, according to Freeman and Schuetz.

On the state level, governments have implemented four main categories of policies: zoning programs, state “fair share” laws, tax financing, and tax abatement. Zoning and “fair share” laws both require actors—either real estate developers or local jurisdictions—to contribute to a city or state’s supply of affordable housing by setting aside certain units. In contrast, tax financing and tax abatement encourage affordable housing development by either earmarking tax revenue for economic development or exempting developers from property taxes if they set aside a certain percentage of units for low-income residents.

However, according to Schuetz and Freeman, the data on state-level and local housing policies remain unpromising. In California, Massachusetts, and New Jersey, state-level programs have “produced relatively small numbers of affordable units.” In particular, Freeman and Schuetz observe that—although some local zoning and “fair share” programs have been more successful than others—on balance, both local and state programs have failed to produce more than a tiny share of affordable housing units. For instance, California produces, on average, nine thousand affordable housing units per year—an average annual increase of less than 0.1 percent of the total amount of housing in the state.

Furthermore, Freeman and Schuetz find that local zoning laws and state-level programs have both underperformed relative to an existing federal program that uses tax credits to finance below-market affordable housing–the Low Income Housing Tax Credit program. They note that these federal resources, provided through the U.S. Department of Housing and Urban Development (HUD), have long contributed to neighborhood revitalization and affordable housing development.

Are federal solutions, then, the most effective way to encourage affordable housing? Freeman and Schuetz decline to address this question, instead focusing on a discussion of local and state policies.

However, other experts argue that certain federal programs, such as the Low Income Housing Tax Credit program supported by Freeman and Schuetz, should be scrapped completely. Edward Glaeser, a professor at Harvard University, and Joseph Gyourko, a professor at the University of Pennsylvania, contend that the tax credit program does “remarkably little to make housing more affordable.” They maintain that the tax credit program has none of the characteristics of a “good policy” because of its cost, its tendency to benefit developers rather than residents, and its failure to limit construction to areas that actually require new buildings.

Ultimately, Freeman and Schuetz call for state governments, research organizations, and other actors to conduct more research on “why existing state and local programs have produced only modest amounts of affordable housing.” In the meantime, they argue, state and local governments can take two immediate measures to reduce the cost of new housing: reducing unnecessary regulatory burdens on developers and allowing greater population density so that developers can produce smaller, low-cost units.

In many ways, the issue of affordable housing resembles a puzzle, Freeman and Schuetz observe. “In an ideal world,” policymakers could solve the puzzle by simultaneously increasing the amount of affordable housing available in “high-quality neighborhoods” and improving housing conditions in low-income neighborhoods.

But, absent these conditions, demand for affordable housing will continue to outstrip supply. And apartments like Jerry Seinfeld’s $400 one-bedroom unit in Manhattan will remain pure television fiction.